Huawei’s 5G Supply Chain: Taiwan Winning Twice?

Author

Resident Senior Fellow and Director of International Studies

Hisilicon (Huawei’s semiconductor company) overtakes Apple for the first time as no.1 customer of Taiwan Semiconductor Manufacturing Corporation: this was the headline on October 22 of the Digital Times (電子時報), Taiwan’s leading ICT industry newspaper. The news reflects Huawei’s effort to stockpile Taiwanese semiconductors as a hedge against future technology transfer restrictions it may face in the United States. But it also points to something more structural: the irresistible mutual attraction between China’s growing 5G business and Taiwanese ICT hardware manufacturers. The deployment of 5G creates an immense opportunity, and being part of Huawei’s supply chain during its current phase of "de-Americanization" offers a positive growth outlook for the Taiwanese tech sector.This is happening in spite of the tensions with China in the Taiwan Strait, the context of the US-China trade war, the deepening of US-Taiwan ties under the leaderships of Presidents Trump and Tsai – and Huawei’s equipment being banned in Taiwan for security reasons.

On November 19, the de facto freeze of the designation of Huawei and 68 of its affiliated companies on the entity list of the US Commerce Department will expire, after the second 90-day period for Temporary General Licenses comes to an end. The current system of temporary licenses may be renewed or terminated; the categories of transactions temporarily authorized without an export license may change yet again. What happens next is at the discretion of the US executive branch and it is not the purpose of this piece to predict future US policy. Listing Huawei to immediately create a regime of exemptions is hardly a sign of consistency, but the US policy designed to prevent Huawei from building 5G infrastructure is overall quite consistent.

Whatever happens, Huawei is de-Americanizing its supply chain and Taiwan is a good alternative. In 2018, Huawei procured itself US$11 billion worth of goods from American suppliers: semiconductors from Qualcomm, Intel and Texas Instruments; radio frequency chips from Skyworks Solutions and Qorvo; memory chips from Micron; integrated circuit design-tools from Synopsys and Cadence Design Systems; and of course software, including Google’s operating system, Android. Recently released, Huawei’s first 5G smartphone Mate 20X includes a lot of US technologies – the result of stocks and of the Temporary General Licenses’ regime.

Can Huawei maintain its 5G offer at the same level without access to American suppliers? It is important – and analytically difficult – to distinguish telecommunication equipment from 5G smartphones. Industry experts argue that Huawei’s offer for base stations, the signal processing centers that link together a mobile network, will not be dramatically affected.

The deployment of 5G creates an immense opportunity, and being part of Huawei’s supply chain during its current phase of "de-Americanization" offers a positive growth outlook for the Taiwanese tech sector.

But there is one troublesome area for the Chinese company. Industry experts underline that the worst challenge for Huawei is access to Field Programmable Gate Arrays (FPGA), a crucial element for building base stations. Today, Huawei’s only two suppliers are American – Xilinx and Altera. Huawei has built stocks but its plan is to replace FPGA with ASIC processing, a technology currently being developed by… Taiwan Semiconductor Manufacturing Company (TSMC). If exemptions are removed, Huawei’s 5G smartphone business is more likely to be affected by American export control restrictions than its telecommunication equipment business.

In 2018, for Taiwanese ICT hardware companies, Huawei was already the second-largest customer after Apple. Total purchases from Taiwan were valued at US$12 billion in 2018. They are expected by industry sources to reach US$15 billion in 2019 according to Business Today (今周刊). Taiwanese companies supply lenses (Largan precision, also a supplier of Apple), provide assembly (FIH Mobile, a subsidiary of Foxconn), and sell radio-frequency IC modules (Richwave). Huawei also buys Taiwanese equipment for 5G infrastructure – for example, Huawei’s 5G base stations are equipped with TSMC semiconductors.

Naturally, Huawei’s 5G business is a huge opportunity for the Taiwanese semiconductor industry because integrated circuits are essential to smartphones, base stations, Internet of Things devices, etc... In 2020, US$12 billion are planned to be invested in new production sites in Taiwan. Taiwan has a global leader, TSMC, and an ecosystem of strong players present in the manufacturing (United Microelectronics Corporation, UMC), fabless IC design (Mediatek), packaging and testing (ASE Technology in Kaohsiung and SPIL in Hsinchu). Taiwanese companies represent 72,2% of the global integrated circuit manufacturing (an industry worth US$47 billion globally in 2018), and 55,9% of the packaging and testing. Adding IC designing and memory sticks, the Taiwanese semiconductor industry weighs 14,9% of the global market .

Today Huawei’s high-end smartphones use the Kirin chip series designed by Hisilicon. Mid-range products run on Snapdragon, designed by the American company Qualcomm. Low-end smartphones, such as the Y6, use the Helio series designed by MediaTek, a Taiwanese company. Despite being designed by three different companies, all are manufactured by the same Taiwanese foundry, TSMC. An alternative may emerge to TSMC manufacturing for low-end and mid-range chips that do not require the best semiconductor technology, but on the high end of the smartphone markets, the competition between Samsung, Apple and Huawei is in fact a competition between the two companies that have the capacity to build advanced fabs: Samsung, that manufactures its own chips, and TSMC, that powers IPhones and Huawei devices.

