TAIPEI/PALO ALTO, U.S. -- The latest Washington crackdown on Huawei Technologies reveals how a handful of U.S. companies, dominating a few key areas of the global chipmaking industry, hold the key to choking off supplies to the Chinese tech titan.
The U.S. Commerce Department on Monday banned Huawei from obtaining foreign-made chips and other electronic components developed or produced using American software or technology, effective immediately. The new ban is seen as an extension to the rule announced in May and closed the loophole whereby U.S. companies could sell to third parties and those third parties could in turn provide to Huawei, according to legal experts.
Unfortunately for Huawei, U.S. software, intellectual property, chip design tools and materials are used by everyone from Qualcomm to Samsung to MediaTek to Sony.
That leaves Huawei with very few options for obtaining crucial chips, according to Geoff Blaber, vice president research at market intelligence firm CCS Insight,
"Whilst the semiconductor industry is global in nature, its foundation is very, very heavily based on the U.S. Subsequently, there are very few, if any, workarounds that Huawei can now look into," Blauber said, adding that America's decades-long dominance in chips is the "basis of Silicon Valley."
The leading players in chip design software are all American companies. These include Cadence Design Systems, Synopsys and Ansys. Mentor Graphics, the world's third-largest chip design tool provider, was acquired by Germany's Siemens in 2016, but it still has huge operations in the U.S.
These four companies together control some 90% of the world's chip design tool market. And because they own much of the intellectual property needed for chip design, they are unlikely to be replaced anytime soon.
As chip manufacturing becomes more complicated, only Cadence and Synopsys, the world's two top players, are able to provide end-to-end solutions needed for advanced chip production. Huawei still has older versions of their chip design tools installed in its computers, but without updates and support from these U.S. companies it will take much longer and be far more difficult to resolve any technical issues that may arise.
The U.K. chip designer Arm Ltd., meanwhile, provides the blueprints on which more than 90% of the world's mobile chips are built. Although the company is headquartered in Cambridge, Arm has a major R&D center and capabilities in the U.S. and would thus be subject to export U.S. rules.
"A lot of Arm's IP originated out of their U.S. offices, and they use chip design tools from U.S.companies like Cadence in their IP developing chip blueprints, which is hard to get around," Blaber said.
All of the world's chip developers, regardless of their nationality, rely on the tools and intellectual property of these companies. These include Apple, Huawei, Sony, Samsung, SK Hynix, Kioxia, NXP, Qualcomm, Nvidia, MediaTek, Broadcom and STMicroelectronics. After Monday's commerce department announcement, all of them will be required to obtain a license in order to ship to Huawei.
Design software is just one area in the chip supply chain where U.S. companies have a virtual stranglehold. After engineers design a chip, they usually outsource the actual production, or fabrication, to other companies. But chip fabrication, like design, relies heavily on U.S.-made chipmaking and chip testing equipment.
Three U.S. companies -- Applied Materials, Lam Research and KLA-Tencor -- along with ASML of Europe and Tokyo Electron of Japan dominate the fabrication process for advanced semiconductors.
ASML is headquartered in the Netherlands, but its machines are packed with U.S. technology and some crucial components of its chipmaking machines are built on American soil. The company has already been caught between rising tensions between Beijing and Washington. Late last year, ASML delayed the shipment of a highly advanced extreme ultraviolet lithography tool to Semiconductor International Manufacturing Co., China's top chipmaker. Tokyo Electron, too, relies on U.S. part and technology to build its machines.
The U.S. is also a leader in materials and chemical sciences, with companies such as Dow DuPont, 3M and Corning each occupying a unique position in the manufacturing processes of chip and display production. According to legal experts, the scope of the new restrictions extend beyond semiconductors to other key electronics components such as display panels. Most displays in the world still require U.S. materials provided by Corning and 3M, as well as equipment from Applied Materials.
While Asian players over the years have become competitive in chip design and manufacturing, they do not control the fundamental tools, intellectual property and basic sciences that those industries are built on, according to Su Tze-yun, director of Taiwan's Institute for National Defense and Security Research and a supply chain expert. Reaching that level of technological prowess requires long-term investment, accumulated experience and massive adoption by customers, Su said, adding that those fields are also often associated with sensitive applications such as aerospace, space and military.
"At the end of the day, the U.S. still controls the basic software, materials science, chemicals and metals, as well as the equipment that are fundamental in chip or electronics manufacturing," Su told the Nikkei Asian Review. "Some high-end metals used in airplane engines, for example, are also used in consumer electronics, and the U.S. still controls those vital and core technologies."
Taiwan Semiconductor Manufacturing Co., the world's biggest chip company by market cap, and Samsung Electronics, the world's biggest memory chipmaker, for example, can mass-produce advanced chips, but both companies rely on cutting-edge U.S. chipmaking equipment to churn out chips.
TSMC Chairman Mark Liu recently confirmed the importance of existing chip equipment suppliers to the company's tech advancement and hinted that it would be very difficult for chip manufacturers to formulate competitive production lines without U.S. tech involvement.
"Our main focus is pursuing technology leadership and trying to overcome each generation's challenge. And to do that, I think our current focus is still working with our equipment partners, to utilize the best of the equipment so that we can pursue our business growth," Liu told investors last month when asked whether the company would build a production line without any American content.
The more advanced the chip manufacturing process is, the more difficult it is to replace any one piece of equipment, material or chemical, as each link in the production chain is carefully designed to ensure maximum efficiency and performance.
This has serious implications for China's attempts to "de-Americanize" its tech supply chain.
Huawei's addition to a U.S. trade blacklist in May 2019 exposed China's reliance on American technology and spurred Beijing's efforts to nurture national tech champions.
China has had some success, including state-backed SMIC and its first homegrown memory chipmaker Yangtze Memory Technologies, the country's hope to eventually challenge Samsung and Micron. However, these Chinese players rely on the same camp of U.S. chipmaking equipment and materials makers as their global peers.
China also has state-backed EDA tool provider Empyrean Software, which hopes to one day challenge U.S. rivals such as Synopsys and Cadence. Chipmaking equipment suppliers Naura Technology Group and Advanced Micro-Fabrication Equipment Co., meanwhile, hope to one day replace Applied Materials and Lam Research. However, these companies are still far behind their foreign counterparts in capabilities and scale.
To fund its chip ambitions, Beijing has poured over 340 billion yuan ($9 billion) into its so-called Big Fund since it was set up in 2014, and last year it set up the Shanghai STAR market, the Chinese version of Nasdaq. SMIC listed on the STAR market in July in the biggest debut in China in 10 years, while chipmaking tool provider AMEC's shares have more than doubled this year thanks to the broad de-Americanization campaign.
"The launch of the STAR board is very obvious support from the government to help these semiconductor-related players to have better access to capital," Roger Sheng, a semiconductor analyst with Gartner, told Nikkei. "Thanks to the high P/E ratio locally, these chip equipment companies don't have to worry about money and can make long-term investments. It will really take a very long time for semiconductor equipment to bear any fruit."
Blaber at CCS Insight agrees.
"Semiconductors is a very global industry. Even if you can invest the vast amounts of money required to create a semiconductor capability, you still have to be able to access all the various elements in that supply chain that are required to make that work -- and within that, the U.S. is still a very significant part in the foreseeable future."