A detailed analysis of Huawei's chip supply chain: opportunities and challenges coexist in the semiconductor industry

Source: The content comes from " China Merchants Electronics ", author: Yan Fan team, thank you.

The Sino-US trade dispute originated from the "301 investigation" that began in August 2017. On March 22, 2018, the Office of the United States Trade Representative (USTR) announced the results of the "301 investigation", determining that there were unreasonable tariffs, forced technology transfer, investment restrictions and other issues in China. On the same day, US President Trump signed a presidential memorandum to impose large-scale tariffs on Chinese imports based on the "301 investigation" in order to reverse the trade deficit between China and the United States. The trade dispute officially kicked off.

According to statistics from the U.S. Department of Commerce, the United States imported $505.5 billion from China in 2017 and exported $129.9 billion to China. The trade deficit reached $375.6 billion. However, after several rounds of mutual tariffs in the past year, U.S. imports from China increased to $539.5 billion in 2018, a year-on-year increase of 6.7%. At the same time, U.S. exports to China fell to $120.3 billion, a year-on-year decrease of 7.4%. The trade deficit reached $419.2 billion. It can be seen that the imposition of tariffs has not helped to reduce the trade deficit between China and the United States. Instead, the unwarranted taxation has increased the value of goods imported by the United States, which is ultimately borne by American consumers.

But it is undeniable that the fluctuations in relations between China and the United States, from mutual tariffs to technology embargoes, have had a significant impact on the development of the global electronics industry. The semiconductor boom has declined significantly in 2018, the RMB exchange rate has fluctuated greatly, and there is also a certain pressure on the supply chain to shift. These have greatly affected the macroeconomic environment. Market sentiment is also inevitably affected, and the A-share electronics sector has fluctuated significantly in 2018. But overall, its marginal impact has decreased in 2018. On September 18, 2018, the day when the 200 billion tax list was implemented, the market rebounded by 1.40% in a single day.

After more than a year of conflict, Sino-US relations have eased slightly after the G20 summit in December 2018, and market sentiment has improved, which has driven the electronics sector since the beginning of the year. However, the US attitude has changed drastically recently. A series of measures such as unwarranted increase in tax rates and imposition of embargo on Huawei have cast a shadow on the Sino-US relations that have gradually reconciled, and trade disputes have resurfaced.

From the perspective of taxation, the previous $200 billion tax bill further increased the tax rate, but since this sector mainly involves home appliance business and some security products, it has little impact on the electronics industry; and the newly added $300 billion includes mobile phones, laptops, headphones and other consumer electronics related products, which may prompt the transfer of finished product business capacity of consumer electronics exports to the United States ; and the component business is not directly affected by tariffs. Many high-quality companies have already had overseas layouts. The Sino-US trade friction will further accelerate the global factory layout of high-quality companies, and the capacity coordination and control capabilities are expected to be further improved, promoting the development of the industry.

In the security sector, the previous 200 billion list has covered some analog cameras, but they only account for 25% of the security sector's exports to the United States. If the 300 billion US dollars is further implemented, all security products exported to the United States will be taxed. However, since overseas leaders such as Hikvision and Dahua have begun to deploy overseas, Hikvision has established a production center in India; Dahua has established a global transshipment center in Mexico. It can effectively offset the impact of increased tariffs.

In the LED sector, since the $300 billion list involves the largest-selling LED bulbs and filament lamps, it will directly impact the end products. Downstream manufacturers may be more cautious when placing orders to deal with inventory risks. However, some mainland LED manufacturers have already made overseas arrangements. For example, MLS has set up production lines in the United States or Mexico based on Ledvance.

Compared with taxation, the impact of technology embargo is more far-reaching. The United States uses its dominant position in the industrial chain to suppress the leading manufacturers in China's ICT industry through embargoes or technology blockades. The most effective means are software system blockades and semiconductor embargoes. Against the backdrop of the Sino-US trade dispute, the urgency of self-control of semiconductors has become more prominent. The Huawei incident has further promoted the market's attention to the semiconductor sector.

Affected by the trade dispute and the Huawei ban, the A-share electronics sector has seen a system adjustment again in the early stage, with a single-day drop of 8.26% on May 6. However, we are not pessimistic about A-share investment. At present, the electronics sector has adjusted to the position of early October 2018. The market has fully released the pessimistic expectations, and many high-quality stocks are significantly undervalued. Moreover, referring to the trend in 2018, even if there are twists and turns in the trade dispute, the impact on A-shares will be marginally reduced.

