Huawei Is about to Run out of High-end Phone Chips as U.S. Sanctions Put Company in 'Big Trouble'

The U.S. squeeze on Huawei continued this week as China's tech giant confirmed its access to high-end chips is at imminent risk.

From September 15, an advanced chipset that powers its flagship devices, the Kirin, will run dry thanks to Trump administration sanctions from May, which banned global chip manufacturers from using U.S. technology to make components for Huawei.

The Taiwan Semiconductor Manufacturing Company (TSMC), one key chipset supplier, previously said it had stopped all new orders from the tech firm, which has indicated its upcoming Mate 40 flagship is expected to be the last to use Kirin processors.

"This is a very big loss for us," Richard Yu, boss of Huawei's consumer division, noted last Friday at a conference in China, the Associated Press (AP) reported. "Unfortunately, in the second round of U.S. sanctions, our chip producers only accepted orders until May 15. Production will close on September 15. This year may be the last generation of Huawei Kirin high-end chips."

Despite recent accomplishments for Huawei, capped with it beating Samsung in terms of shipments for the first time ever, it has been a tough few years for the telecoms and 5G company, which U.S. officials have claimed is a major risk to national security.

Similar to the ongoing dispute with TikTok and WeChat, authorities say its supposed ties to the Chinese state pose a surveillance risk to the data of U.S. users. Huawei was placed on a trade blacklist in May last year, meaning U.S. companies now have to get approval from the government before selling it components or tech.

The move left it without access to mobile software, including the full Android operating system, and its phones are now without Google services, such as YouTube. Huawei has attempted to launch its own app stores and alternatives as the ban persists.

HiSilicon, a division of Huawei, designs its chips internally before outsourcing the work to TSMC. However, both rely on equipment from U.S. companies to operate.

Yu said at the conference last week that his company does not currently have the ability to manufacture its own chipsets, indicating that production will grind to a halt without an alternative. He said smartphone production now has "no chips and no supply."

So what happens next?

Ultimately, it is far from clear how the company will be able to navigate the minefield it has found itself sitting in the middle of. According to the AP, Yu said 2020 phone sales will likely be lower than the 240 million sold in 2019, but did not elaborate.

One glimmer of hope may come from the U.S. chipmaker Qualcomm, which The Wall Street Journal reported has started lobbying to ease the Entity List restrictions and let it sell high-end chipsets to Huawei, including for use in future 5G smartphones.

Like Google and other U.S.-based companies, Qualcomm was immediately forced to stop doing business with Huawei once the blacklist restrictions took hold. Citing a company presentation, the newspaper reported that Qualcomm has now told U.S. policymakers the blacklist will not stop Huawei from getting chips, but it could lose Qualcomm sales to foreign rivals, a market worth up to $8bn annually.

Sean Wright, an independent cybersecurity expert, told Newsweek the current situation with the Kirin chips could have a "big impact" on Huawei's immediate future, but said any long term damage may be slowed if another supplier is found quickly.

"If it can get access to other chips then I think [Huawei] will be fine," Wright said via a direct message. "If not that'll likely be a big problem, and Huawei will likely find itself in trouble and unlikely to be able to produce new flagships."

The Verge previously reported Huawei has suggested it could approach either Samsung or China's Semiconductor Manufacturing International Corporation (SMIC) for its future chip manufacturing, although no public business deals have been revealed, and both are believed to use U.S. technology, meaning they would be instantly off-limits.

Any relationship with Samsung, however, appears to have stalled. The Global Times, a Chinese government newspaper, said in June that the South Korean tech giant had "turned down" Huawei's request to create chipsets for its high-end devices.

Patrick Moorhead, the founder and principal analyst at Moor Insights & Strategy, told Newsweek that Huawei looks set to face a variety of new challenges. "Short term, the company is in a real bind because it can't source chips from TSMC," he said. "I'm expecting it will lose market share because it can't participate at the premium or mid range part of the market. Long-term there will be challenges until SMIC gets the capabilities to manufacture leading edge parts, which could be years."

According to Phone Arena, upcoming Huawei devices could be powered by chipsets from a Taiwanese semiconductor company called MediaTek.

"The problem of Kirin supply is not limited to volume," Jusy Hong, a director of phone research at consultancy firm Omdia, told the South China Morning Post. "Most of the Huawei models currently sold in China are high-end models... potentially limited supplies of Kirin SoCs [system on a chip], which are integrated in high-end models, will have a tremendous impact on sales and profits beyond volume.

"The impact of the U.S. sanctions spreads across price segments. [A ban] on Huawei producing Kirin processors [via TSMC] will have an impact not limited to Huawei's top line-up but also on its mid-range."

Android Authority reported Huawei is already using MediaTek components for some of its more affordable handsets, but it is unclear if the manufacturer is able to make the chips to the same premium standards as the Kirin, of the few real Qualcomm peers.

The mobile trade outlet noted the loss of the Kirin chips could be worse than the loss of the Google Play app store because it will also impact on its domestic business.

While Huawei is bracing for impact, China's economic bounceback from the COVID-19 pandemic helped it to ship more phones globally than any other vendor in Q2. It was a PR-win, but the release also noted its overseas shipments had fallen 27 percent.

A spokesperson for Huawei declined to comment further.

In a prior statement, the firm described the updated Entity List rules as "arbitrary and pernicious," saying they threatened to "undermine the entire industry worldwide."

Citing unnamed company executives, the South China Morning Post reported Huawei is confident it can still make high-end phones because it has a "back up plan." What that plan entails, and how it can evade further U.S. sanctions, remains a mystery.

Richard Yu
Richard Yu (Yu Chengdong), head of Huawei's consumer business, speaks during the presentation of a Kirin 990 5G chip set at the international electronics and innovation fair IFA in Berlin on September 6, 2019. TOBIAS SCHWARZ/AFP/Getty