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Huawei crackdown

Asia suppliers hit after US cuts Huawei's access to foreign chips

New ban extends to semiconductors and components based on American technology

The U.S. further restricted Huawei's access to chips produced from American technology and software.   © Reuters

TAIPEI -- Shares in key Asian suppliers to Huawei suffered sharp falls on Tuesday after the U.S. government further broadened its clampdown on the Chinese tech champion, forbidding non-American companies from supplying it with any chips based on U.S. technology.

MediaTek, the mobile chip designer, plunged more than 9% at the Taiwan Stock Exchange. The company, the world's second-largest mobile chip supplier, is seen as one of the crucial mobile chip suppliers for Huawei's smartphone business. It also sells chips to other smartphone makers including Samsung Electronics, Oppo, Vivo and Xiaomi.

"We have always abided by global trade regulations and we are closely monitoring the changes of U.S. export control rules. We are consulting external legal experts to carry out a legal analysis to ensure we follow the latest rules," MediaTek said in a filing with the stock exchange. "Based on the current evaluation, there is no major impact on our short term operation." 

Novatek Microelectronics, a designer of display integrated circuit drivers, and camera lens maker Largan Precision also saw their shares falling by 8% and 3% respectively in the morning session. Both count Huawei as a major customer.

The falls came after the U.S. Commerce Department on Monday banned Huawei from obtaining foreign-made chips, either developed or produced from American software or technology. The rule takes effect immediately.

Legal experts and market watchers said the measure could affect a host of companies if their chip development involves U.S. software and technology. 

As well as MediaTek the list could include image sensor provider Sony; sensor supplier STMicroelectronics; as well as key memory chipmakers Samsung Electronics, SK Hynix, Kioxia, Nanya Tech and many Asian, European and domestic Chinese chip developers, the experts said.

However shares in some suppliers to Huawei rose on Tuesday.

Samsung, which supplies memory chips and advanced smartphone displays, rose nearly 2% while Huawei's key image sensor chip provider Sony also rose nearly 1% in the morning. Both companies also supply products to Apple, which ships nearly 200 million iPhones a year. That could fill the gap if they lose orders from Huawei following the latest ban.

SK Hynix told the Nikkei Asian Review that it is still evaluating the newest revision of Washington's export controls and could not provide detailed comments for the time being. 

Washington had already tightened export control rules in mid-May to restrict foreign chip manufacturers such as Taiwan Semiconductor Manufacturing Co. and China's Semiconductor International Manufacturing Co. from building customized chips for Huawei and its affiliates if using U.S. chipmaking equipment.

That was designed to rein in Huawei's in-house chip unit, HiSilicon Technologies, whose custom chips for Huawei products, helped Huawei stand out from rivals in the smartphone and telecom equipment businesses.

Monday's ban is expected to disrupt the supply chain again as the scope of the ban now extends to any chips that involve American software or technology, whether custom or standardized semiconductors.

TSMC has been Huawei's most crucial chip producer, helping the Chinese company produce most of its in-house high-end mobile chips for its flagship handset lineups. However, Richard Yu, CEO of Huawei's consumer electronics group, confirmed that his company could not receive any customized chips from TSMC after Sept. 14.

"Because of the second round of [U.S.] sanctions, production of the chips will be stopped after Sept. 15," Yu told a public forum this month. "It will very likely be the last generation of the Kirin series. It will be extinct. Huawei spent more than 10 years developing chips ... it will be a great loss to us."

Harry Clark, partner of Orrick, a U.S. law firm, told Nikkei that the new rules are directed principally at supply of foreign-made chips to designated Huawei entities, "but the rules can apply to products other than semiconductors."

Moreover, a license will be required as long as Huawei and its affiliates play some role in a transaction involving exporting, reexporting or transferring American technologies to a non-designated company, the lawyer said, based on the Commerce Department's statement.

"And even if a company has a license to enable it to engage in activity covered by the May 2020 rule, it will need to obtain a different license or a modified license if it proposes to engage in activity that is covered by one of these new rules," Clark said.

Following the rule tightening in May, Huawei has been seeking alternatives to its own in-house chip designs, eyeing MediaTek. Huawei has also had its eye on Chinese local mobile chip developer UNISOC Communications.

All were seen as potential suppliers of core processor chips for future smartphones. The Chinese company also did not give up testing Qualcomm's mobile chips on its future smartphones in hopes that the U.S. might later grant licenses, sources told the Nikkei Asian Review.

"We've seen Huawei test all kinds of different mobile chip platforms, including those from MediaTek and Qualcomm following the May ruling," a supply chain executive knowledgeable about the matter told Nikkei. "It does not want to give up its hard-earned smartphone business."

Almost all of the world's key chip developers need U.S. chip design tools from Cadence Design Systems and Synopsys to design chips, as well as chipmaking tools from Applied Materials, Lam Research and many others to make semiconductors.

The scope of the new restrictions could expand to other key electronics parts such as display panels, as most displays in the world still require U.S. materials providers such as Corning, 3M as well as equipment builder Applied Materials as fundamental tools.

Kavin Wolf, a veteran trade and export control law lawyer and partner with law firm Akin Gump told Nikkei that "every foreign-made semiconductor of any type anywhere in the world is now subject to U.S. license requirements if a Huawei company is in any way involved, directly or indirectly, in the transaction."

In a statement, U.S. Commerce Secretary Wilbur Ross said: "Huawei and its foreign affiliates have extended their efforts to obtain advanced semiconductors developed or produced from U.S. software and technology in order to fulfill the policy objectives of the Chinese Communist Party."

"As we have restricted its access to U.S. technology, Huawei and its affiliates have worked through third parties to harness U.S. technology in a manner that undermines U.S. national security and foreign policy interests. This multipronged action demonstrates our continuing commitment to impede Huawei's ability to do so," he said.

The Commerce Department also added 38 more Huawei affiliates across 21 countries, including China, Egypt, Saudi Arabia, Germany, France and the U.K., to the Entity List, claiming that Huawei is believed to use them to evade the export control restrictions. Huawei's high-profile research and development center in the U.K., which just received approval to break ground in June, was among the newly added entities.

"Huawei has already built the inventories it needs for the short term, so the latest ban would not have an immediate impact on the Chinese company," Jonah Cheng, chief investment officer at J&J Investment and a veteran tech analyst at UBS, told Nikkei.

"What we are monitoring closely is whether the U.S. government would revise this ban on Huawei after the elections in November and how Beijing would react if the ban is still not amended by that time," Cheng said.

Huawei's mobile ambitions already faced new setbacks this month when the U.S. Department of State urged companies to remove their apps from Huawei's app store "to ensure they are not partnering with a human rights abuser." Huawei has been eager to build its own app ecosystem and mobile operating system after Google was barred from offering its Google Mobile Services to the Chinese company in May 2019.

The latest ban on Huawei comes as relations between Washington and Beijing have turned frostier than ever. U.S. President Donald Trump in early August issued two executive orders to ban the popular Chinese apps WeChat and TikTok from Sept. 20 over allegations of national security risks. Trump also said he is considering taking action against more Chinese companies, including e-commerce giant Alibaba Group Holding.

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