At present, we believe that we need to start from the bottom up and grasp the high-quality companies that can actively respond to adjustments and build their own competitiveness against the trend based on the medium and long-term logic. At the same time, we should pay attention to the performance of the semiconductor sector under the catalysis of the independent and controllable logic. We are still firmly optimistic about the long-term development of China's electronics industry, and the medium and long-term position building value of related high-quality white horses in the market system adjustment is prominent!

Huawei was founded in Shenzhen in 1987. The company started as a switch agent, and then expanded from rural areas to cities, and gradually broke through communication equipment. In 1997, it introduced eight management transformation projects such as IBM's IPD (Integrated Product Development) and ISC (Integrated Supply Chain). This greatly optimized the company's internal management process and paved the way for subsequent global layout and overseas expansion. While making great breakthroughs in the operator business, Huawei further expanded its business boundaries and comprehensively laid out the cloud, pipe and terminal fields. Huawei established a terminal company in 2003, which was later reorganized into the consumer business BG ; in 2011, the enterprise business BG was established. The three major fields have progressed in parallel, driving Huawei's rapid growth in the past decade.

In 2018, Huawei achieved revenue of RMB 721.2 billion, a year-on-year increase of 19.5%. The company has maintained an operating income growth rate of more than 15% for five consecutive years. Net profit was RMB 59.3 billion, a year-on-year increase of 25.1%.

At present, Huawei's three major business segments have revenues of 294 billion yuan for carrier business, 336.6 billion yuan for consumer business, and 74.4 billion yuan for enterprise business. In 2018, the company's consumer business achieved a growth rate of 45.1%, and its revenue scale exceeded that of carrier business for the first time, accounting for 48.4% of its revenue.

In the field of R&D investment, Huawei insists on investing more than 10% of its sales revenue in R&D every year, and the cumulative R&D investment in the past decade has reached 485 billion yuan. In 2018 alone, the company's R&D expenditure reached 101.5 billion yuan, accounting for 14.1% of its annual revenue, an increase of 13.2% year-on-year.

The company currently has more than 80,000 R&D personnel, accounting for about 45% of the company's total number of employees. As of the end of 2018, Huawei has obtained a total of 87,805 authorized patents worldwide, including 11,152 authorized patents in the United States. According to data released by the World Intellectual Property Organization (WIPO), Huawei submitted a total of 5,405 patent applications in 2018, ranking first in the world.

The company's continuous high growth in recent years and its comprehensive layout of cloud management have made its revenue scale far surpass that of other communication giants such as Nokia and Ericsson, and it is on par with traditional IC giants such as Microsoft and Google. In comparison, Huawei ranked only 351st in the Fortune Global 500 in 2012, 42 places behind Ericsson. In 2018, Huawei's ranking in the Fortune Global 500 jumped to 72nd, while Ericsson dropped to 500th.

Since the reform and opening up, China has actively developed its local OEM manufacturing industry and gradually become the world's factory. However, in the past, China's local manufacturing industry focused more on low value-added assembly business , and the basic materials, basic parts, basic processes and industrial technology foundations at the upstream of the smile curve of the entire industrial chain were relatively lacking. The industry lacks a top-down autonomous system.

In order to change this situation, enhance the comprehensive competitiveness of my country's industries, and respond to a new round of global scientific and technological revolution and industrial transformation. In 2014, led by the Ministry of Industry and Information Technology, more than 20 relevant departments of the State Council jointly drafted "Made in China 2025", which was issued on May 19, 2015. The goal is to become a manufacturing power within ten years. By 2035, my country's manufacturing industry as a whole will reach the middle level of the world's manufacturing powers. And by the 100th anniversary of the founding of New China, its comprehensive strength will be among the world's manufacturing powers. The main fields of manufacturing have innovation leadership capabilities and obvious competitive advantages, and have built a world-leading technology system and industrial system.

In order to achieve this goal, the country has formulated five major projects and ten major areas. Among them, whether it is the industrial base strengthening project or the new generation of information technology industry, both highlight the importance of developing the next generation of information networks and self-sufficiency in core components.

The recent launch of the Science and Technology Innovation Board is a response to Made in China 2025 from a capital perspective. From the perspective of the industry classification of the Science and Technology Innovation Board, the new generation of information technology industry is the primary focus, including semiconductors and integrated circuits, electronic information, next-generation information networks, artificial intelligence, big data, cloud computing, emerging software, the Internet, the Internet of Things and smart hardware.

Driven by national policies, China's ICT industry has developed rapidly, and Huawei, as the industry leader, has continued to lead the industry's development. Huawei's rise has consolidated the country's competitiveness in core areas such as communications and semiconductors, and has shaped the terminal brand of Huawei mobile phones. From the perspective of the industrial chain, it has driven the localization demand of upstream and downstream, and on the other hand, it has also provided a cradle of talents for domestic industries. This shows the importance of the company to the development of China's hard technology.

