Export ban II: Huawei’s harsher, higher-stakes sequel

New export ban rules announced by the US Department of Commerce could be the blow that finally incapacitates Huawei, cutting off its ability to create advanced semiconductors.

Despite these restrictions, Huawei has continued to use US technology.  

Hisilicon has been able to continue designing chips, relying on existing licenses from key US Electronic Design Automation (EDA) tool companies Synopsys and Cadence. The rules limited these companies’ ability to provide updates, patches, and technical support, but Hisilicon could continue using the software, even if it wasn’t quite up to date.

It also didn’t block Huawei from contracting chip fabrication to Taiwan Semiconductor Manufacturing Company (TSMC), a Taiwanese company, and to Semiconductor Manufacturing International Corporation (SMIC), a Chinese company, both of which use US equipment in their production lines.

The rules did prevent Huawei from offering Google Services on its phones, a significant blow that led to reviews like “a stunning phone you shouldn’t buy.” Indeed, Huawei’s handset shipments have started to suffer outside of China, but overall sales are up due to a huge increase in domestic demand—where Google Services are not allowed anyway.

The US now says it will apply the rules to indirect relationships like TSMC, meaning anyone in the world using US technology or software to design or manufacture semiconductors for Huawei must now obtain licenses from the US.

To directly quote from the briefing, “Huawei benefited from a loophole that allowed it to make use of US electronic design software and manufacturing equipment to continue to produce its own semiconductors. That ends today.”

I’m not a lawyer, and I can’t tell you if this version of the ban is watertight. People are already suggesting loopholes on Twitter. But at the end of the day, TSMC can’t afford to give up on its US market and will comply if its lawyers can’t find a work around. SMIC, as a Chinese company, could be another story.

How does this affect Huawei?

Under these rules, many more suppliers will need a US license to work with Huawei. Fabs owned by TSMC and Samsung will need a license; many semiconductor IP companies, even some non-US ones, will need a license; outsourced design service companies will need a license. One would assume that most of the time the US will deny licenses, or at least hold the threat of denial over China and Huawei if they don’t play ball.

The process of making a semiconductor is complicated and has multiple phases, going from raw materials, to design, to fabrication, to packaging and assembly. The new rules threaten Huawei’s ability to make chips in two central phases, by limiting access to fabrication plants (“fabs”) and preventing the use of EDA tools in design.

And the rules in theory also affect Chinese companies. Just like TSMC, SMIC will have to apply for a license to manufacture Huawei’s chips, as it too uses US equipment. Imagination Technologies may be Chinese owned these days, but it still uses US EDA tools, so its IP couldn’t be used by Huawei without a license unless the company moves away from these tools. All Chinese design service companies, such as Verisilicon, use these tools—there just aren’t any realistic alternatives.

Huawei is said to have prepared by stockpiling a lot of chips, and the rules came with a 120-day reprieve for orders already in place, so Huawei’s next Kirin chip (Kirin 1000), which is in production at TSMC, should be good to go. Production is expected to stop by mid-September, so I imagine Huawei will look to manufacture as many of this chip at TSMC as possible between now and then. Plans for the 5nm Kirin 1100 for next year may have to be scrapped, as only TSMC can do this. Any future high-end designs at 7nm and 5nm will have to be scrapped or moved to another less advanced process.

Of course, even this is possible only if there is a fab that can set that up without US equipment in that time period. There isn’t an obvious loophole.

The fab problem

Not having Google Services is one thing, but if you don’t have a chip you don’t have a product, even for the domestic market.

But Huawei has surprised us before and may continue to do so. It would have known this was coming, and as such will have some contingencies. But it’s hard to conceive of a plan that would cover this situation. Huawei does have a stockpile, but you can’t stockpile chips that haven’t been manufactured yet.

Without loopholes, there are more or less no existing fabs that can work with Huawei for now. In the short-term, this means Huawei has nowhere to manufacture its chips. In the medium-to-long term, there are some answers, if costly ones.

One, TSMC, Samsung, SMIC, and other fabs could create Huawei-specific, or China-specific, production lines with zero US equipment. This would be a huge investment just to deal with one customer, but if US restrictions spread to all Chinese companies it could make sense economically. Even Huawei alone could still make sense to TSMC, which relies on Huawei for 10-15% of sales, but this risks the wrath of the US government. The Chinese government might also push SMIC to set up a non-US line. It announced a $2.2 billion investment into SMIC straight after the US announcement, perhaps to create such a production line, but this wouldn’t replace TSMC’s 5nm and 7nm, and current SMIC free capacity is not enough to deal with orders from Huawei.

Two, Huawei could start fabricating its own chips, like Intel or Samsung. It would have to create its own chip production line free of US equipment. This isn’t something that can happen overnight, and would not be cheap, but would give it more control.