There are several examples of potential winners in the Taiwanese tech sector. For Mediatek, the largest integrated circuits designer in Asia, Huawei represents only 3% of its total sales in 2018. But since Mediatek’s new 5G system-on-chips will be available for sale next year, this percentage is set to increase and future business with Huawei might develop beyond smartphones. Win Semiconductors, a company that produces gallium arsenide, a key compound for the production of semiconductors, is expecting an increase in orders – today, Huawei already accounts for 10% of Win’s sales. Companies manufacturing components integrated in the fabrication of small cells, such as Sercomm and Alpha Networks, are expecting a boom. Indeed, 5G runs on high-frequency radio waves that have higher bandwidth and that better support increased capacity than lower frequency networks, but provide less coverage – hence the need for deployment of small cell technology in base stations. In addition, if the US ban on Huawei is confirmed, Macronix will have an opportunity to take over part of Micron’s memory chips business with Huawei.

In sum, the main risk for Taiwanese hardware providers in their Huawei business comes from the possible loss of Huawei’s access to the Android operating system. If the alternative Hongmeng is not credible, Huawei will lose smartphone market shares to Samsung, a company that does not depend on Taiwanese hardware. Ironically, while Taiwan is geopolitically aligned with the US, Huawei’s competition with Samsung results in Taiwan having a lot to lose in American technology transfer restrictions against Huawei, even if these restrictions do not directly constrain Taiwanese firms, and in a China-Taiwan alignment in the global smartphone competition.

Huawei’s reliance on Taiwan will increase – a trend at complete odds with the current tensions in cross-strait relations.

TSMC, also the highest valued company on Taiwan’s stock market, is in a key position to benefit from the 5G rollout if it navigates successfully the US-China rivalry. TSMC is today the only company with Samsung to manufacture the 7-nanometer technology for the integrated circuits that power the most advanced smartphones. TSMC’s 7-nanometer technology is on the market since 2018. Integrated within the most advanced smartphones, it is purchased by the leading movers of the 5G deployment: Hisilicon, Broadcom, MediaTek… Huawei’s Kirin 980 uses TSMC’s 7 nanometer technology. The Taiwanese giant has recently announced that its production of 7-nanometer semiconductors will be insufficient to meet the demand in the fourth quarter of 2019, and possibly even in 2020, as a result of 5G becoming commercially available.

TSMC’s position seems to be solid because its technological advance is actually consolidating, if not increasing. TSMC is on-track to start the production of 5-nanometer chips in 2020. The company plans a US$ 10 billion investment in Tainan (southern Taiwan) for the next generation of chips – the 3-nanometer technology. The move to 5 and then 3-nanometer will further increase the speed of microprocessors, allowing the addition of new functions to smartphones – in other words, TSMC’s hardware R&D is empowering the 5G/Artificial Intelligence revolution. This is possible because the entry ticket to build new generation fabs is so capital-intensive and demanding in terms of human resources that many players can’t catch up. Already, UMC (Taiwan) and Global Foundries (United States) announced they will not invest beyond the production of 14-nanometer technology.

There is confidence in Taiwan that the leading semiconductor technology will stay in Taiwan. TSMC’s US$3 billion fab (fabrication facility) in Nanjing only produces 16-nanometer technology. According to Jackson Hu, the former CEO of UMC, it makes economic sense for Hisilicon to focus on chip design, and catching-up is extremely difficult because the "degree of work specialization in the process technology is so high that Huawei would need entire teams" – single recruitments do not solve Huawei’s problem.

The top management of TSMC has a "US DNA". Most leaders were trained in the United States, some have American passports. TSMC has a difficult history with China, being constantly compelled to protect its technology from theft, or from intangible transfers through recruitment. TSMC has even won reparation in 2009 from SMIC after the Shanghai-based semiconductors company misappropriated TSMC intellectual property. If TSMC was forced to choose between the US and China, there is little doubt that the company would today choose the United States.

Taiwan’s involvement in Huawei’s supply chain highlights it is an important aspect of China’s 5G project. The discussion in Europe is – rightly – framed in terms of security risks and excessive leverage. China has recently announced a plan to accelerate the roll-out of the domestic 5G non-standalone infrastructure. One of the desired effects is to give a huge boost to domestic manufacturers of 5G smartphones so that they can benefit from economies of scale, reduce their costs dramatically and achieve global domination. Taiwanese hardware manufacturers seek to win this battle alongside Chinese companies, taking advantage of Huawei’s attempt to reduce its dependence on US components in particular.

So far, Huawei has secured more than 50 international commercial contracts with telecommunication operators. For both base stations and 5G smartphones, Huawei’s reliance on Taiwan will increase – a trend at complete odds with the current tensions in cross-strait relations. This suggests that the US export control restrictions, as they are currently designed and especially with their current regime of exemptions, will do little to weaken Huawei’s 5G equipment offer.

Copyright : SAM YEH / AFP

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Huawei’s 5G Supply Chain: Taiwan Winning Twice?