White House Targets Huawei with More Sanctions, This Time via Chip Tech Partners

ON 03/21/2024 AT 06 : 53 AM

After Chinese electronics giant Huawei surprised the world with advanced 7nm chips last summer, the U.S. began planning countermoves.

Disputes with Huawei which began in earnest about five years ago were justified mostly as national security concerns. Though the one about to happen comes with similar claims, this time the fight appears to be about global competition.

In 2019, after the United States said it had credible evidence that spyware was a part of Huawei’s 5G communications chips and computer network devices, other information suggesting the company had engaged in extensive corporate espionage against U.S. high-tech firms, and some evidence of Huawei’s “dumping” of 5G products to secure market especially in western countries, the government launched a multi-pronged set of actions to block use of the company’s tech and growth plans.

Within the U.S., the government issued immediate directives ordering the removal of already installed Huawei 5G electronics and software everywhere. It blocked imports of further shipments of all Huawei tech (including smartphones) into the U.S., blocked all future models of Huawei’s smartphones from receiving access to Google’s Android operating system, and ordered U.S. chipmakers such as Qualcomm from providing semiconductors to the company. The government also took actions sanctioning the company and its senior executives financially, along with beginning investigations of those senior executives for involvement in illegal actions tired to the company’s communications software and potential embedded spyware.

The U.S. also provided information regarding its findings about Huawei’s tech which was convincing enough to the European Union to cause it to shut down all future use of Huawei’s 5G devices and software.

With such a devastating blow to the company’s market and supply chain, industry watchers and most western governments felt these combined steps would crush forever Huawei’s then fast-growing market in smartphones and its global leadership in telecommunications tech forever. That of course turned out not to be the case, through a combination of some emergency decisions by Huawei to generate cash, some technology decisions which many were skeptical of at the time, but which are currently working out well, and a focused approach by the company’s executives. The U.S. was just one of Huawei's markets and it could afford to lose it and other Five Eyes nations but it was certainly a blow to China's espionage efforts. 

It also helped that the Chinese government was fully supportive of Huawei’s actions to survive with policies and financial support.

After making the decision to move forward as a company and remain in all its markets, Huawei first tightened the business focus it needed to manage by selling off its budget smartphone product line, Honor, so it could work to concentrate on its Huawei-branded smartphones as a key part of its consumer electronics product line.

Then, after accepting that it would be blocked from purchasing top-of-the-line 5G-enabled chips for those smartphones from Qualcomm and others, something it had done in the past, Huawei decided next to continue to ship 4G-based devices, something which would support the vast majority of consumers in its now narrowed consumer markets, rather than rush to find an alternative 5G component supplier. Under the terms of the new sanctions, it was still entitled to legacy security patches for its existing and older phones which used Google’s Android Operating System, so it decided to ride with that rather than retrofit them with anything else. But then the company added to that by announcing it would be creating a new smartphone operating system which it said was built from the ground up, though it was indeed at least strongly “inspired” by Android.

Android is based on the the free and open-source Linux operating system and not that difficult to replicate and even improve upon. 

That new OS was HarmonyOS, a software system which now appears in all Huawei’s smartphones, its computer tablets, its smartwatch line, and tech accessories such as its wireless earbuds.

The company also began investing heavily in a new line of advanced computer chips for its smartphones, laptops, and other devices.

In all cases, the Chinese government was there not just to support the company financially but also to defend its reputation around the world, despite the many charges of software and other spying alleged against the company for years. China also later instituted its own phased-in bans on chip technologies coming from the U.S. and other countries, by insisting its home-based enterprises had to use Chinese chips where equivalents or better were available. No import tariffs were used

Now five years after the initial sanctions against Huawei and more than four years after additional severe restrictions on the company’s operations in the U.S. and Europe, Huawei has survived better than almost anyone expected in the core 5G business that triggered the initial sanctions. It has also bounced back as a smartphone and semiconductor chip developer.

As examples, the company announced as the year 2023 was closing that it expected total sales for the year to close at 700 billion yuan (U.S. $97 billion). Though this was 21% less than what the company had earned in its peak year of 2020, if one considers the seriousness and comprehensive nature of the sanctions levied against it, and that Huawei made the tough decision to sell off its successful budget phone line as a cost of continued existence, that represents a remarkable comeback for a company many were about to write off.

A major factor for that success came from Huawei not giving up on its strong tech and non-western market position in the telecommunications market. Through skillful sales maneuvering and targeting business partners when needed, revenues in the company’s telecom area fell by only 6% between 2020 and 2022. It also continues to maintain a 30% global market share in this area, a value about the same as it held three years ago. That is largely because both China itself and most developing countries continue to stick with Huawei for their long-term telecommunications needs. The bottom line is that this business, which many had virtually written off as unsalvageable after the U.S. and EU blocked access to their markets, is nearly as strong as it used to be.

