(ATF) Last Friday, the US Department of Commerce announced punitive measures to restrict chip purchases by the Chinese telecom giant Huawei. These aim to stop foreign companies that manufacture semiconductors – or chips – from using US software and technology for Huawei products, unless they receive permission from US officials.
This measure may give the US Department of Commerce the ability to prevent the Taiwan Semiconductor Manufacturing Company (TSMC) from supplying its products to Huawei.
ATF received a terse statement from Huawei about the latest move. US officials have been concerned about Huawei’s rollout of 5G mobile broadband around the world for some time. The move may hinder China’s rollout of 5G at home and abroad.
As both sides draw battle lines, US companies in China are likely to be keeping a low profile. The loss of chip sales may mean the US will lose its position as the world’s top supplier of chips, according to Semiconductor Industry Watch.
Over the past five years, the total revenue of Chinese chip companies has increased by more than 20% annually, according to the China Semiconductor Industry Association (CSIA).
But Chinese chip companies were estimated to only have 3% to 4% of the overall share of global semiconductor sales and manufacturing in 2018. Currently, China has more than 1,600 chip design companies, with about a 13% share of the global market, compared with 5% in 2010.
Key parts in Chinese phones imported
Huawei’s mobile phones are made domestically but many key parts are imported. These include the SOC (System On a Chip), DRAM (Dynamic Random Access Memory), NAND Flash (or ‘memory chip’), CIS (security controls), radio frequency (RF), and Organic Light Emitting Diodes (OLED).
Many in the Chinese market believe that companies in northern China and Shanghai can create domestic substitutes. But the underlying theoretical basis of equipment and materials, and the original technical basis of physics, chemistry and mathematics were also European and American.
Semiconductor expert and Huawei founder Ren Zhengfei emphasised: “Only by focusing on basic scientific research for a long time, can there be industrial strength in this area. The development of the chip industry lies in the education and research of basic disciplines. With in-depth and strong basic scientific research support, there will be breakthroughs in semiconductor equipment and materials; breakthroughs in wafer foundry and storage processes; application innovation. The real localization of chips has begun to enter deeper water. The biggest opportunity and challenge in the future lies in more basic research and innovation.”
For the past three decades, the chip industry has been at the core of the continuous revolutionary development of information and communication technology (ICT). ICT breakthroughs have, in turn, been a driving force for economic growth that has given the United States a significant lead over other high-income countries in productivity growth and real GDP growth since 1988.
As American chip technology has made these advances in application technology, mobile communications has become the most adopted technology in world in history. Its global economic impact is estimated to exceed US$1 trillion.
Chinese companies such as Huawei and ZTE, which were pared off from the army or PLA’s communications and telecoms arm, plus mobile phone companies such as Xiaomi, OPPO and Vivo, which are second only to Samsung and Apple, among the top ten global handset brands, have all benefitted from these technological advances.
Among the major mobile-phone manufacturers, China also has Lenovo, REALME and TECNO. In 2019, Chinese mobile phone manufacturers’ smartphone shipments accounted for nearly half – 46% – of the global market share.
These are Chinese mobile phones, but the main chip in the smartphone is mainly American – the radio frequency front-end chip is mainly American, as is the storage chip, and the power supply and other chips are American.
Chinese companies earn hard money for integrated mobile phone production, and most of the profits boost US companies’ earnings.
Technological advances driving global demand
Global chip demand is growing at an average annual rate of 8.6%, and reached US$475 billion in 2018. We are now in the early stages of another large-scale transformation of the global economy driven by technology: the era of digital transformation and artificial intelligence (AI).
Revolutionary applications such as enhanced or virtual reality experiences, driverless cars, the Internet of Things (IoT) and Industry 4.0 systems, and ‘smart cities’ are gradually becoming commercial realities. The realisation of these new applications is inseparable from the advancement of chip technology, including sensors, 5G technology, high-performance processing units to power computers with machine learning capabilities, plus advanced low-power processors that perform very complex tasks, such as computer vision.
In addition, the chip industry is currently testing the first batch of sub-computing prototypes, which can run 100 million times faster than current computers. Quantum computing can revolutionise areas that require a lot of computing power: such as artificial intelligence and cybersecurity.
Chips’ also used in weapons
Also of concern are breakthroughs in chip technology to maintain national security.
On May 12, 2020, Applied Materials (AMAT), Pan Lin Group (LAM) and many other US semiconductor equipment companies sent letters to Chinese wafer manufacturing companies, scientific research institutions and universities, to request that equipment bought from American companies not be used. These devices are used to process military products, and manufacturers reserve the right of unlimited traceability.
In the past China was found to be installing Playstation chips into its missiles guidance systems.
Modern warfare is inseparable from technology, and thus inseparable from chip technology. Only by mastering chip technology and achieving chip technology breakthroughs can China’s military compete in a technological sense.
As the US pivots to Asia, this time more aggressively, Huawei is the first high-profile casualty. But many other firms on both sides are also getting burnt.
