Seven questions and answers about the US sanctions on Huawei chips
Latest update time：2020-03-15
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Source: The content comes from " CITIC Securities ", thank you.
On May 15, 2019, the United States officially included Huawei and its affiliates in the "Entity List". Faced with heavy pressure, Huawei responded positively, and in the following six months, Huawei launched the "spare tire" plan, increased its efforts in self-developed chips, and continued to develop suppliers in mainland China, Japan and Taiwan. In addition, it also established an investment company to build a gripper for ecological layout.
According to CITIC Securities, if the new round of US sanctions against Huawei is further escalated, the focus may be on the chip manufacturing supply chain. Industry research shows that Huawei has basically achieved self-developed substitution or switching to non-US suppliers on the IC design side in the past year. It is meaningless for the US to continue to exert pressure, and it may even relax supervision due to the decline in performance of US chip manufacturers. On the manufacturing side, Huawei is highly dependent on TSMC, and upstream semiconductor equipment and EDA software are still monopolized by US manufacturers, which is expected to become the focus of US pressure. SMIC, a beneficiary of manufacturing transfer orders, is highly recommended.
1. What is the path of the US sanctions against Huawei in the past year?
We have sorted out the sanctions imposed by the US government on Huawei over the past year:
1) Implemented: Huawei was added to the "Entity List" and the "temporary license" was extended four times in a row, with the most recent extension until April 1, 2020. On May
16, 2019, US President Trump signed an executive order requiring the United States to enter a state of emergency. US companies are not allowed to use telecommunications equipment produced by companies that pose a risk to national security. The US Department of Commerce will formulate specific rules within 150 days. On the same day, the US Department of Commerce stated that for national security reasons, it plans to include Huawei and its 70 branches in the "Entity List". Subsequently, the US government extended the "Huawei Temporary License" for four consecutive times, mainly to allow existing US telecommunications service providers, especially those in rural areas, to continue to "safely" operate existing telecommunications networks.
2) Reported by the media but not yet implemented:
2.1) The "minimum US content standard" is planned to be reduced from 25% to 10%.
According to a Reuters report on December 23, 2019, the United States plans to reduce the "US-derived technology standard" from 25% to 10% in order to block non-US companies such as TSMC from supplying Huawei. Reuters reported that TSMC's internal assessment showed that TSMC's 7nm and below processes have less than 10% US-derived technology content and can continue to supply, but the 14nm US technology content is above 15%, which may be restricted. TSMC's legal meeting responded that it will be reviewed on a case-by-case basis for each product, and the determination of the technology content will be calculated and reported by TSMC.
2.2) Foreign manufacturers are expected to be prohibited from using U.S. semiconductor equipment to manufacture chips for Huawei.
According to a Reuters report on February 18, 2020, in addition to the U.S. minimum content standard rule, the U.S. Department of Commerce is drafting changes to the so-called "Foreign Direct Product Rule," which restricts multinational companies from using U.S. proprietary technology for military or national security products. The United States will force all foreign companies that use U.S. chip manufacturing equipment to seek a U.S. license before shipping.
Trump tweeted on February 18 that he opposed stricter restrictions on the sale of U.S. products overseas, and there are still differences of opinion within the U.S. government. The U.S. government is scheduled to hold a cabinet meeting on February 28 to study policy formulation on Huawei.
2. What is the relative level of US sanctions against Huawei?
The Entity List is an important means of export control for the United States. The EAR requires entities on the list to obtain a license before they can purchase U.S. items or items containing U.S. technology.
The U.S. sanctions against Huawei are mainly based on the Export Administration Regulations (EAR) formulated by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce. The U.S. export controls include those at the national level as well as those for specific companies or individual entities. The Entity List lists a series of entities that are denied trade. The BIS can modify the Entity List by revising the EAR. If the U.S. government determines that the relevant company is engaged in activities that violate the national security or foreign policy interests of the United States, it can be included in the Entity List after reviewing the end use and end user by the End-User Review Committee composed of the U.S. Departments of Commerce, State Department, Defense, Energy, and Treasury. For all businesses related to products originating in the United States that are subject to the Export Administration Regulations, if they involve companies on the Entity List, they must obtain permission from the Bureau of Industry and Security of the U.S. Department of Commerce.
