The US government has given Huawei a 90-day grace period. While the reprieve provides a bit of breathing room for Huawei, as we’ve pointed out a few times last week: This doesn’t change the fact that Huawei still relies heavily on US-sourced technology.

Every year, Huawei releases a list of “core suppliers.” Of the thousands of suppliers used by the company last year, 92 were classified as core.

In other words, more than one-third of Huawei’s core suppliers were from the US last year. Moreover, Huawei is sourcing are high-tech components such as microprocessors and communication modules from them that go into nearly all of their products, from smartphones to telecommunications equipment.

Bottom line: Thanks to what scholars call the “second great unbundling,” in which production is separated into various fragments across multiple countries, the global supply chain is now less vulnerable to problems related to any single market.

However, cutting off Huawei from US technology is not a matter of a single market. It is a body blow to their whole supply chain, including those companies that heavily rely on US technology for the components they make:

  • Huawei can replace most components made by American suppliers with products from companies in South Korea, Japan, and Taiwan, as well as its in-house chipmaker HiSilicon.
  • For over a decade, Huawei has been working on a so-called “business continuity management system” to address potential extreme scenarios. Although the system may help Huawei weather a short-term crisis, it won’t offset the negative impacts.
  • The US technology export restrictions are not limited to US firms. Any product that contains more than 25% of US-originated technology or materials is subject to the restrictions and therefore needs the US government’s approval to sell to Huawei.
  • Some non-US companies have already cut ties with Huawei.

Business continuity system: In an interview with global media in December, Huawei’s rotating chairman Ken Hu unveiled a section of their business continuity management system. The initiative covers Huawei’s research and development, procurement, manufacturing, and logistics, according to Hu.

In July, the company released a “2018 sustainability report,” in which it expounded on several aspects of the system, such as sourcing components from more than one supplier, readying a safe inventory during mass production, and establishing strategic partnerships with core suppliers to ensure a stable supply.

Over the past 10 years, with this system in place, we have successfully dealt with quite a number of emergencies and natural disasters such as the tsunami in Japan (2011), the flood in Thailand (2011), the earthquake in Nepal (2015), as well as the ransomware attacks (2017).”

Ken Hu, rotating chairman at Huawei

Alternatives: The business continuity management system may have helped Huawei stockpile some inventory—some reports say it will support Huawei’s production for up to 12 months. However, Huawei can’t use the grace period to stockpile new components; the reprieve is only to support existing customers. After their reserves are exhausted, Huawei will have to find new sources.

The 33 US-based “core suppliers” of Huawei mainly provide three categories of products: Systems on a Chip (SoC), near-field communication (NFC) chips, and radio frequency (RF) modules.

System on a Chip: Intel and Qualcomm’s SoCs can be found in a wide range of Huawei’s consumer and enterprise devices such as smartphones, personal computers, and servers.

Intel and Qualcomm hold 17.4% and 10.5% of the global market, respectively, sharing the majority of the market with Taiwan’s TSMC and South Korea’s SK Hynix, along with two other US companies.

The smartphone SoC market is dominated by US companies, though Huawei’s chip design subsidiary HiSilicon also has a slice.

Huawei also included ARM, the designer of the Arm SoC architecture, in its core suppliers’ list. The UK-based company has since suspended business with Huawei in compliance with the US ban. However, most of the in-house chips developed by Huawei’s HiSilicon, including its Kirin chip, server chips, camera chips, and router chips, are Arm-based.

Losing access to future support and development of the architecture would “deeply affect its competitiveness.” Huawei could also choose RISC-V, an open-source Arm substitute, but the support ecosystem from tool vendors and semiconductor providers to design services around it is less comprehensive compared with those of Arm or Intel’s x86 architectures. Still, the RISC-V ecosystem is continuously expanding with a wide range of tools and design resources from numerous third parties.

Radio frequency modules: An RF module is an electronic device used to transmit and receive radio signals between two devices. The technology is used in Huawei’s smartphones as well as telecom equipment such as switches and antennas for cellular base stations.

Three US companies—Amphenol, Qorvo, and Broadcom—that supply the technology to Huawei are classified as core suppliers. Amphenol provides RF connectors for Huawei’s routers and antennas, while Qorvo and Broadcom provide RF front-end modules for its consumer devices.

Skyworks, another US company, also supplies some RF front-end modules for some of Huawei’s high-end handsets, including its Mate 20 X 5G, the company’s first 5G-enabled smartphone. The RF front-end market is currently dominated by Broadcom, Skyworks, and Qorvo with market shares of 29%, 28%, and 18% respectively.

NFC chips: NFC is a set of protocols that enables two electronic devices within 4cm of each other to establish communication. The technology is widely used in contactless payment systems in smartphones.

The US firm NXP Semiconductors provides essential NFC chips for Huawei phones, including the Honor 8 and Honor 8V. The company currently makes up nearly half of the global NFC chip market, followed by Samsung and Broadcom, according to data from the China Center for Information Industry Development.

No immunity: The data shows that US companies control significant portions of the component markets critical to Huawei’s products. Even so, Huawei may have other options.

Companies like South Korea’s Samsung and SK Hynix, as well as Taiwan’s MediaTek and TSMC are all potential alternative sources. However, they too are not immune to US restrictions.

Last year, when the Chinese telecommunications company ZTE was banned from using American technology, the Taiwanese semiconductor maker MediaTek considered itself to be subject to the ban and decided to apply for an export license from the US government.

This time, in response to the US ban, a handful of non-US companies, including the UK’s ARM and semiconductor wafer maker IQE, as well as Japanese electronics giant Panasonic have already suspended business with Huawei.

On the other hand, we have also seen some Japanese carriers suspend shipments for Huawei phones after the ban took effect. But they all resumed sales as a result of the extended reprieve. This shows that many affected companies are still waiting for more certainty around the sanctions and are as yet unwilling to declare a breach with Huawei. When (or if) the reprieve—which may be extended repeatedly depending on US-China trade negotiations—finally ends, we expect to see more non-US companies cutting ties with Huawei. For their sake, Huawei had better be ready for that eventuality.

Writing about semiconductors and telecommunications.

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