Huawei Hate Revitalizes Trade War to U.S. Detriment
Just when it seemed that the trade war with China was winding down, a new reporting suggests tensions are heating up again.
The Wall Street Journal reported Tuesday that U.S. Department of Commerce plans to make it more difficult for global microprocessor chip factories to supply products to Huawei.
This move shouldn’t be unexpected. The Trump administration has made its intentions regarding Huawei clear: The White House sees the world’s largest telecommunications equipment company as an espionage tool of the Chinese government. Administration officials are making every effort to kill the $100 billion company.
Huawei planned to crack the U.S. smartphone market in 2018. However, deals to distribute handsets through AT&T corp. (T) and later Verizon (VZ) fell apart after lawmakers pressured both carriers against the decision, according to a January 2018 Bloomberg report.
A year later, President Trump signed an executive order officially barring U.S. companies and government agencies from using communication technology made by firms that posed a national security risk.
With this order, U.S. companies couldn’t use Huawei tech — or tech from several other Chinese-owned companies. But they could still sell chips to Chinese firms.
Considering that market represents about 36% of all sales made by U.S. semiconductor companies last year, the next step Trump’s administration took were even more severe.
The Department of Commerce blacklisted Huawei and 70 of its affiliates in May 2019. Any U.S. company that wished to sell tech to any of those firms would need prior approval.
This made it difficult, if not downright impossible, to sell U.S. products to a market that represented approximately one-third of all sales.
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Since then, news that the U.S. and China were mending their differences and bringing the trade war to an end allowed chip companies and investors to breathe a sigh of relief. But the latest developments threaten to reignite tensions.
Now, the Trump administration is looking to go after global chip factories. These manufacturers make physical chips based on several proprietary designs for numerous companies — including Huawei.
Going after the chip factories is roundabout way of attacking the Chinese firm. One with potentially devastating consequences for the global chip ecosystem.
Most semiconductor businesses are fabless — or lacking an actual factory. They produce semiconductor designs only. This intellectual property is then shipped out to foundries where actual silicon is mass produced with specialized equipment.
Taiwan Semiconductor (TSM), the world’s largest contract chip manufacturer, relies on tools and services from the likes of Lam Research (LRCX), Applied Materials (AMAT) and KLA Tencor (KLAC).
Without these products, mass-producing advanced chipsets for Apple (AAPL), Qualcomm (QCOM), Huawei and countless others would be impossible.
The Trump administration hawks want to control production by altering the Foreign Direct Product Rule, a framework that subjects certain foreign-made products based on U.S. IP.
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The result would be any firm that uses American-made semiconductor equipment would be required to get prior approval before making products for Huawei.
It’s a draconian idea, but there is some precedent.
When the trade restrictions began in 2019, Huawei was forced to fast-track vertical integration plans. Its HiSilicon subsidiary began building more of the components required to make its devices run. It contracted with global chip factories for the rest.
The Mate 30, Huawei’s flagship smartphone, shipped in December with no American-made hardware. While previous generations used flash memory from Micron (MU), LTE antennas from Skyhook and Qorvo and power supply chips from Broadcom (AVGO), the latest model featured hardware from Samsung, Toshiba and HiSilicon.
In the course of a year, the global market for fabless semiconductors was remade. This latest plan will exacerbate this trend and would disrupt the global supply chain.
The current U.S. strategy would lead to the splintering of the system — one silo for American IPs and another for the rest of the world. Over time, offshore firms will likely gravitate to the second group, as it won’t have the tangled political strings.
This development would only hurt U.S. tech companies in the long run.
American semiconductor firms are among the most advanced in the world. A rich history of innovation led to vibrant international markets envied throughout the world.
However, what’s happening now is dangerous. As politicians take aim at Huawei, many great American success stories are likely to become collateral damage.
Semiconductors, as measured by the VanEck Vectors Semiconductor ETF (SMH) are ahead 5% in 2020, after rising 64.5% in 2019.
The major stocks have had a good run. However, the current share prices likely do not reflect the political inherent risks.
Investors are well-advised to exercise some caution. The fallout could be a big blow for leading semiconductor equipment firms.
Jon D. Markman