It makes more sense for it to work closer with domestic fabs to create US-free production lines, as it is more economical and lets both companies focus on their core expertise. Either option could result in no longer having access to leading edge process and so a worse product than today.

But either option could fail, depending on what the US does with international equipment makers. While there are non-US manufacturers, they are probably vulnerable to US pressure just as TSMC and Samsung are. Leading Dutch equipment company ASML has previously followed US export rules, and without ASML you can’t have a high-end chip.

The EDA problem

On the EDA front, Huawei’s research and innovation lab, called the 2012 lab, has been rumored to be working on its own set of tools. It is unclear how ready these are, but this could be one area where the company surprises us all.

Read more: SILICON | China’s design tools conundrum

Domestic tool companies already have tools for certain parts of the design flow, but nothing that covers the entire design process from architectural exploration, to RTL verification, to physical design, etc. The Department of Commerce has made it clear it wants to stop Huawei using Synopsys, Cadence, and Mentor tools, and I interpret the following to mean its partners can’t use them either to supply Huawei with design services or silicon IP:

This expanded rule will impose a US licensing requirement, an export-control licensing requirement whenever anyone anywhere in the world uses US technology or software to design or produce semiconductors for Huawei. Companies wishing to sell certain items to Huawei produced with US technology must now obtain a license from the United States.

That brings us to the IP problem. Although Huawei has a make rather than buy philosophy, it does rely on several IP companies that will be affected by the new rules, and these IP companies often use US EDA tools to design their IP. Although Arm cores were previously deemed to be UK origin technology and Huawei could continue to access Arm v8 and v9 architectures Arm uses EDA tools from companies like Synopsys, so could Arm IP be back on the chopping block? 

As I have written before, the new open source architecture RISC-V could be Huawei’s way out here. But while RISC-V is growing fast and is extremely versatile, its ecosystem does not match Arm’s yet, so it will be a few years before it is viable in consumer electronics like handsets.

But it’s not just Arm. There’s a lot of scattered IP in a design: the GPU, communication interfaces, on-chip monitors, etc. In addition to EDA, Synopsys, is also an IP provider. Just one example is its USB IP: Huawei uses Synopsys USB 2 and USB 3 PHY IP, and it no longer can. This IP is not something that can just be designed overnight, and Huawei will need to find an alternative that doesn’t come from a company using US EDA tools.

System-on-a-chip design companies like Hisilicon invariably rely on IP for some parts of their designs, in order to speed up the design process and create the best performing design possible. For some IP, it seems Huawei will have to design itself using a mix of its own tools and other domestic tools, as well as encourage its non-US suppliers to verify RTL using other tools. I spoke to one non-US IP company, whose lawyer confirmed it won’t be hit by the rules and can carry on licensing to Huawei, so there will be some IP suppliers Huawei can still rely on.

Production, EDA, and to a lesser extent, IP are the three main areas of concern, but there are many others, field programmable gate arrays and emulators for chip prototyping being one, 5G test and measurement equipment being another.

Deus ex Biden unlikely

I expect the US tech lobby will be going crazy right now, as many companies are not just losing their Huawei business, but also Chinese business. The first question I often get asked in meetings these days is: “is your IP American?”

The environment in the US is very anti-China. As Trump and Biden attack each other as soft on China, they’re bidding up the confrontational attitude, and I don’t expect that to change any time soon. There may be change rhetorically, but not in US policy goals.

China has, of course, been just as brash and undiplomatic. Its media are calling for a strong counterattack, and the government itself has threatened to use what it calls its “Unreliable Entity List.” That threat hasn’t been made concrete at this time, but Apple, Boeing, Qualcomm, and Cisco are have been rumored as targets.

I have considered some options for Huawei here, but none of them feel very realistic or short-term. The best option would be to find a way to avoid the ban coming into force.

Meanwhile, TSMC will be trying everything it can to help. Losing Huawei’s business would also a huge blow for the Taiwanese fab, and I’m sure it will be taking legal advice as well as lobbying the US government to let it continue its work with Huawei. Its announced fab in Arizona seems not entirely certain, so this investment could be used for leverage in any negotiations.

Will there be enough chips?

A worst-case scenario sees Huawei without enough chips for its next flagship product, and stuck with either nowhere to manufacture chips, or an inferior US-equipment free production line that means future products are no longer world leading, possibly after many months of interrupted production. That’s not even considering a scenario where the company can’t even viably design chips at all.

I’ve focused on phones, but Huawei also needs the chips it designs for all its other product lines: servers, laptops, switches, base stations, AI, cameras, etc. It will have been stockpiling a lot of these, especially 5G base station chips, but it still faces the problems highlighted above across all its product lines.

The company has surprised us before though, and perhaps it can again. But if it can’t, then we can expect a very different Huawei, and US tech can look forward to retaliation in China.