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Huawei crackdown

Huawei bid to move production to China faces supplier resistance

Japanese, Taiwanese and Korean partners weigh geopolitical risks

Huawei has come under pressure from the administration of U.S. President Donald Trump over national security concerns. (Nikkei Montage/Source photo by Reuters and AP)

TAIPEI -- Huawei Technologies is struggling to meet a goal to shift a key part of its output into China, with some of its suppliers reluctant to make changes to their own operations amid deepening uncertainty in the global semiconductor industry.

The world's biggest telecom equipment maker has been pushing to get more of its supply chain into China as it faces a crackdown by the administration of U.S. President Donald Trump over national security concerns. Such a shift would help Huawei mitigate the impact of any further U.S. pressure on its suppliers.

In particular Huawei wanted its chip-related suppliers to carry out most chip packaging and testing -- the last step in making semiconductor components -- in China by the end of this year at the earliest. It has made a similar request concerning production of the print circuit boards on which chip components are mounted, sources familiar with the matter told the Nikkei Asian Review.

The Chinese tech company has also brought in more second-tier domestic suppliers since last year as part of its localization efforts, and is only ready to accept new suppliers if they have Chinese production capacity ready, sources said.

However Huawei's drive has hit challenges because of the economic uncertainties brought by COVID-19 as well as the latest round of Washington's clampdown. Many suppliers want to "stay on the conservative side and avoid making bold movements" at a time when there is "low visibility over future demand," said a supply chain executive with direct knowledge of the issue.

"Some chip testing and packaging suppliers and print circuit board makers already helped Huawei expand some capacity in China over the past year... however, not all of them answered the call," said the executive. "The global pandemic which already hit demand as well as the U.S. strong hostility against Huawei have weakened suppliers' incentive to swiftly address the Chinese company's push."

Another supply chain executive familiar with the matter said: "There are suppliers who also need to address their U.S. semiconductor clients' requests to produce outside of China over security reasons, so they chose not to expand their Chinese capacity."

And a third executive said: "The supply chain is so complicated and intertwined like a big onion. Huawei could peel the skin, and the first few layers of the onion and get them to relocate to China or support its domestic players as alternatives, but when you really dig and peel inside, it could be challenging to really bring everyone there."

The comments from industry sources suggest the Trump administration's salvo against Huawei may be having some success, making suppliers weigh looming geopolitical uncertainties and an economic slowdown that could hit demand.

Huawei procured chips worth $20.8 billion last year, including its own designs, making it the world's third-largest semiconductor buyer after Apple and Samsung Electronics, according to research house Gartner.

Currently, chip manufacturing is mostly done outside China, such as in Europe, Japan, South Korea and Taiwan. Huawei hopes the last part of chip assembly could be done largely in China, multiple sources said.

Many Taiwanese, Japanese and South Korean suppliers had received requests from Huawei to help allocate more production to China, people with direct knowledge told Nikkei.

Huawei started efforts to localize its supply chain in 2018 after ZTE Corp., China's second largest telecom gear provider, was sanctioned by the U.S. government, people with knowledge of the plans said. Huawei accelerated its efforts after its CFO Meng Wanzhou was arrested at the Canadian border in late 2018.

Besides localizing production, Huawei has stationed hundreds of its engineers at the plants of second-tier domestic suppliers to try to help them improve, in a move to reduce reliance on foreign companies, people familiar with the matter said.

Those suppliers include Jiangsu Changjiang Electronics Technology, the country's top chip packaging and testing service provider, as well as compound semiconductor maker Xiamen Sanan Integrated Circuit.

JCET and Sanan are backed by China's Integrated Circuit Industry Investment Fund, the so-called Big Fund, which Beijing wants to use to boost the country's semiconductor industry, viewed as crucial to national security.

"Huawei has stationed more than 100 engineering staff at JCET, the country's top chip packaging and testing house for nearly a year... but the reality was the progress was not so smooth as Huawei expected to move a big chunk of high-end chip packaging, assembly and testing to the Chinese company by the end of last year," said an industry executive with knowledge.

Some essential know-how and materials are still controlled by Japanese companies such as Ajinomoto Fine-Techno, the exclusive provider of high-end Ajinomoto Build Film, better known as ABF -- a crucial substrate for high-end processors for premium smartphones and base stations.

Ajinomoto's electronics materials manufacturing and suppliers are in Japan and may not have the immediate incentive to shift production, multiple sources familiar with the matter said.

Hitachi Chemical, which supplies key materials for ABF board, also has not yet decided to expand capacity at its Hong Kong facilities, one of the people said.

Huawei, JCET and Hitachi Chemical declined to comment. Ajinomoto did not respond to a request for comment.

Chiu Shih-fang, a supply chain analyst with Taiwan Institute of Economic Research, said it was natural for Huawei to ask manufacturing partners to produce in China to "gain more control and secure" its chip supply chain without external interference.

"However, the current geopolitical situation and the pandemic are prompting suppliers to diversify production bases from China," Chiu said. "In that case, it could be challenging for them -- if they are not Chinese companies -- to again concentrate and move more production to China for a single client."

Nikkei staff writer Kensaku Ihara in Taipei contributed to this story.

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