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Huawei crackdown

Huawei turns to mobile chip rivals to beat US pressure

Chinese tech giant's position in global smartphone market at risk

Huawei is activating contingency plans to source chips from rivals MediaTek and UNISOC. (Nikkei montage/Getty Images/Reuters)

TAIPEI -- Huawei Technologies is seeking help from rival mobile-chip makers to withstand a U.S. clampdown aimed at crippling the Chinese company, sources familiar with the matter told the Nikkei Asian Review.

Huawei is in talks with MediaTek, the world's second-largest mobile chip developer after Qualcomm of the U.S., and UNISOC, China's second-largest mobile chip designer after Huawei's HiSilicon Technologies unit, to buy more chips as alternatives to keep its consumer electronics business afloat, the sources said.

Developing its own cutting-edge chips has been a key strategy for Huawei, helping China's biggest tech company and the world's second-largest smartphone maker stand out in the global market for handsets and other devices. Analysts and industry executives say that adopting rivals' chip offerings could hamper Huawei's competitiveness.

Taiwan's MediaTek, a key mobile chip supplier to Samsung and Chinese smartphone makers Oppo, Vivo and Xiaomi, already supplies Huawei's mid- to low-end 4G-capable smartphones. Huawei now also hopes to secure contracts to buy MediaTek's mid- to high-end 5G mobile chips, two people familiar with the talks said. Huawei previously used only in-house chips for its high-end mobile phones.

"Huawei has foreseen this day coming. It started to allocate more mid- to low-end mobile chip projects to MediaTek last year amid its de-Americanization efforts," one of the sources said. "Huawei has also become one of the key clients for the Taiwanese mobile chip developer's mid-end 5G mobile chip for this year."

MediaTek is evaluating whether it has sufficient human resources to fully support Huawei's aggressive bid, as the Chinese company is asking for volume 300% above its usual procurement in the past few years, another source familiar with the talks said.

Huawei also seeks to deepen its collaboration with UNISOC, a Beijing-backed mobile chip developer that relies mostly on smaller device makers as customers and mainly supports entry-level products and devices for emerging markets. Previously, Huawei used only very few UNISOC chips for its low-end smartphone and tablet offerings, sources said.

"The new procurement deals would be a great boost to help UNISOC further upgrade its chip design capability," said a chip industry executive. "In the past, UNISOC was struggling quite a bit, because it could not really secure big contracts with global leading smartphone makers as these top smartphone makers could find better offerings elsewhere. This time could be an opportunity that it could really seek to match the international standard."

UNISOC last year accelerated its 5G chip development to catch up with Qualcomm and MediaTek, Nikkei has reported. More recently, the company received 4.5 billion yuan ($630 million) from China's national integrated circuit fund, the so-called Big Fund.

UNISOC is preparing to list on the Shanghai STAR tech board, the Chinese version of Nasdaq, later this year. Qualcomm has needed a license from the U.S. Department of Commerce to supply Huawei since mid-May of 2019.

Washington announced new export control rules on May 15 designed to block Huawei's own chip development efforts via HiSilicon and the company's partnership with Taiwan Semiconductor Manufacturing Co., the world's biggest contract chip manufacturer and sole supplier of iPhone processors.

Under the tighter restrictions, non-U.S. companies must apply for a license to use American technology or software to produce Huawei-designed chips.

The new restrictions strike at the heart of Huawei's strategy for competing with Apple and Samsung Electronics: develop custom, cutting-edge chips in-house and have the world's top contract chipmakers produce them.

Huawei built its chip design prowess through HiSilicon, which employs 10,000 engineers, over the course of more than a decade. TSMC produces all of HiSilicon's high-end mobile processors -- dubbed the Kirin series -- for Huawei's flagship smartphones, as well as its networking processors for 5G base stations, artificial intelligence chips and server chips.

Manufacturing partnerships with TSMC and other Asian contract chip builders -- including Win Semiconductors, Advanced Wireless Semiconductor and Semiconductor Manufacturing International Corp. -- have helped Huawei increasingly use its own chips in place of those from American suppliers, such as mobile chips from Qualcomm and radio-frequency chips from Qorvo, Skyworks and Broadcom.

Huawei has expanded the use of mobile processors designed in-house for its smartphone business to 75%, rising from 69% in 2018 and 45% in 2016, according to GF Securities. The Chinese company shipped 240 million smartphones in 2019.

This has helped Huawei withstand U.S. pressure after Washington added the company to its trade blacklist last year. But these crucial manufacturing partnerships are now at risk.

TSMC has halted new orders from Huawei in compliance with the latest U.S. ban, Nikkei reported. SMIC, in response to questions from Nikkei, referred to co-CEO Zhao Haijun's remarks that the chipmaker remains fully committed to abiding by U.S. regulations, as it has done for its more than 20 years of operation.

MediaTek and UNISOC declined to comment.

These Asian chip developers also may be wary of becoming caught in the U.S.-China tensions, particularly after U.S. State Department official Christopher Ashley Ford signaled on Thursday that the government will monitor whether the export rules need to be changed further.

Kevin Wolf, a Washington-based trade law lawyer with Akin Gump, told Nikkei he is not yet aware of efforts "to impose controls over exports by foreign companies of foreign-origin items that are not subject to current U.S. export controls even if destined to Huawei." But Washington may look for ways to restrict such exports if they harm the U.S. government's ability to impose controls on trade with Huawei, Wolf said.

Shares of MediaTek were down nearly 4% as of noon Taipei time following the news that the U.S. could further change its export control rules.

Huawei also declined to comment.

Eric Xu, Huawei's rotating chairman, said in late March that his company could still buy chips from MediaTek and UNISOC if the U.S. blocked its contract chipmaking partners from using American equipment, materials and software to build Huawei-designed products.

But being forced to use the same "off-the-shelf" chips that smaller rivals like Oppo and Xiaomi use, rather than its own customized ones, could weaken Huawei's product portfolio of consumer electronics, analysts said.

"According to our checks, Huawei has enough inventories of mobile application processors to last till the end of this year. So the real impact could happen from the last quarter of the year if the vital chip supply issues are not solved," Jeff Pu, a tech analyst with GF Securities, told Nikkei. "If the supply of Huawei's own HiSilicon-designed chips runs out next year, it would be devastating especially for its two most important flagship M and P series of phones, which sell for more than 4,000 yuan and target the premium market."

Even if Huawei could secure chip supplies from MediaTek and UNISOC, "it would be challenging for the company to roll out such high-end products as it has in the past in the competitive smartphone market," Pu added.

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