Take integrated circuit chip design as an example. Since Huawei established HiSilicon Semiconductor in 2004, it has continued to invest heavily, providing soil for its development based on its huge revenue volume and chip demand. According to statistics from the China Semiconductor Industry Association, in 2017, HiSilicon achieved a revenue of 30.3 billion yuan, far ahead of other domestic chip design companies, and has global competitiveness, ranking seventh in the world. In 2018, HiSilicon continued to grow rapidly, achieving a revenue of 50.3 billion yuan.

From the perspective of the industrial chain, HiSilicon has a huge demand for chip manufacturing and packaging every year. In the past, due to the imperfect industrial chain in the mainland, the company placed more foundry services in Taiwan's TSMC, Siliconware Precision Industries and other manufacturers. At the same time, HiSilicon has maintained close technical exchanges with mainland manufacturers such as SMIC and Changdian Technology all year round. And After the relevant manufacturers have the capabilities, they actively transfer orders to the mainland supply chain. This has effectively driven the development of China's semiconductor manufacturing and packaging industry.

Perhaps it is because they feel threatened by China's technological power led by Huawei. On May 16, the US Department of Commerce added Huawei and 70 subsidiaries to the so-called Entity List, which will prohibit Huawei from purchasing components from US companies without the approval of the US government. On May 20, the US Department of Commerce announced a "limited exemption" for Huawei's ban, aimed at mitigating the impact on existing customers, but Huawei still cannot purchase US components for the production of new products.

The "Entity List" is a list of individuals published by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce. It was first released by the U.S. Department of Commerce in February 1997. Entities that are considered to endanger U.S. national security or affect U.S. overseas interests will be included in the list to clearly inform exporters that they must not help these entities obtain any items subject to these regulations without a license. At the same time, applications for relevant licenses should be reviewed in accordance with the review standards specified in Part 744 of the Export Administration Regulations (U.S.), and no license exceptions are applicable to the export or re-export of relevant items to such entities. Previously, manufacturers such as ZTE and Fujian Jinhua were included in the "Entity List". In addition to the Entity List, the U.S. Department of Commerce has also released the Unverified List, which is called the Unverified Entity List. Exporters are required to submit additional detailed records to the Department of Commerce before exporting any items. This list is less binding than the Entity List. In April 2019, Sanan Optoelectronics was included in the "Unverified List".

But in fact, facing the potential threat of supply cuts from the United States, Huawei had already made an extreme survival assumption many years ago and actively began to prepare for both short-term and long-term situations.

(1) Short-term response: Since the incident involving Ms. Meng in 2018, Huawei has begun to increase its purchases of parts from suppliers such as Murata, Toshiba, Kyocera, and Rohm, and has increased its purchases in Taiwan. For example, orders from Largan Precision have increased significantly. At the same time, according to industry chain research, Huawei has also prepared 6-12 months of inventory for products from American semiconductor companies. This is enough to ensure normal production in the near future, thereby giving Huawei a buffer period for supply chain switching.

(2) Long-term strategy: Huawei continues to increase its R&D investment in HiSilicon. The rapid growth of HiSilicon provides a solid guarantee for Huawei's three major business segments : the mobile phone side has Kirin SOC processors and Balong baseband processors; the base station side has Tiangang chips; the enterprise network business has AI processors such as Ascend 310 and 910. At the same time, Huawei also plans to set up wafer fabs in Cambridge, UK and other places in the near future, which are expected to be operational before 2021.

In an open letter, HiSilicon President He Tingbo said, "It is expected that one day, all advanced chips and technologies from the United States will be unavailable, and Huawei will continue to serve its customers. For this assumption that was thought to never happen, thousands of HiSilicon children embarked on the most tragic long march in the history of science and technology to build a 'spare tire' for the company's survival." These "spare tire plans" are the strategies that Huawei founder Ren Zhengfei set early on to cope with challenges.

In addition, Huawei is actively looking for alternative suppliers and implementing a de-A strategy. On the one hand, it relaxes the certification qualification conditions for domestic suppliers and increases the exploration and cultivation of domestic potential suppliers. Domestic leading manufacturers such as BOE and OmniVision Technologies have seen significant growth in their business with Huawei.

On the self-developed operating system , Richard Yu, president of Huawei's consumer business unit, said on May 17 that in addition to self-developed chips, Huawei also has the core capability of operating systems. Huawei began developing its own operating system as early as 2012, and it is expected to be released between Q3 2019 and Q1 2020. The OS connects mobile phones, tablets and personal computers, and is expected to be compatible with all Android applications and Web applications.

