TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker, has halted new orders from Huawei Technologies in response to tighter U.S. export controls aimed at further limiting the Chinese company's access to crucial chip supplies, multiple sources told the Nikkei Asian Review.
"TSMC has stopped taking new orders from Huawei after the new rule change was announced to fully comply with the latest export control regulation," a person familiar with the situation said. "But those already in production and those orders which TSMC took before the new ban are not impacted and could continue to proceed if those chips could be shipped before mid-September."
The U.S. Commerce Department announced on Friday that all non-U.S. chip manufacturers using American chipmaking equipment, intellectual property or design software will have to apply for a license before shipping chips to Huawei.
"It's a difficult decision for TSMC, as Huawei is the company's No. 2 customer, but the chipmaker has to follow the U.S. rules," another person familiar with the matter said.
Huawei, the world's biggest telecom equipment producer and second-biggest smartphone maker, relies heavily on TSMC to manufacture its advanced chip designs -- including all of the mobile processors used in Huawei's flagship smartphones.
TSMC, which also produces artificial intelligence processors and networking chips for Huawei, has been viewed as a vital lifeline for the Chinese company in its efforts to resist U.S. pressure since Washington placed it on a trade blacklist last May.
This relationship with Huawei, however, has put the Taiwanese company in the crossfire of Washington-Beijing tensions.
The tighter U.S. controls were announced the same day that TSMC unveiled plans to build a $12 billion plant in the state of Arizona, a move that U.S. Secretary of State Mike Pompeo said will "bolster U.S. national security at a time when China is trying to dominate cutting-edge tech and control critical industries."
China's Department of Commerce strongly objected to the tighter U.S. export controls on Sunday and said such restrictions pose a huge threat to the global supply chain. The department demanded that Washington reverse the new restrictions and warned that China would take necessary countermeasures otherwise.
In response to a request for comment, the Taiwanese company said it "does not disclose customers' order details," adding that "TSMC has always complied with the laws and applicable regulations." The manufacturer said it is assessing the impact of the new export controls.
TSMC shares in Taiwan fell more than 2% in Monday morning trading, while the island's benchmark index was down less than 1%.
Huawei hit back at the U.S. ban at the opening of its annual analysts summit on Monday afternoon.
The new restrictions are designed to target the Chinese company's contract chipmaking suppliers, which receive designs from Huawei's HiSilicon Technologies and put them into production.
These include TSMC, top Chinese contract chipmaker Semiconductor Manufacturing International Co. as well as Win Semiconductors, a manufacturer of radio frequency chips. Win's support is crucial for Huawei to cut its reliance on American suppliers Skyworks and Qorvo, a legal expert said.
Huawei is TSMC's second-largest client behind only Apple, accounting for 15% to 20% of the Taiwanese company's annual revenue. Huawei also accounted for up to 20% of SMIC's revenue, according to a Bernstein Research estimate.
Chip shipments bound for Huawei that went into production before May 15 and will ship before midnight Sept. 14 are not subject to the new rule, according to the document posted online by the U.S. Commerce Department's Bureau of Industry and Security. A license will be required for all other shipments.
Harry Clark, a Washington-based trade law expert and managing director of American law firm Orrick, said that chip contract manufacturers outside the U.S. will have to apply for a license for any shipments that do not meet the necessary criteria. Violating such laws, he added, could leave a company "exposed to substantial penalties" imposed by the regulators.
Huawei has been preparing for such a move by the U.S. since the end of last year, including by stockpiling more than a year's worth of networking equipment-related chips, especially for its crucial telecom equipment and carrier business, sources told Nikkei Asian Review.
The company has also explored a wide range of other options, including asking European chipmaker STMicroelectronics, a longtime supplier, to co-design chips, Nikkei reported earlier. However, those efforts may not immediately solve all of its vital chip supply issues, which are critical for Huawei to continue rolling out world-class technologies, analysts said.
"The proposed legislation likely aims to stop Huawei's tech progress and quash China's 5G ambitions," Jefferies Equity Research analysts said in a research note. "We expect China to retaliate if this materializes. The risk of a 'super' cold war is mounting."