Since May 2019, the U.S. government has been trying to destroy China’s Huawei, the world’s largest telecommunication equipment maker. American national security hawks think that it presents a significant threat: if any telecom network uses Huawei equipment anywhere in the world, they argue, China’s military could interfere with U.S. military overseas operations. Many security analysts question this thinking by pointing out that a number of nations, including both China and the U.S., can hack virtually any commercial network — with or without Huawei equipment. But that hasn’t dissuaded the U.S. government.
In the first round of government actions last year, the United States placed Huawei on a list of bad actors — the Entity List — which cuts off Huawei from U.S. suppliers of technology, principally semiconductor chips. But this ban has many loopholes, including the fact that chips made overseas are exempt from the ban. Moreover, the ban spurred Huawei’s already formidable chip division, HiSilicon, to redouble its efforts to replace American chips with its own.
Confused by the world of semiconductor chips and how they relate to the tech race between the U.S. and China? Read our explainer here.
Frustration in national security circles with the ineffectiveness of these measures led to a new round of Entity List measures announced on May 15. This time, Washington changed the rules so that Huawei cannot even employ outside firms, such as renowned Taiwan chip maker TSMC, to make its chips while using American equipment. Since American firms dominate the electronic design automation (EDA) tools necessary to design chips, as well as most types of machinery needed to fabricate chips, the new rules weaponize the wider semiconductor supply chain. The goal is to kill off Huawei’s access to chips and destroy Huawei’s competitiveness in 5G telecom equipment.
But there are a number of reasons to believe that weaponizing the supply chain will not destroy Huawei and may even backfire on the United States.
Let’s look at the EDA software for chip design first. The three firms — Cadence, Synopsys and Siemens’ Mentor Graphics — that dominate this industry are either American or have enough American-origin tech to fall under the export control. In the short term, then, it would appear Huawei has no viable alternatives and cannot design new chips.
But in reality, Huawei has several options. As other chip design firms have done when forced into a corner, it could hack the software from the EDA firms. The EDA firms, in turn, might just turn a blind eye to such activities since they would prefer Huawei to keep using their tools than foster future competitors.
Huawei could also set up front companies to work with the EDA tool vendors. The EDA vendors, it should be noted, are not passive players in this new regulatory landscape. Several have already set up corporate partnerships in China that look suspiciously like they are designed to provide Entity List firms with EDA tools that they can’t receive directly from the American vendors.
But perhaps most critically, Huawei has time. Many of its self-designed chips for its next two years of products have already been designed. In other words, it only needs EDA tools to design chips that will appear in Huawei’s products two years from now. Huawei has also been stockpiling large quantities of chips, which could last for a year or more depending on the chip.
The U.S. national security hawks, however, weren’t foolish. They anticipated that cutting off the EDA tool supply wouldn’t be sufficient to kill Huawei, which is why they also designed a policy to prevent Huawei’s designs from ever being made into chips.
Huawei, like most other tech firms that design chips, relies on external foundries, such as Taiwan’s TSMC, to produce them. These foundries, in turn, are full of American machinery covering virtually the entire production line except for lithography (machines using beams of light to print circuitry designs on wafers — the Netherlands dominates here). So, the thinking went, forbidding TSMC or any other foundry from using American equipment to produce for Huawei means that Huawei can’t get its chips produced.
Or does it?
There are international competitors for every type of machine the American firms produce. Some insiders believe international competitors, particularly Japanese firms, could eventually replace many American machines in foundries. Conceivably, a foundry without a single piece of American equipment could produce chips for Huawei several years from now.
Conceivably, a foundry without a single piece of American equipment could produce chips for Huawei several years from now.
If Huawei needs new chips for new products before a de-Americanized plant is realized, Huawei could also try to engage foundries through intermediaries — similar to its options on the EDA tool side. This creates plausible deniability. If the EDA tool vendors and foundries do not know they are working with Huawei, business could continue as usual.
One might argue that the U.S. government would be able to ferret out these complex corporate maneuvers to circumvent the Entity List, but that probably overestimates American bureaucratic capacity. Forty years of attacks on American “big” government — stretching back to the Reagan administration — have led to a deep decline in government capacity. Industry insiders report that the Commerce Department’s Bureau of Industry and Security, which is in charge of the Entity List, has next-to-no supply chain knowledge in semiconductors, and private industry is not exactly lining up to enlighten them on the subject.
Even if the Entity List ban effectively scares off foundries from producing chips for Huawei, Huawei’s past history tells us that the company can still survive as a major provider of telecom infrastructure equipment. Ten years ago, Huawei’s own chip division was a shadow of its future self, and yet Huawei was already the third largest and fiercely competitive telecom equipment firm in the world. Preventing Huawei’s inhouse chips from being produced just means Huawei will revert to relying on more external purchased chips.
If anything, the implications of Washington’s war on Huawei are more dire for American industry. America’s semiconductor manufacturing equipment industry is the last stronghold of American-made machine tools. The expanding export controls around the Entity List have already set in motion moves to change that. On a recent investor call, one executive from a prominent maker of such equipment said confidently that the firm would meet this regulatory challenge by moving more production overseas. A recent internal study by American industry insiders also concluded that the fastest way to de-Americanize a fabrication facility was simply to move production of the American equipment to East Asian countries, including China.
If American firms follow through on these offshoring moves, Washington’s weaponization of the supply chain will end up shooting itself in the foot.
Dr. Douglas B. Fuller is an associate professor at City University of Hong Kong and author of Paper Tigers, Hidden Dragons: Firms and the Political Economy of China’s Technological Development. @FuDaoge