After the Huawei ban, Huawei's hardware suppliers such as Qualcomm, Intel, TI, ON Semiconductor, and Teradyne all received letters from the US Department of Commerce, requiring relevant suppliers to prohibit supplying to Huawei and suspend all new orders. However, due to the "limited exemption" made by the US Department of Commerce on the ban on Huawei on May 20, the supply of relevant suppliers has been restored to a small extent, which can support the product maintenance of some old customers in the short term.

At the same time, Huawei is also actively seeking support from non-US suppliers. The company has asked its top Asian suppliers to maintain delivery. TSMC said that although it is evaluating the impact of the US decision, it will continue to supply Huawei. Innolux also said that its supply arrangements for Huawei will remain unchanged.

European countries have also made clear their support for Huawei's business . In March this year, Huawei opened the European Cybersecurity Center in Brussels, Belgium, and rarely opened its products and source code to the outside world. This showed Huawei's sincerity in external cooperation and won the trust of European countries. EU countries such as Germany, France, and the Netherlands have also made it clear that they will not ban Huawei under pressure from the United States and will not exclude Huawei from bidders for 5G networks. In addition, Russian telecommunications giant Viper Communications plans to invest 5 billion rubles by 2020 to fully switch to Huawei equipment in the renewal of Moscow's telecommunications network.

Overall, the Huawei incident has disrupted the development of the global technology industry. Although US supply chain manufacturers have stopped supplying Huawei under pressure, the company still has support from supply chains and downstream customers in other countries around the world. We still have confidence in Huawei.

At the same time, there have been many market rumors recently, with many media outlets reporting that non-US suppliers such as Infineon and Murata have stopped supplying China. However, all of these rumors have been refuted by listed companies. We believe that we still need to maintain a calm attitude and not be afraid of the short-term impact of rumors. The leaders of China and the United States will also hold talks at the G20 summit on June 28-29, and the Huawei incident may see a turnaround.

In 2018, Huawei's carrier business accounted for 42% of its total revenue, while its consumer business accounted for 47% of its total revenue. Therefore, mobile terminals and communication equipment are Huawei's most important terminal products.

In terms of consumer business: Huawei Mobile Terminal Company was established in 2003 and later reorganized into the Consumer Business BG. In recent years, Huawei's mobile phone sales have continued to increase rapidly. In the first quarter of 2015, Huawei's mobile phone sales were 17.4 million units, with a market share of only 5%; in the first quarter of 2019, mobile phone shipments jumped to 59.1 million units, with a market share of 19.02%, surpassing Apple and second only to Samsung.

We believe that the rise of Huawei phones is mainly due to: 1. Huawei has always insisted on HiSilicon's chip research and development in difficult times, achieved self-sufficiency in processor chips, broke Qualcomm's monopoly on processor chips, and possessed core competitiveness; 2. Huawei phones have world-leading camera effects. The Honor 6 Plus series first launched dual cameras, and the P20 Pro launched triple cameras, effectively capturing consumer demand; 3. The market positioning is accurate. The Honor series focuses on cost-effectiveness, while the mid-to-high-end Mate and P series can compete with giants such as Apple and Samsung in terms of performance.

In terms of carrier business: Huawei's carrier business has always been the company's business focus. The company started in the Chinese market and gradually expanded its business to the world. In addition to developing countries, Huawei has made breakthroughs in the European telecommunications market since 2014 and has won a large share. Taking this opportunity, Huawei surpassed Nokia in 2015 and became the world's number one communications equipment provider. The development of the company's carrier business has not been smooth sailing. The company has experienced Cisco's lawsuit against Huawei and the challenge from the emerging enterprise Harbor. Despite the ups and downs, it is still growing steadily.

In contrast, ZTE, another Chinese carrier business giant, has also continued to improve its competitiveness in the carrier market over the past decades. However, due to the unfair embargo imposed by the United States in 2016 and 2018, its business development was affected to a certain extent, and its market share declined in 2018.

As a consumer electronic product, mobile phones are relatively less complex, so in this section we will start from the perspective of disassembling the phone and discuss the self-sufficiency rate of Huawei's mobile phone business item by item.

We have compiled a teardown report of Huawei's flagship models launched in the past two years. Overall, Huawei can achieve self-sufficiency in chips including processors and power chips . In terms of under-screen fingerprint, CIS chips and OLED, breakthroughs by domestic manufacturers such as Goodix Technology, OmniVision Technology and BOE have strongly supported import substitution. Memory chips are still dependent on imports, but Korean manufacturers can meet the demand, and domestic Changxin is following up quickly. Currently, the chips that are more dependent on American suppliers are mainly in the fields of wireless charging and RF .

