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The trade war between the United States and China showed signs of thawing earlier this year when the Trump administration announced in January that it had signed Phase One of the highly anticipated trade deal between the two countries. However, following the havoc ushered in by the coronavirus, things took a backburner as both countries turned their attention inwards to stem the flow of the deadly respiratory disease.
Matters took a drastic turn late last week when the United States Department of Commerce issued a new rule that came into effect on Friday with a 120-day grace period. This provided the United States government a new tool in its battle against Chinese telecommunications equipment giant Huawei Technologies as the American administration now has the authority to regulate sales of semiconductors fabricated through products manufactured by companies inside the U.S.
Naturally, the move put one of the world's largest semiconductor manufacturers – Taiwan's TSMC – right in the crosshairs of both China and the U.S. TSMC (NYSE:TSM), who officially announced its intention to build a new $12 billion fabrication facility in Arizona on the same day reports of the new Commerce department broke news, is now reportedly suspending future orders from Huawei. Given the ramifications of the decision, we decided to take a closer look at the current state of affairs surrounding these latest developments.
TSMC Adheres To U.S. Export Controls By Suspending Future Orders From Huawei Technologies
The new rule put in place by the Commerce Department states that any orders for any Huawei products that were placed with TSMC before May 15th, and that are due to ship by September 14 (120 days) will not come under the ambit of the new rule. However, any other orders will require increased American scrutiny, in a move that the Commerce department believes will grant it better insight and visibility into chip shipments made to Huawei.
The Chinese company designs its processors through its semiconductor arm HiSilicon, with orders placed for these designs to TSMC. The relationship between the two companies is not new, with TSMC using its 16nm FinFET+ node to fabricate chips for Huawei as early as 2016.
Additionally, TSMC's bleeding-edge 7nm (DUV) and 7nm+ (EUV) nodes that are the demand of the tech world are also utilized by Huawei for the Kirin 980, Kirin 990 4G, Kirin 985 4G and Kirin 990 5G. Apart from TSMC, only Korean tech giant Samsung Corporation's semiconductor arm Samsung LSI has the required prowess to meet the technical complexity of these chips, but given the history between Huawei and TSMC, the former finds it easier to work with TSMC – particularly due to the close proximity between China and Taiwan.
Following a Stricter American Stance, is Huawei Increasing the Scope of its Orders to TSMC Before the 120-day U.S. Delivery timeline Expires?
Those familiar with the situation told the Review that:
"TSMC has stopped taking new orders from Huawei after the new rule change was announced to fully comply with the latest export control regulation. But those already in production and those orders which TSMC took before the new ban are not impacted and could continue to proceed if those chips could be shipped before mid-September."
Interestingly, as China's semiconductor dependence on American-origin equipment was pushed to the limelight last week and today, another report from China's Economic Daily News (cited by ITHome) claimed that Huawei has urgently placed a new order for $700 million worth of 5nm and 7nm products with TSMC. This order covers Kirin 1080 SoC based on the 5nm node, with the 7nm manufacturing process covering 5G baseband modems.
Given that TSMC has been reported to have commenced manufacturing these chips in April, it appears unlikely that they cover the ambit of the rule change. Yet, given the limited information on this matter for the time being, nothing can be said with certainty. The EDN report goes on to mention that following the $700 million order, TSMC has reached full capacity for manufacturing these products. The situation is further complicated when we consider a report that surfaced earlier this week suggesting that Huawei's 5nm process will enter mass production in the second half of this calendar year.
TSMC has $5.9 Billion in revenue associated with Huawei, can the demand surplus fill the vacuum?
Naturally, were TSMC and Huawei to sever ties completely, the revenue impact for the Taiwanese fab could be materially significant, especially in the odd case that it is unable to make up for loss capacity through replacement orders. Keep in mind that all industry reports right now indicate that TSMC is operating in a large demand surplus with orders backlogged for its advanced nodes. It is likely that the company will be able to substitute the majority of its revenue shortfall - if not all.
Analyst Nicolas Baratte estimates that the lion's share of TSMC's dependence on Huawei comes from the latter's smartphone products, which right now, account for roughly 10% of the fab's total revenue. These are followed by Huawei's server products primarily based on British chip house ARM's designs with a 2% share and specialty technologies covering image sensors accounting for another 2%.
Overall, and after factoring in replacement, TSMC could stand to lose 5%-6% of its revenues permanently in case it severs ties with Huawei. Potential replacements for Huawei include Qualcomm Incorporated (NASDAQ:QCOM)for smartphones and AMD Corporation (NASDAQ:AMD), NVIDIA Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC) for HPC (high power computing) applications.
Research firm reveals that Chinese firms miles away from becoming fully independent from American-made semiconductor manufacturing equipment
When talking about dependence, Guangzhou based research firm GF Securities states in a research report that China is still heavily dependant on the U.S. for semiconductor fabrication. The details suggest that while the overall dependence of local Chinse firms on American products for chip manufacturing is 35%, this share increases to 50% when the focus is narrowed down to core process equipment. American companies' 35.5% share is slightly higher than Japanese companies' 32.8% market share, and the Chinese are currently focusing on developing mature first-line equipment amongst other areas.
Analyzing the American market share with a fine-toothed comb, GF's analysts report that U.S. companies have a 50% market share in equipment for ion implementation, etching, process control and thin film deposition. Cleaning and inspection equipment account for 27% and 13% shares, respectively. Chinese firms including Shengmei semiconductor, China Microelectronics Corporation and North Huachuang Microelectronics Equipment Co., Ltd are slowly making their way up the equipment share percentage food chain, with North Huachuang's oxidation, diffusion and heat treatment products garnering a 32.2% share.
Commenting on the U.S. move, Huawei's chairman Guo Ping put on a brave face in a conference held on Monday with analysts. The executive accepted that Huawei's business will be hurt due to the decision, that the company needs to comprehend the impact of the restrictions and that its previous challenges that were part of the same back-and-forth between American and Chinese governments have led it to develop a "thicker skin". Mr. Ping concluded his remarks on a positive note by stating that his company is confident about making its way through the crisis.