The United States has included Chinese companies in the export restricted entity list many times in history.
For example, 1) On March 7, 2016, the United States included ZTE in the export restricted entity list. 2) On August 1, 2018, the United States included 44 domestic companies and scientific research institutes involved in the military field in the export restricted entity list in order to achieve a technological blockade. 3) On October 29, 2018, the United States announced that for the sake of maintaining national security, it would officially add the domestic storage company Fujian Jinhua to the export restricted entity list from October 30. 4) On June 21, 2019, the U.S. Department of Commerce included Sugon, Tianjin Haiguang, Chengdu Haiguang Integrated Circuit, Chengdu Haiguang Microelectronics Technology, and Wuxi Jiangnan Institute of Computing Technology in the Entity List. 5) On October 7, 2019, the U.S. Department of Commerce added eight companies, including Hikvision, Dahua Technology, iFlytek, Megvii Technology, SenseTime, Meiya Pico, Yitu Technology, and Yixin Technology, as well as 19 public security agencies and one police academy, to the Entity List.
Figure 2: Taking AMD as an example, US manufacturers' trade sales compliance policies
The "US minimum content standard" for foreign products in the EAR is generally set at 25%, and 10% or 0% for special countries or special products.
The US Export Administration Regulations (EAR) control objects including goods originating from the United States, and also certain foreign-made goods (if the value of US components, technology, etc. exceeds the specified minimum content, or the foreign product is directly manufactured using US technology or software). The "US technology minimum content standard" provision (de minimis rule) in the EAR sets
three minimum content standards for different export-controlled products or export objects: 1) 0% minimum content; 2) 10% minimum content; 3) 25% minimum content.
Under normal circumstances, this standard is set at 25%; for countries such as Cuba, North Korea, Syria, etc., the standard is set at 10%; and for specific products such as chips and high-speed internal connectors for specific high-performance computers, hotspot technology, specific encryption items, specific military products, etc., the standard is set at 0%. The above minimum content rules are listed in the Export Administration Regulations, so they can be revised by BIS to modify the applicable objects of the three types of standards.
This also means that if the United States lowers the applicable standard for Huawei from 25% to 10%, it will actually be treated with the same standard as Cuba, North Korea, Syria and other countries.
Figure 3: Explanation of relevant provisions regarding minimum content standards in the US Export Administration Regulations (EAR)
3. What are Huawei’s countermeasures under previous sanctions and how do US suppliers supply Huawei?
Huawei's countermeasures mainly include: 1) A large amount of inventory in the early stage.
After ZTE was included in the US rejection list in 2018, Huawei had already started to make corresponding preparations; first of all, it prepared a large number of components. Huawei's net cash flow from operating activities has long been ahead of net profit, and the trend has remained consistent. In 2018, there was a big turning point downward; at the same time, it can be seen from the balance sheet that Huawei's inventory has increased significantly, and the main increase here is raw materials. The proportion of raw materials to inventory has reached a peak of 37.5% in recent years. Therefore, we can reasonably infer that Huawei has stockpiled a large number of related components in 2018 in case of emergency;
2) Supply chain switching.
Huawei has been preparing for the BCM (Business Continuity Management) plan since more than ten years ago. The BCM plan originated from IBM. Considering that business continuity can still be achieved in extreme cases where upstream supply cannot be guaranteed, it is a complete management process for identifying potential threats to the organization and the impact that these threats may have on business operations once they occur. In terms of specific implementation, it includes switching to non-US manufacturers and independent research and development. For details of the switch, please see the following questions 4/5.