In terms of wireless charging , Huawei mainly uses IDT chip solutions, which was acquired by Japan's Renesas in 2018. However, since its R&D location is in the United States, it is still affected by this ban. However, many domestic manufacturers have emerged in the field of wireless charging recently, such as Maxic, Yichong, etc. Among them, Maxic has recently passed Huawei certification and is expected to quickly achieve domestic substitution in the future .

In the field of RF chips, there is still a big gap between domestic chips . According to Yole's forecast, in 2017, the global mobile phone RF chip market size was US$15 billion, of which the filter market size was the largest, reaching US$8 billion. In the future, it will be power amplifiers, switches, tuners, low-noise amplifiers, etc. In 2023, the entire RF chip market size will reach US$35 billion, with a compound growth rate of 14% . Among them, the fastest growing is the filter, with a compound growth rate of 19%. It is also worth noting that with the advent of 5G, AIP chip solutions used in millimeter wave scenarios will gradually increase in volume, and it is estimated that there will be a market space of 423 million in 2023.

Currently, the top four RF chip companies are Skyworks, Qorvo, Broadcom, and Murata, with market shares of 24%, 21%, 20%, and 20%, respectively. Among them, only Murata is not an American manufacturer. Murata's SAW filter market share ranks first in the world, but other RF devices are not very competitive, and it also does not have FBAR technology. Therefore, the domestic mobile phone industry chain is highly dependent on the American RF chip supply chain .

We believe that domestic digital chip design capabilities are relatively strong. However, analog chips are more dependent on the experience of R&D personnel, so there is a big gap. Among them, RF chips, as the crown jewel of analog chips, have the highest threshold and strong bargaining power in the supply chain. According to Navian's statistics, the market share of domestic RF chips was only 2% in 2017. Although it has improved in the past two years, there is still a large gap from domestic substitution.

At present, the main domestic RF PA manufacturers include Weige Chuangxin (entered Huawei's supply chain in 2018), Huizhiwei (being verified by many leading domestic manufacturers), Zhongke Hantianxia, ​​Guomin Feixiang, etc. The main RF switch and LNA manufacturers are Zhuoshengwei.

In the previous article, we discussed the insufficient self-sufficiency of RF chips in the mobile phone chip supply chain. On the base station side, the chip shortage is further highlighted. Since base station products require high reliability and high precision, the chip self-sufficiency rate is relatively low. Currently, the two major products that are highly dependent on American suppliers are RF chips and FPGA . In addition, some high-voltage power supply devices on the base station side are also worthy of attention.

(1) Detailed explanation of the trends and suppliers of the RF chip industry

In terms of IF and RF chips, in the past, analog IF and RF chips mainly adopted discrete solutions , and the chip architecture within the system was relatively complex: mixer, DVGA, phase-locked loop, ADC, DAC, orthogonal modulator, DPD receiver, RF filter, RF PA, etc.

On the eve of 5G, in order to meet the size requirements of micro base stations, all companies have begun to turn to two types of single-chip solutions: RF ADDA or Transceiver. Both of the above two types of solutions integrate intermediate frequency analog chips and some RF chips to complete the function of converting baseband signals to RF. The back end only needs to add RF PA to complete the base station function. Since the integration of RF ADDA and Transceiver chip solutions has been greatly improved, the threshold of base station chips has been further raised , making it more difficult for domestic manufacturers to enter. As can be seen from the AD9213 chip block diagram below, the integration of single-chip solutions is extremely high, so currently the only mature suppliers in the industry are TI and ADI.

However, according to industry chain verification, HiSilicon has already started the research and development of RF transceiver, but the early test results are relatively unsatisfactory. In addition to HiSilicon, Jinzhuo Network's RF transceiver chip is also under development in China, and is still in the early stage of FPGA verification.

(2) FPGA domestic substitution begins

FPGA (Field Programmable Gate Array) is a field programmable gate array. Compared with ASIC (application-specific integrated circuit), FPGA is slower and requires a larger area to achieve the same function, but FPGA has the advantages of rapid production, lower cost, irreplaceable programmability and vector computing, so it is widely used in the market.

In 2018, the global FPGA market size was US$6.335 billion, up 8% year-on-year, of which electronic communications accounted for 40%, consumer electronics accounted for 23%, automobiles accounted for 16%, data centers accounted for 8%, and industry accounted for 13%. FGPA can effectively improve the operating efficiency of base stations, help improve connection speed, reduce latency, increase connection density, and make better use of spectrum bandwidth. It is expected that by 2025, the FPGA market size will reach US$12.5 billion.

Through industry chain research, we learned that FPGA is mainly used in the digital front end of base stations to achieve data compression, acceleration and other functions . Specific application scenarios include: I/Q data compression, hardware acceleration, AAA processing, and improving CRAN base station connectivity.