In the smartphone area, thanks to the introduction of an array of high-end smartphones over the last few years, powered first through stockpiling of chips prior to the implementation of the original U.S. sanctions and now the development of a state-of-the-art 7nm chip technology in the latest Huawei phones, including the Huawei P60 Pro and Huawei Mate 60 Pro series, Huawei’s smartphone sales are now soaring. In the first six weeks of January 2024, Huawei saw its smartphone unit sales in China rise by 64% compared to the same period before.

Though it is hard to pin precisely which smartphone maker suffered the most from Huawei’s gain, the probable loser was Apple, who saw its revenues fall by 24% in the same six-week period. Apple had been the top seller of smartphones in the enormous Chinese market this past year, with an 18% market share. Thanks to Huawei’s well-respected new high-end smartphones and the already strong sales growth for them this year, Apple’s market share is expected to fall even more in the coming year.

The new Huawei smartphone that is leading the 2024 sales growth for the company is the Huawei Mate P60 Pro. Introduced last August at the same time as U.S. Treasury Secretary Janet Yellen was visiting Beijing to discuss trade conflicts, the phone includes Huawei’s own Kirin 9000S processor chip. That device was wholly designed within Huawei and was manufactured by Semiconductor Manufacturing International Corporation (SMIC), a Chinese company specialized in high-end custom chip tech.

That this chip even existed, and with such a high precision chip architecture (as measured by the tiny 7nm individual transistor dimension), shocked U.S. industry executives and government officials alike. Speculation was high that Huawei must have had help from entities which may have unlawfully assisted the company in evading sanctions to achieve this specification, though it is unlikely it will ever be proven or specifically articulated. It was to many arrogant Americans simply impossible to believe Huawei could have accomplished this by itself, or wholly within the Chinese high-end electronics ecosystem.

It also once again positioned Huawei as a dangerous threat to America, but this time as a business threat against American semiconductor business giants such as Intel and Qualcomm.

It also proved that the Biden regime's ambitious 2022 Chips and Science Act (CHIPS, for short), designed to provide funding to encourage bringing back more high-end semiconductor fabrication facilities onto American soil, was too slow a solution to prevent companies like Huawei gaining technological and commercial advantage, in a market the U.S. used to “own”.

As one example of how long such investments can take to pay off, consider the latest funding the White House released under the CHIPS Act.

Just yesterday, on March 20, Joe Biden announced during a groundbreaking ceremony for part of a new semiconductor facility for Intel Corporation at New Albany, Ohio, that the latest CHIPS beneficiary would be Intel itself, to help fund this factory as well as three others in Arizona, Oregon, and New Mexico. Intel, the company which is credited as having in 1971 introduced the world’s first microprocessor and has dominated the market ever since, is receiving $8.5 billion in grants and over $11 billion in loans via the Act to support building those new facilities, installing equipment, and training personnel for the factories. That is on top of Intel’s own commitment to invest over $100 billion of its own money in the new plants. Intel has assets of $188 billion. 

But despite this sizable investment, plus all the technological, operational, and organizational brainpower a company like Intel can bring to bear, even though part of the plant started construction in 2022, Intel announced it might not be until 2027 or 2028 until it will begin producing chips there.

What this means is that for the next 3 to 4 years, companies like Huawei will continue to pull ahead with their advancements in their own factories and those of their partners,

That is why confidential sources close to the White House revealed this week that the Biden administration would soon be placing sanctions as a minimum on Chinese chip manufacturers Qingdao Si’En, SwaySure, and Shenzhen Pensun Technology. ChangXin Memory Technologies (CXMT), a major manufacturer of high-density, high-computing speed, and low power consumption mobile chips, including the People’s Republic of China’s first Double Data Rate 5 DRAM chip, a product of major importance for smartphones and computer laptops, may also find the U.S. will be imposing new trade restrictions on it. All four enterprises have supplied Huawei with some components. A few were either previously being considered by Huawei for acquisition before the U.S. imposed the first two waves of major restrictions on how Huawei does business.

In each case, the U.S. will allege the companies targeted for sanctions have illegally conspired with Huawei to evade sanctions placed on Huawei itself.

While those charges may be true to a substantial extent, claiming sanctions evasion as the reason for the new restrictions will substantially understate why the U.S. is taking such desperate measures. Because if a company like Huawei, which the government felt it had substantially hobbled, could rise again so fast and in the same markets it had commanded previously, it is clear that American competitiveness itself – and the jobs which are built by that – is now at stake.

Throttling competitors/enemies almost always ends up making them stronger and the aggressor ultimately weaker. Iran has flourished under U.S. sanctions and has become vastly more powerful than it would have without the sanctions. Russia has also risen to overcome sanctions and expanded its allies around the globe. North Korea has also doubled-down on its nuclear weapons program and become stronger militarily in response to the U.S. bullying. 

China could easily thwart U.S. sanctions by imposing its own or a trade embargo, but is using the sanctions to force its manufacturers to become more independent and resilient and seek alternate markets.