The response strategy of American technology companies: by proving that the products are not related to national security and applying for temporary licenses, most of them have now fully or partially resumed supply. In the future, even if the content is reduced from 25% to 10%, it is expected that the supply will not be affected.
Although the "US minimum content standard" is set at 25%, theoretically all American companies are completely prohibited from supplying Huawei, but Trump said during the G20 summit on June 29, 2019 that as long as the relevant equipment does not involve major national security, he agrees to continue selling technology products to Huawei. Subsequently, the US Department of Commerce confirmed through its official website on July 9, 2019 that as long as there is no threat to national security, it will grant licenses to American companies to supply Huawei. We have sorted out the supply of important American technology companies to Huawei. Although they all experienced a period of supply interruption at the beginning of the implementation of the "Entity List" in May 2019, they have generally resumed supply in full or in part. Those that have obtained special licenses include Microsoft and Micron, and those that have not yet obtained licenses but are deemed to be able to supply in full or in part include Intel, Qualcomm, Xilinx, Skyworks, Qorvo, TI, etc.
Non-US overseas suppliers: The actual supply was not affected by the US Entity List.
According to our industry chain research, non-US overseas suppliers such as Korean manufacturers did not actually suspend supply after the US included Huawei in the Entity List. Therefore, during the last round of sanctions, Huawei was still able to obtain raw materials from non-US overseas suppliers.
4. Analysis of Huawei’s current dependence on US chips at the base station end?
We call the products without American components as "de-A". Huawei's operator BG has achieved de-A for the entire series of products except for a few old products. The
core chips of base stations include ADC/DAC chips, FPGA, DSP, switching chips, RF PA, LNA, PA driver, etc. Most of the world's 5G base stations are highly dependent on American suppliers. Usually, ADC/DAC chips are mainly supplied by ADI and TI, FPGA is supplied by Xilinx and Altera, and PA driver is supplied by TI. The supply of RF chips is relatively less single. In addition to Skyworks and Qrovo, RF PA and LNA can also be provided by NXP in Europe and LNA by domestic RF companies. In addition to core chips, the rest of the parts such as circulators, high-frequency boards, power semiconductors, and high-speed backplane connectors can all be replaced by domestic products.
The ADC/DAC, which is the most difficult part in the entire de-A process, has been completely replaced by HiSilicon.
ADC/DAC is the most critical link in converting analog electromagnetic waves into 0101 bit streams. The function of ADC is to perform high-frequency sampling on analog signals and convert them into digital signals. The function of DAC is to modulate digital signals into analog signals.
High-speed and high-precision ADC/DAC is the jewel in the crown of the entire analog chip.
There are several core difficulties, including sampling frequency, sampling accuracy, and precise coordination of the entire manufacturing and R&D process. Huawei uses HiSilicon's self-designed chips as a replacement in the latest de-A base station. Huawei has adopted self-designed ADC/DAC on a large scale since 4G, and it is manufactured by a Taiwanese wafer factory. It has reached a level that is only one generation behind ADI's latest products, and can fully meet the high-performance commercial use of 5G products.
Huawei used Xilinx and Altera in the early stage of FPGA, but now this part has been completely replaced by its own chips.
FPGA chips play a vital role in base stations, but in the current global market, the production of this chip is mainly monopolized by several companies in the United States, and Chinese companies basically have no production capacity layout in this field. In terms of market size, Xilinx and Altera occupy more than 80% of the market size. In terms of customer distribution, the main customers are concentrated in Asia and North America, the domestic market in the United States is less than 30%, and more than 40% of products are exported to Asian countries. American companies that occupy an almost monopolistic position in this field have extremely high profits. In the base stations of different manufacturers, the role of FPGA is different. In the 5G base stations of some manufacturers, the role of FPGA is to perform FFT (fast Fourier transform, used for signal processing), interface, alarm and other functions. Huawei is divided into two, with its own FPGA responsible for interface and alarm work, and DSP responsible for FFT.