Taking I/Q data compression as an example, the base station signal needs to be orthogonally modulated to increase the frequency. The two signals after orthogonal modulation are I and Q. Since the complexity of 5G signals is greatly increased, FPGA data compression is required for the baseband signal. The CPRI protocol is used as an example in the figure, but in fact FPGA data compression can be extended to UL and DL signals on all common air interface standards.

Currently, the FPGA market is dominated by Xilinx and Altera, of which Altera was acquired by Intel in 2015. Other manufacturers include American companies Lattice and Microsemi; mainland companies include: Unigroup Guoxin; Jingwei Yager; Gowin Semiconductor; Shanghai Anlu Technology, etc. , but they are still far from large-scale commercial use in base stations.

(3) Base station power chip analysis and industry recommendations

Huawei HiSilicon has continued to invest in the base station field, achieving self-sufficiency in baseband chips in the 4G era, and launched the Huawei Tiangang 5G baseband chip in 2019. In addition, there are also reserves of base station RF chips.

But relying on Huawei alone is not enough. Since base stations are much more complex than mobile phones, the certification process is longer and the quantity is limited. Therefore, domestic chip design companies prefer mobile phone chips that are large in quantity and easier to replace with domestic products.

Taking power chips as an example, base stations need high-voltage chips for converting AC to DC, and also need isolated power chips for transforming voltage at 48V. The threshold for these chips is not high, but domestic manufacturers rarely invest in research and development in this field. After the ZTE incident, Huawei accelerated the certification process for domestic chips, but the industry chain cannot rely on Huawei alone, and domestic companies need to work together to promote it.

(1) Android's suspension of GMS service authorization may affect overseas markets

On May 20, foreign media reported that Google had stopped cooperating with Huawei, and Google China later confirmed the matter via email. It also said that Android has stopped authorizing GMS services for new Huawei devices, and Google services for existing devices will not be able to be upgraded, but their use will not be affected.

Since overseas markets are highly dependent on a series of services in GMS services, such as Google Play software store, Google Maps, Youtube, etc., Huawei's mobile phone sales in overseas markets may be affected. According to Canalys statistics, Huawei's mobile phone sales in 2018 were 206 million units, of which 101 million units were sold overseas, accounting for about 50% of the total sales. It is reported that many overseas operators have stopped selling new Huawei phones.

In the face of software blockade, Ren Zhengfei said in an interview earlier that he was negotiating a relief plan with Google. At the same time, Huawei is also actively developing an operating system and has registered the Hongmeng trademark. According to Yu Chengdong, the system will span mobile phones, tablets and computers, and will be compatible with Android apps. It is expected to be launched as early as Q3 2019 or as late as Q1 2020.

(2) The lack of IP and EDA has far-reaching impact

In terms of IP, there have been recent media reports that ARM has stopped cooperating with Huawei. We believe that since Huawei and ARM have signed a lifetime license for the ARM v8 architecture, the development of new products will not be affected for the time being. In fact, according to a survey of the China Merchants Electronics Industry Chain, HiSilicon will hold a Kirin new product launch conference on May 30, and internal work is proceeding as usual.

At the same time, from the perspective of the scope of authorization, Huawei purchased the most difficult architecture license . During the development process, it only used the most basic instruction set defined by ARM, and relied entirely on self-research in the future, so it has a low reliance on ARM's technical support. Currently, the main manufacturers worldwide that use ARM architecture licenses are: Huawei, Qualcomm, ARM and Samsung.

In fact, we should pay more attention to the progress of ARM v9, because Huawei's previous contract did not involve future products. Therefore, if the embargo cannot be resolved before the launch of v9, it may reduce HiSilicon's long-term competitiveness.

The Huawei ARM incident highlights the lack of the domestic semiconductor industry in the core IP field. It is recommended to pay attention to local IP companies such as VeriSilicon and Imagination.

EDA: There are currently three major integrated circuit EDA companies in the world, namely Synopsys, Cadence, and Mentor Graphics. The three companies have almost formed a monopoly in the market share of the EDA industry, and they are all American companies.

Synopsys' advantage lies in the fact that after acquiring Astro, it has improved its product portfolio and provided comprehensive and powerful solutions. Cadence was once the industry's number one manufacturer, but fell to second place after the marriage of Synopsys and Astro. The company has unique advantages in analog circuit design. Mentor is much smaller than the above two companies and was acquired by Siemens in 2016.

