What The US vs Huawei Conflict Tells Us About The Semiconductor Industry

— — And the geopolitical and cyber war implications

Several years ago, I took a renewed interest in the semiconductor industry due to 5G, Artificial Intelligence (AI), Internet of Things (IoT), autonomous vehicles (AVs), edge computing, gaming, etc. The U.S. battle with Chinese ZTE and Huawei also caught my attention. How critical is this conflict?

What I learned:

a) Many companies like ZTE, Huawei, AMD, Nvidia, Qualcomm, Apple, etc, design their chips (semiconductors) but use others to fabricate (manufacture) them. The distinction between design and fabrication is important as fabrication complexity increases and sources are limited.

b) The primary chip fabricators include TSMC (Taiwan), Samsung (Korea), and SMIC (China). TSMC is perhaps the largest and most advanced. Besides TSMC, Taiwan has many secondary fabrication facilities and resources for such and produces 25% of the global supply [1]. Intel both designs and fabricates but does not fabricate for others.

c) In compute chips, the 5 nm is better than 10 nm. The nanometer (nm) distance signifies the distance between transistors; the smaller the space, the more transistors can be packed into a chip, making the chip more powerful. The 5 nm is needed for 5G, AI, etc. For example, 5 nm will increase the speed of the processors by about 20% and lead to 40% power reduction compared to the preceding 7nm generation. [2]

d) Only 16% of the chips used in China are fabricated domestically; a significant number are fabricated in Taiwan.

e) The chips fabricated in China are not of the high-performance type required for advanced applications[3] . China’s SMIC is their largest and most advanced fabrication company. SMIC just started producing 14 nm chips in 2019 (Annual Report).

f) The U.S. is vulnerable on fabrication as well; particularly, as Intel is at 10 nm (although improving[4]) and doesn’t fabricate for others. Hence, the criticality of the plan announced in June 2020 for TSMC to build a plant in Arizona[5].

g) Fabrication is becoming more strategic due to importance of chip speed, size, and power consumption and these chips are driving everything (autos, satellites, medical devices, etc). Fabrication facilities are extremely complex and expensive. 3 nm chips will require even more advanced technology, such as Extreme Ultraviolet Lithography (EUV) or beyond [6]. The TSMC facility for 5 nm chips in Arizona is expected to cost $12 billion.

h) The alternatives to Chinese ZTE and Huawei for 5G are Ericsson (Sweden) and Nokia (Finland); although these competitors have not picked up slack and seem forsaken by Europe. The Trump administration has even suggested U.S. purchase of Ericsson or Nokia [7].

i) Fabrication is highly dependent upon equipment from chip-making equipment which is dominated by U.S. companies such as Applied Materials, KLA and Lam Research. ASML Holding from the Netherlands is another key player [8].

j) Global big tech corporations are highly dependent on advanced semiconductors; e.g. Apple, Alibaba, Tencent, Google, SpaceX, ….

Shocking to me:

• China, the leader in assembling supercomputers, doesn’t have capabilities to fabricate chips less than 14 nm.
• Huawei, the world’s largest telephone equipment manufacturer, lead producer of 5G installations, and lead producer of smartphones, is so exposed on the supply chain for fabricating chips.
• Very little European government support for Ericsson and Nokia.

Huawei was banned in 2019 from buying American-made technology on which it relies on to expand its global empire [9]. Chips designed or fabricated with US technology are a significant portion of the ban [10]. The Chinese and Huawei have been stockpiling chips but these reserves are expected to run out in early 2021 [11] . A major portion of China’s 2015 initiative, “Made in China 2025”, is semiconductors. Will this happen?

Another consideration is patents. Huawei and ZTE are leaders in 5G patents [12]. Regardless the restrictions, both Huawei and ZTE will collect royalty payments from others deploying 5G [13]. Of greater consequence is the possibility of China restricting this technology (use of Huawei and ZTE patents and licensing); this action would crimp global 5G deployment.

This battle is momentous as these chips are the engines behind 5G, AI, Internet of Things (IoT), gaming, cloud, autonomous vehicles (AVs), cybersecurity, and edge computing. Militaries are being rebuilt based on cyber. Space, both commercial and military, are highly dependent on advanced semiconductors. Is Taiwan just a major player or the fuse? Geopolitics are being rewritten by silicon warfare?

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[1] Fulco, M. (09 September 2018). Taiwan Remains Top Hub for Semiconductor Manufacturing. Taiwan Business. Retrieved from: https://topics.amcham.com.tw/2018/09/taiwan-remains-top-hub-for-semiconductor-manufacturing/

[2] Zacks Research. (16 June 2020). NXP Collaborates With TSMC to Enhance Automotive Platform. Zacks Equity Research. Retrieved from: https://finance.yahoo.com/news/nxp-collaborates-tsmc-enhance-automotive-113311259.html

[3] Macro Polo. Retrieved from: https://macropolo.org/digital-projects/supply-chain/ai-chips/

[4] Hruska, J. (04 March 2020). Intel Expects to Reach Process Parity With 7nm in 2021, Lead on 5nm.

Extreme Tech. Retrieved from: https://www.extremetech.com/computing/306978-intel-expects-to-reach-process-parity-with-7nm-in-2021-lead-on-5nmv

[5] Bloomberg News. (09 June 2020). Huawei’s patents on 5G means US will pay despite Trump’s ban. SCMP. Retrieved from: https://www.scmp.com/tech/big-tech/article/3088129/huaweis-patents-5g-means-us-will-pay-despite-trumps-ban

[6] Lapedus, M. (21 May 2020). EUV’s Uncertain Future At 3nm And Below. Semiconductor Engineering. Retrieved from: https://semiengineering.com/whats-next-for-euv/

[7] FitzGerald, D. and Krouse, S. (25 June 2020). White House Considers Broad Federal Intervention to Secure 5G Future. WSJ. Retrieved from: https://www.wsj.com/articles/white-house-federal-intervention-5g-huawei-china-nokia-trump-cisco-11593099054?mod=tech_lead_pos3 [Note — this idea also floated from WH in Jan and Feb 2020].

[8] Horwitz, J. (15 July 2020). SMIC’s Shanghai listing tests if money alone can bring chip dominance to China. Reuters. Retrieved from: https://finance.yahoo.com/news/smics-shanghai-listing-tests-money-072535315.html

[9] Webb, A. (15 January 2020). The $150 Million Machine With $200 Billion at Stake for China. Bloomberg. Retrieved from: https://www.bloomberg.com/view/articles/2020-01-16/dutch-ban-raises-stakes-in-u-s-china-technology-war.

[10] Alper, A., Sterling, T. , Nellis, S. (05 January 2020). Trump administration pressed Dutch hard to cancel China chip-equipment sale: sourcesRetrieved from: https://www.reuters.com/article/us-asml-holding-usa-china-insight-idUSKBN1Z50HN

[11] Bloomberg News. (07 June 2020). Huawei Employees See Dire Threat to Future From Latest Trump Salvo. Bloomberg. Retrieved from: https://finance.yahoo.com/news/huawei-troops-see-dire-threat-210000676.html

[12] Bloomberg News. (09 June 2020). Huawei’s patents on 5G means US will pay despite Trump’s ban. Retrieved from: https://www.scmp.com/tech/big-tech/article/3088129/huaweis-patents-5g-means-us-will-pay-despite-trumps-ban

[13] ibid. Bloomberg News (09 June 2020).