This is the fourth part of a series looking into the increasing conflict between the US and China in technology infrastructure and semiconductors. This is a highly fluid situation with new development every week, and we try to present our best understanding and interpretation of the current events as it is unfolding. See the link below for previously notes:
The Silicon War (Part 1): Who is TSMC and why is TSMC setting up a factory in the US a big deal?
The Silicon War (Part 2): Who is HiSilicon and why is the US Commerce Department targeting it?
The Silicon War (Part 3): What does Washington exactly want by targeting Huawei?
We explored the four possible theories of why the US is targeting Huawei in Part 3 of the series, if you haven’t read it, we highly recommend you to give it a try before scrolling down. No one knows what WILL happen next but we want to offer our thoughts of what COULD happen next. Think of this as a map for potential future events, which can help us better understand the nature of the conflict and how things will unfold. We arrange the following potential events from least likely to most likely base on our current assessment.
The White House provides concrete evidence of why Huawei’s equipment is a national security risk, with clear instructions of how they want it changed before lifting the sanction. This would be similar to the ZTE case 2 years ago and would suggest that the sanction on Huawei is to protect US national security risk and nothing more. However, we view this as extremely unlikely. The White House had a million opportunities to do this in the past if they wanted to, but we have seen absolutely nothing.
The US and China restart trade negotiations, reaching an agreement with lifting Huawei sanction as part of the deal. This would be clear evidence that the US is using Huawei as leverage to get better terms in the trade negotiation. While possible, we don’t think it’s likely to happen, especially in the near future with the current administration. If Huawei was not part of the Phase 1 deal last year when the US economy was still holding up with a record-low unemployment rate, why would it happen this time around? After labeling Huawei a national security risk, lifting the sanction during a "recession" doesn't look good going into the election.
Expand the restriction from Huawei to ZTE, Xiaomi, Oppo, and Vivo, limiting their ability to buy semiconductor components from US companies. This would be the strongest evidence that the real intention of the White House is to stop or delay 5G deployment in China. But by doing that it will be 1) extremely painful in the near term for some of the US companies like Qualcomm which generates a large portion of revenue from these companies, and 2) force these Chinese companies to work together and support local semiconductor suppliers, potentially creating stronger competitors in the long term.
Gradually expand the restriction to other Chinese technology infrastructure and semiconductor companies. This is the most likely next step in our view. In fact, it is already happening. After putting Huawei on the Entity List, the Commerce Department added another 28 companies onto the list in October 2019, and another 33 companies and entities in May 2020. Almost all companies added to the list are technology infrastructure related, including video surveillance equipment providers, and supercomputer providers, etc. One interesting detail in the latest Huawei restriction is that the Commerce Department changed the Foreign Direct Product rule to make sure HiSilicon can’t manufacture the chips they designed anywhere without US license, but the new rule does not limit Huawei’s ability to buy chips from other semiconductor suppliers like MediaTek. We are not sure if this is a bug or a feature of the new rule, but it could be an effort to push Huawei to operate more like other smartphone or network equipment companies in China, the ones that rely heavily on US suppliers. If that’s the case, we wouldn’t be surprised to see the White House increasingly pressure HiSilicon, while making it easier for Huawei to work with US suppliers at the same time.
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