At present, HiSilicon has signed a multi-year contract with EDA manufacturers, so basic use is not affected for the time being. However, EDA is different from IP, and this field is highly dependent on technical support . Especially for highly complex CPU development, once a bug occurs during the RTL to layout process, it needs to be analyzed from the perspective of EDA code. Without the technical support of EDA manufacturers, it will seriously affect the progress of chip development.

We understand that Huawei has also been actively testing domestic EDA software recently, such as Xinhe Technology, HuaDa JiuTian, ​​etc., but overall, domestic EDA software is more distinctive in certain segments and is far less comprehensive than overseas giants such as Synopsys.

(3) Other risks: 25% long-arm jurisdiction

Recently, media reported that the U.S. Export Administration Act stipulates that if the products sold by a third-party company to a target company on the "Entity List" contain more than 25% of parts and software produced by U.S. companies, the third-party company will also be included in the sanctions list.

By consulting the U.S. Export Administration Regulations, we found the source of the 25% long-arm jurisdiction claim.

“Items subject to the Export Administration Regulations” include the following:

1. All USorigin items wherever located in the world.

2. Any item in the United States and being exported to any of these entities from the United States.

3. Any foreign made item that contains more than 25% US origin “controlled” content (or 10% if exported or reexported to Iran, North Korea, Sudan, or Syria) (the so-called “de minimis” rule).

4. Anyforeign made item that is the direct product of US origin technology or majorplant and equipment located abroad, where the foreign-made product and the USorigin technology or majorplant and equipment are controlled for "nationalsecurity" reasons.

We believe that the concept of US origin "controlled" content is rather vague, giving the US greater freedom in its implementation. If strictly enforced, more non-US suppliers may be subject to the 25% long-arm jurisdiction, which is worthy of attention.

The Huawei incident highlights the imperfection of the domestic ICT industry chain. In the past few years, China started from the lowest value-added foundry in the smile curve, gradually cut into the downstream, and established world-renowned brands such as Huawei, ZTE, Xiaomi, and Gree. However, semiconductors, software systems, and even basic materials located at the upstream of the smile curve of the entire industry chain are significantly insufficient. The industry lacks a top-down autonomous system .

According to Gartner statistics, the total demand for chips from mainland brands in 2018 was US$94 billion, while the total output value of local chip design companies was only US$26 billion.

For Huawei, Huawei's chip purchases in 2018 were US$21 billion, ranking third in the world. HiSilicon's revenue was RMB 50.3 billion, equivalent to US$7.3 billion at the exchange rate of 6.88 at the end of 2018. Although it is the seventh largest fabless chip design company in the world, it is still far from enough to meet all the company's needs. The domestic semiconductor industry chain needs to work together to promote independent control.

Here we have counted Huawei's top 70 US suppliers, of which 39 are semiconductor suppliers. This shows the strong position of the US semiconductor industry chain. In the table below, the data on Huawei's business revenue share is taken from BloomBerg; while the domestic benchmark companies and self-sufficiency rates are obtained through industry chain research.

Overall, the domestic semiconductor chip self-sufficiency rate is still relatively low.
(1) In addition to mobile phone processors, only fingerprint recognition, MCU, discrete devices, and audio codec, driven by some excellent domestic companies, have a good market share.

(2) In the fields of AI chips, analog chips, RF chips, IP, etc., some leading companies with great potential have emerged, but there is still a distance to go before domestic substitution can be achieved.

(3) The PC processors and memory, which have the largest market space, as well as EDA and FPGA, which are of prominent importance, are still in the breakthrough period.

From the perspective of market size , we excluded other types of companies that have little to do with hard technology. Among the top 20 U.S. companies in terms of Huawei's purchase amount, there are 13 semiconductor companies, 2 optical module companies, and 1 base station antenna company. Other companies with large purchase amounts include foundry Flextronics, glass giant Corning, PCB company TTM, and LittleFuse, a company that produces fuses and other circuit protection devices.

Affected by the previous memory price increase, Huawei's memory purchase amount in 2018 was relatively high. Micron's total purchase amount reached 3.951 billion US dollars, making it Huawei's largest supplier, accounting for 18.81% of Huawei's total chip purchase amount in 2018. And Thanks to its comprehensive layout in the field of communication RF chips, Broadcom ranked second with 2.247 billion.

In addition to the above two companies, other downstream areas of chip design companies with large procurement amounts include: mobile phone processors, PC/server processors, analog chips, communication chips, etc. These are all sub-sectors with large market scales.

In 2018, the global revenue of Fabless design companies reached 109.4 billion US dollars. By region, American companies have a clear leading position, accounting for about 68% of the global design industry; followed by Taiwan and mainland China, with shares of 16% and 13% respectively. Then came Europe, Japan and other countries. But it is worth noting that the chip design industry in Europe is dominated by IDMs , such as Infineon, NXP, and ST, which are all among the top 15 semiconductor companies in the world, but are not included in the statistics of Fabless.