FPGA, DSP and ADC/DAC are not three isolated chips,
so what is the relationship between ADC/DAC and FPGA or DSP? Please refer to a picture from Analog Devices of the United States. ADC/DAC mainly completes analog-to-digital conversion, and the calculation part is completed by DSP/FPGA.
Switching chips are usually found in BBUs and are used for data exchange between boards and with SPNs. The main suppliers in this area are Broadcom and Marvell in the United States. Huawei's switches and routers started very early, and it already has a complete series of routing and switching chips, and has long been able to achieve autonomy.
In addition to Huawei, a domestic third-party chip supplier, Centec Networks, is also an important player. Centec Networks is a global leading supplier of Ethernet switching core chips and white-label solutions. Its products are dedicated to the deployment and application of SDN and white-label switches in operators, enterprise networks, and data center networks. Therefore, there is no shortage of solutions in China in this link.
The above mentioned are all the progress in the localization of core links, and another important link is the RF chip, which is divided into three parts, PA, LNA, and RF switch. In addition to the United States, there are many suppliers in Europe and Japan for PA, such as NXP in Europe and Sumitomo in Japan; and in the LNA and switch links with lower technical barriers, they have been able to completely achieve domestic substitution, such as a company in Shijiazhuang and a company in Nanjing.
Just like the RF switches and LNA on mobile phones, the RF switches and LNA on the base station side are also completely domestically produced. In addition to core chips, domestic manufacturers are also rapidly rising in high-speed backplane connectors, circulators, high-frequency copper clad laminates and other links. As Ren Zhengfei said in an interview with Fortune on October 10, 2019, "What the United States is most worried about is from 5G to the core network industry. We no longer need American components at all.
5. To what extent is Huawei currently dependent on American chips for mobile phones?
Huawei's mobile phone supply chain has been significantly higher than other manufacturers through self-developed chips and domestic substitution. At the same time, some chips have been replaced by similar suppliers in Japan, South Korea and Europe, and the de-A effect has been significant. There are still 1~2 chips in the RF front end that use American products.
The supply chain of Huawei's mobile phone terminals is shown in the following table. Among them, application processors and basebands, WiFi and Bluetooth, power management chips, and some RF front-end chips have achieved localization breakthroughs through self-development + foundry, but some core components of the RF front end, such as PA, still rely on American manufacturers.
Take Huawei's Mate30 Pro 5G mobile phone as an example. About half of the chips are self-developed by Huawei HiSilicon, and the foundries are mainly TSMC, SMIC, etc. Some use Japanese, Korean and European chips, and there are still a small number of American chips in the RF.
(1) The application processor and baseband use the Kirin series of self-developed chips, which are designed by Huawei HiSilicon and manufactured by TSMC. For example, the latest Kirin 990 5G chip is manufactured by TSMC's 7nm+ EUV process, and subsequent models will also use TSMC's 5nm. Since SMIC's 14nm has entered the mass production stage, we believe that Huawei HiSilicon is SMIC's current main 14nm customer.
(2) The RF front end is the shortcoming of the localization of mobile phone chips. Huawei has achieved partial substitution through self-development, but it is not yet complete. The Mate30 Pro 5G model launched by Huawei after being included in the Entity List has changed significantly compared with previous models in the RF front end. It no longer uses the US Skyworks/Qorvo chips, but instead uses 3 self-developed front-end/PA modules (Hi6D03, Hi6D05, Hi6D22), 6 self-developed LNA/RF switches, 2 Japanese Murata PA modules, 2 Japanese Murata multi-channel modulators, and 1 US Qualcomm QDM2305 front-end module. Although the integration level has decreased compared to the Skyworks/Qorvo solution, the de-A effect in the key RF field is obvious. If there is a supply interruption, I believe Huawei has the corresponding inventory support, and it is expected to quickly promote complete replacement.
