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Trump's sanctions won't put Huawei out of business

Even chip unit HiSilicon can survive drive to stifle China's 5G champion

| China
Huawei can get by without HiSilicon if it needs to.   © Reuters

Douglas Fuller is an associate professor of political economy at the City University of Hong Kong and the author of "Paper Tigers, Hidden Dragons: Companies and the Political Economy of China's Technological Development."

Security hawks in the Trump administration have set another noose around Huawei Technologies but the Chinese telecommunications equipment maker is likely once again to escape with its life.

Even HiSilicon, the growing Huawei chip-design unit which is the immediate target of the measures announced May 15, can probably survive Washington's latest attempt to stifle the rise of China's leading supplier of fifth-generation, or 5G, mobile technology gear.

In any case, Huawei can get by without HiSilicon if it needs to. A decade ago, Huawei was already the third-largest telecommunications infrastructure equipment company globally even though HiSilicon had only limited capability then to design microchips.

One option would be for Huawei to turn over its designs for network equipment or phones to a contract manufacturer that could handle both assembly of the products and their delivery to customers.

Under the new rules, Huawei could still service the products, just as long as it did not get directly involved in the steps between designing the items and their included chips through to the delivery of the assembled goods. Of course, the rules could be tightened to foreclose this kind of maneuver.

The new controls, even if strictly implemented, would not cut off Huawei from access to all chips or optical components produced outside the U.S. Without HiSilicon's custom-designed smartphone processors, Huawei phones might lose some edge in competitiveness, but the company would still be able to purchase high-quality chips from Qualcomm, Samsung Electronics or Taiwan's MediaTek.

Currently, HiSilicon relies on so-called chip foundry companies, most importantly Taiwan Semiconductor Manufacturing Co. (TSMC), to produce the chips it designs. The new U.S. sanctions aim to cut this supply line by blocking foundries that use American equipment -- which right now is all of them -- from making chips to order for Huawei and its affiliates.

Such a step would certainly cause major short-term difficulties for HiSilicon, but these could be overcome in the medium term.

American companies now provide specialty equipment across the entire range of tools used for chip fabrication, with the sole exception of lithography, the process whereby beams of light transfer circuitry patterns onto silicon, which is dominated by the Netherlands' ASML.

This does not mean there is a lack of companies from elsewhere with potentially competitive alternatives. If TSMC, or another chip foundry wanted to "de-Americanize" a production line, it would find that nearly impossible now but could potentially do so in the near future, according to chipmaking equipment executives.

Some skeptics believe developing replacements for market-dominating chip equipment would take several years at least.

But according to a number of industry executives, Japanese equipment vendors such as Tokyo Electron could fill the gaps left by de-Americanization in two years or less. If officials in Tokyo or elsewhere saw a great temptation in potential Huawei orders for their respective national champions, government support could accelerate the emergence of substitute vendors.

Japanese equipment vendors could fill the gaps left by de-Americanization in two years or less.

HiSilicon can probably rely on chip designs already completed for up to 18 to 24 months, which could be just enough time for a foundry to create a de-Americanized chip fabrication line. This would be under the assumption a foundry agreed to produce those previously designed chips. TSMC reportedly is busy churning out chip inventory for Huawei now as there is a 120-day phase-in for the new controls announced in May.

HiSilicon is in a difficult spot with its next generation of semiconductors as Trump's advisers are seeking to cut off its access to the critical software needed to design chips, known as electronic design automation, or EDA, tools.

Two of the three major EDA companies, Synopsys and Cadence Design Systems, are American. The third, Mentor Graphics, is owned by Germany's Siemens but its technology is effectively all-American in origin.

These companies will be hoping the controls are relaxed or withdrawn during the window while Huawei works off existing designs. The worst outcome for them would be if Huawei successfully promoted development of an alternative, lower-cost Chinese supplier that might then undercut their highly profitable global sales although the chances of any company creating a full-fledged alternative to the EDA leaders' spectrum of tools within five years is low.

Huawei is wise to publicly emphasize the risks that the new U.S. controls present, both to itself and to the financial health of its American suppliers. Highlighting these issues could be conducive to increasing support for corporate initiatives to help overcome these constraints, such as de-Americanization of fab lines, from governments including those of China, Taiwan, South Korea and Japan.

With a new U.S. administration possibly taking office next January, the best solution for Huawei and American industry would be the withdrawal or watering down of export controls. The bigger point, though, is that even if the Trump administration returns for another term and the export controls stay in place, they are unlikely to inflict a mortal wound to Huawei.

What they will do is further undermine American technological competencies. U.S.-made equipment will be tainted by political risk even more than it has been since the first controls on sales to Huawei were announced a year ago. Rather than building up U.S. industry, the incentives built into the export controls will encourage American producers to move manufacturing and development offshore.

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