The chip design industry in mainland China has achieved rapid growth in recent years. In 2010, it occupied 5% of the Fabless market share. In 2017, this proportion increased to 11%. In 2018, driven by the strong performance of Huawei HiSilicon, the market share further increased to 13%. However, if IDM is also taken into account, Chinese semiconductor companies still have a long way to go. Currently, there are no Chinese companies among the top 15 semiconductor companies in the world .

Overall, domestic IC design is characterized by large number and small scale . In 2018, there were 1,698 IC design companies, of which only 208 had revenues of over 100 million yuan. According to Trendforce statistics, among the top ten domestic chip design companies in 2018, HiSilicon Semiconductor far exceeded other manufacturers with sales of 50.3 billion yuan . The second-ranked Unisoc had revenue of only 10 billion yuan, a slight year-on-year decrease.

Domestic chip design companies are still in their infancy, so they need to learn from the experience of major European and American companies during their development.

(1) Mergers and acquisitions: Take Texas Instruments as an example. The company is the world's largest analog chip design company. However, before 2000, TI was only a chip design company focusing on DSP and baseband processors, and had not yet made a big splash in the analog chip field. The company's full entry into analog chips came from a merger in 2000. The company acquired the once-famous analog giant Burr-Brown for US$7.6 billion. Subsequently, the company completed a number of mergers and acquisitions, which improved the company's layout in the analog chip field.

Since there are many types of analog chips and different application environments have completely different requirements for chip parameters, it will take a long time to enter the market through independent research and development. At the same time, after the launch of self-developed chips, there is uncertainty in the certification replacement process at the customer's end. Therefore, mergers and acquisitions have become the most economical and effective way to enter new markets in the analog chip industry. Although there is not much room for overseas mergers and acquisitions in the domestic semiconductor industry, the introduction of overseas R&D teams and the merger and integration of domestic companies are also feasible.

Corresponding to the A-share market, there are currently three major mergers and acquisitions in the semiconductor design sector, namely, Will Semiconductor's acquisition of OmniVision Technologies, Wingtech Technology's acquisition of Nexperia Semiconductor , and Beijing Ingenic's acquisition of Beijing SiCheng . In the above-mentioned mergers and acquisitions, the targets of the mergers and acquisitions were all overseas leading companies or subsidiaries of leading companies. The company has a high-quality track, strong product competitiveness, and complete technical reserves. If the merger and acquisition is successful, it will greatly improve the performance of the original listed company, and at the same time bring new markets and customers to the listed company, broadening the development space.

(2) Entering into advantageous segments: In the process of development, the choice of track is very important for domestic chip design companies. The prosperity of downstream application fields of chip design companies varies, and the speed of technological change, performance and reliability requirements, and competition landscape also vary greatly.

Take Goodix Technology as an example. The company has been deeply involved in the field of biometrics for many years and led the market in launching under-screen fingerprint recognition chips in 2018. Driven by the increase in the volume of under-screen fingerprint chips, the company achieved a net profit of 414 million in the first quarter of 2019, a year-on-year increase of 2039.95%. While the performance has reversed greatly, the performance has far exceeded that of overseas competitors. We believe that the current global semiconductor industry is in the stage of destocking, and downstream demand is also sluggish. Such a market environment is a major challenge for domestic chip design companies. They need to avoid the low-threshold red ocean market and find a niche that suits them , so that they can gradually surpass overseas competitors like Goodix and lead the development of the industry.

(3) Actively cooperate with downstream terminal manufacturers: The support of terminal manufacturers is of great significance to chip design companies. Previously, even if domestic chip design companies had qualified products, terminal manufacturers preferred chip solutions from overseas giants that had been verified through mass production. Since the ZTE incident last year, major terminal manufacturers have begun to vigorously promote cooperation with domestic chip manufacturers to develop alternative solutions to avoid being "choked". The promotion of terminal manufacturers will effectively promote the development of domestic chip design companies.

(4) Long-term support from national policies: In recent years, the government has introduced a number of preferential policies for the semiconductor industry, and has also set up a large fund of 140 billion yuan. We believe that government subsidies should be equally distributed in the field of chip design, and chip design companies should flourish. At present, the government's subsidies to leading companies are relatively strong, and in the future, it will focus on small and medium-sized chip design companies with complete R&D teams and core technologies . At the same time, we will continue to promote major national science and technology projects and increase the support of universities and research institutes for continuous research on cutting-edge technologies. The teams of research institutes are stable, and they can accumulate technology over a long period of time, which can better develop cutting-edge technologies.