SHANGHAI: The latest U.S. government action against China's Huawei takes direct aim the company's HiSilicon chip division--a business that in a few short years has become central to China's ambitions in semiconductor technology but will now lose access to tools that are central to its success.
That could make it the most damaging U.S. attack yet against a Chinese company that U.S. officials told reporters Wednesday functioned as a "tool of strategic influence" for the Chinese Communist Party. Huawei Technologies Co Ltd for its part denounced the U.S. allegations and called the new measures "arbitrary and pernicious."
Established in 2004, HiSilicon develops chips mostly for Huawei, and for most of its existence has been an afterthought in a global chip business dominated by U.S., Korean and Japanese companies. Like most electronics firms, Huawei relied on others for the chips that powered its equipment.
But heavy investment in research and development helped drive rapid progress at HiSilicon, and in recent years the 7,000-employee unit has been central to Huawei's rise as a dominant player in the global smartphone business and the emerging 5G telecom networking business.
HiSilicon's Kirin smartphone processor is now considered to be on par with those created by Apple Inc and Qualcomm Inc --a rare example of an advanced Chinese semiconductor product that competes globally.
HiSilicon is also central to Huawei's leadership in 5G, stepping into the breach when the United States cut off access to some U.S. chips last year.
In March, Huawei revealed that 8% of the 50,000 5G base stations it sold in 2019 came with no U.S. technology, using HiSilicon chipsets instead.
But the U.S. export control rule, first reported by Reuters last week, aims to block HiSilicon's access to two crucial tools: chip design software from U.S. firms including Cadence Design Systems Inc and Synopsys Inc, and the manufacturing prowess of "foundries," led by Taiwan Semiconductor Manufacturing Co Ltd <2330.TW>, that build chips for many of the world's top semiconductor firms.
With the new restrictions，HiSilicon "will be in a situation where they’re not able to manufacture chips at all, or if they do, then they’re not leading edge anymore," says Stewart Randall, who tracks China's chip industry at Shanghai-based consultancy Intralink.
Without its own processors, Huawei will lose its edge over domestic smartphone rivals, analysts said. International sales had already been gutted by a ban on the use of key Google software.
Industry sources say Huawei has stockpiled chips, and the new U.S. rule will not go into full force for 120 days. U.S. officials also note that licenses could be granted for some technologies. HiSilicon can also keep using design software it has already acquired.
HILSILICON IN TOUGH SPOT
Still, analysts agree HiSilicon is in a tough spot. Nearly all chip factories globally -- including China's leading foundry, Semiconductor Manufacturing International Corp <0981.HK> -- buy gear from the same equipment makers, led by U.S. firms Applied Materials Inc, Lam Research Corp and KLA Corp.
The new U.S. rule requires licenses for companies using U.S. machinery to build Huawei-designed chips and delivered to the Chinese firm. To be sure, the new rule will not catch items shipped to a third party, allowing HiSilicon's fabricators like TSMC the ability to ship chips to HiSilicon’s device manufacturers who can send them directly to a customer.
While there are alternatives to American machines - Japan's Tokyo Electron Ltd <8035.T>, for example, makes gear that competes with Applied Materials - replacing U.S. technology is not as simple as swapping out a machine.
“You almost have to think about it like a heart transplant," said VLSI Research Chief Executive Dan Hutcheson, noting that chip production lines are finely calibrated systems where everything has to work well together.
Doug Fuller of the Chinese University of Hong Kong said Huawei had a few options. It could slip around the rule by having suppliers ship directly to Huawei customers, though the U.S. officials said they would be vigilant about such workarounds.
Huawei and the Chinese government could re-double efforts to build production capabilities that did not require U.S. tools, by investing in nascent Chinese competitors and buying from Japanese and Korean firms, even if that required quality sacrifices.
Or Huawei could turn away from HiSilicon and revert to buying from overseas suppliers--just not American ones. "There’s talk of Huawei just turning to Samsung processors," for its smartphone, said Fuller.
Reuters also reported:
A decision on a key legal aspect of the trial over whether Huawei Technologies Chief Financial Officer Meng Wanzhou can be extradited to the United States from Canada will be announced next Wednesday, the British Columbia Supreme Court said on Thursday.
Meng was arrested in December 2018 at Vancouver International Airport at the request of the United States on charges of bank fraud, and is accused of misleading HSBC about a Huawei Technologies Co Ltd-owned [HWT.UL]company's dealings with Iran.
Meng, 48, has said she is innocent and is fighting extradition.
The case has strained relations between Ottawa and Beijing.
The judgment will deal with the charge of double criminality, deciding whether Meng's actions were crimes in both Canada and the United States at the time of her arrest.
Meng's lawyers argued that unlike the United States, Canada did not have sanctions against Iran at the time Canadian officials authorized the start of the extradition process, meaning Meng's arrest did not meet the legal standard of double criminality.
Canadian prosecutors have argued that Meng should be extradited on fraud charges, and that contrary to her defense argument, the case is not solely about a violation of U.S. sanctions against Iran.
Should the judge rule that Meng's actions were not a crime in Canada, the rest of the case "dies," said Gary Botting, a criminal defense lawyer and extradition expert based in Vancouver. "If the double-criminality standard falls, she gets to go home. Not just walk but fly."
Arguments on the double-criminality charge took place in January in Vancouver.
A court memo on Thursday said British Columbia Supreme Court Associate Chief Justice Heather Holmes would preside over an in-person court appearance by Meng and the other parties, once the decision is released at 11 a.m. PDT (1800 GMT) next Wednesday.
A second phase of the trial, focusing on abuse of process and whether Canadian officials followed the law while arresting Meng, is set to begin in June. Closing arguments are expected in the last week of September and the first week of October.
It could be years before a final decision is reached, since Canada's justice system allows many decisions to be appealed. - Reuters
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