(3) Currently, non-US suppliers of memory chips mainly include South Korea's Samsung, SK Hynix, Japan's Kioxia (formerly Toshiba Memory) and other manufacturers. It will take some time for domestic suppliers such as Hefei Changxin and Yangtze Memory Technologies to mature their technologies.
(4) WiFi, Bluetooth, power management chips, etc. are currently basically self-developed by Huawei HiSilicon.
(5) Image sensors can be supplied by Sony of Japan, Samsung of South Korea or Will Semiconductor (Beijing OmniVision) of China. Fingerprint recognition sensors are supplied by Goodix Technology, Silead (GigaDevice) and other domestic companies. Various types of precision sensors are mainly supplied by European manufacturers such as STMicroelectronics and Bosch.
6. What are the important time points for follow-up observations and our deductions and judgments?
The Trump administration plans to hold a meeting on February 28 to discuss further restrictions on technology exports to Huawei.
According to the Wall Street Journal, the Trump administration is expected to hold a meeting on February 28, with cabinet-level officials including Commerce Secretary Wilbur Ross, Defense Secretary Mark Esper and Treasury Secretary Steven Mnuchin participating. At that time, they will discuss whether to restrict foreign companies using U.S. semiconductor equipment from supplying Huawei, as well as additional restrictions on the export of some chips containing U.S. technology. At present, there are still some differences within the U.S. government, which is one of the reasons why the policies reported by the media have not been implemented immediately. The main manifestation is that the U.S. Department of Commerce has promoted tough measures, and Trump and the Department of Defense have shown a non-tough attitude in stages. We speculate that interested U.S. manufacturers have also conducted a certain degree of lobbying. Therefore, there are still variables in what specific policies will be implemented.
We deduce that a new round of sanctions against Huawei may be launched to a certain extent, which will be one of the bargaining chips prepared by the United States for the second phase of Sino-US negotiations. The
Sino-US trade dispute began in mid-2018. The first phase of Sino-US trade negotiation agreement was reached on January 15, 2020. The second phase of negotiations will be carried out later. It is currently in the buffer period for reaching the first agreement, which is a time point in the "cycle" of trade disputes when the tension is still low. The second phase of negotiations involves more core issues such as intellectual property protection and forced technology transfer, and the difficulty of negotiations is expected to be greater than the first phase. Therefore, for the United States, Huawei is still one of its main bargaining chips, and the second round of trade frictions is likely to shift from the tariff field to the technology field. Therefore, we believe that the US sanctions on Huawei may still be launched to a certain extent.
Industry research shows that Huawei has basically achieved self-developed substitution or switching to non-US suppliers on the IC design side in the past year. It is meaningless for the US to continue to exert pressure, and it may even relax supervision due to the decline in performance of US chip manufacturers. On the manufacturing side, Huawei is highly dependent on TSMC, and upstream semiconductor equipment and EDA software are still monopolized by US manufacturers, which is expected to become the focus of US pressure.
At present, Huawei has achieved a large number of self-developed chips, but the manufacturing link still relies on Taiwan manufacturers such as TSMC and Win Semiconductors, which is the main bottleneck in its industrial chain. Once the manufacturing link cannot place orders at foundries such as TSMC and Win Semiconductors, and SMIC's production capacity still needs some time to climb, its large number of self-developed chips will not be able to achieve mass production and application, so it is expected to become the entry point of this US sanctions policy. In addition, in terms of semiconductor equipment, American manufacturers currently occupy about 40% of the semiconductor equipment market. In key processes such as deposition, etching, ion implantation, CMP, cleaning, and testing, American manufacturers such as Applied Materials, Lam Research, and KLA-Tencor have leading process technology advantages and stability and have undergone long-term mass production tests. Therefore, they are difficult to replace in the short term. In terms of EDA software, the current EDA tools for IC design are still basically monopolized by three American companies, Cadence, Synology, and Mentor, and it is difficult to completely replace them in the short term.
7. What impact will the sanctions on Huawei have on the domestic chip industry chain?
Focusing on IC manufacturers, we recommend SMIC and Hua Hong Semiconductor.
The manufacturing link in Huawei's chip industry chain is a relatively important link. A large number of chips in Huawei's base stations and terminals are self-developed, and Huawei does not have the ability to manufacture chips, so they are mainly completed by chip foundries such as TSMC and SMIC. TSMC has leading technical capabilities and mainly carries Huawei's Kirin processors, high-performance computing chips, and RF chips. SMIC also carries a large number of power management chips, RF chips, low-end main control chips, etc.
If Huawei cannot obtain TSMC's supply due to US sanctions, we believe that some orders may be transferred to SMIC for production with similar processes. If the US sanctions do not completely cut off TSMC's supply, Huawei is expected to increase its cooperation with SMIC for supply chain security considerations.
The relationship between the process and product application of ordinary silicon technology in IC manufacturing is similar to a pyramid structure. A large number of cost-sensitive chips are made by mature processes, while high-performance products are made by advanced processes. The
mature processes at the bottom of the pyramid can basically be produced by domestic foundries such as SMIC and Huahong Semiconductor, while the advanced processes at the top of the pyramid still need to rely on international giants such as TSMC and Samsung.
Although SMIC's advanced process technology capabilities lag behind TSMC by about 2 generations of nodes, its process node combination is basically complete and its technical capabilities are the best in China. It has long-term cooperation with Huawei and is the only manufacturer in China capable of taking on transfer orders.
TSMC's 7nm was put into mass production in 2018, and 5nm was introduced into mass production in 2020. SMIC has complete process capabilities in mature processes above 28nm. In terms of advanced processes, 14nm has begun to increase its production capacity, and 7nm is expected to be put into mass production from the end of 2020 to the beginning of 2021. If the policy of reducing the "US technology content" affects TSMC's supply to Huawei, we believe that Huawei may transfer some high-end chips to TSMC's 7nm, 5nm and other nodes with higher TSMC independent technology content as soon as possible, and on the other hand, it may transfer projects above 14nm or that may be affected to SMIC.
Focus on IC equipment manufacturers, and pay attention to North Huachuang and AMEC. Equipment manufacturers provide underlying support for wafer fabs. The use of domestic equipment is conducive to increasing the technological autonomy of wafer fabs
. Therefore, in the long run, North Huachuang, as the domestic semiconductor equipment manufacturer with the largest sales scale, the most complete varieties, and first-class technology, will continue to benefit from the trend of domestic wafer fabs such as SMIC increasing their purchases of domestic equipment. North Huachuang's equipment has been used in SMIC's 14nm production line, and it is also jointly developing subsequent 7/5nm equipment, which deserves special attention. AMEC is one of the few domestic manufacturers that has made a single type of semiconductor equipment at the international top level. It focuses on etching equipment, especially silicon etching. It has passed TSMC's 5nm verification and has first-class technical capabilities. It is recommended to pay long-term attention.
Domestic IC design manufacturers benefit from domestic substitution in the long term.
From the perspective of the industrial chain, if the United States actively imposes sanctions, it can indeed inspire and stimulate the progress and possibility of domestic substitution in the domestic semiconductor industry. Domestic terminal manufacturers such as Huawei are more active in looking for domestic suppliers than before. It is expected that a number of companies in the IC design field will continue to benefit from the trend of domestic substitution, such as
GigaDevice in the field of memory chips, Will Semiconductor in the field of image sensors, Zhuoshengwei in the field of RF front-ends, and Shengbang Shares in the field of analog chips.
*Disclaimer: This article is originally written by the author. The content of the article is the author's personal opinion. Semiconductor Industry Observer reprints it only to convey a different point of view. It does not mean that Semiconductor Industry Observer agrees or supports this point of view. If you have any objections, please contact Semiconductor Industry Observer.
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