Under U.S. pressure, Huawei’s difficult road to change the core

Since last year’s U.S. sanctions against Huawei, huawei has quickly taken measures such as “preparation for a positive tire” and “domestic replacement”, quickly resisting the U.S. blow and maintaining growth in 2019. Against the backdrop of previous sanctions that have not had the desired effect, the U.S. appears to be preparing to further escalate sanctions against China, with the focus likely to be on the chip manufacturing supply chain.

There have been many rumors that the United States is pressuring TSMC to cut back on Huawei. There are also rumours that the US is planning to reduce the 10 per cent limit on technology sources. In addition, the delivery of ASML’s EUV lithographs purchased by SMIC last year was put on hold in the United States.

Industry research shows that in the past year, Huawei in the IC design side has basically achieved self-research alternative or non-U.S. supplier switching, the U.S. side continues to rely on the original means of pressure is not significant, and may even be due to the decline in the performance of U.S. chip manufacturers in the future to relax regulation, but at the manufacturing end, Huawei highly dependent on TSMC, and upstream semiconductor equipment, EDA software is still monopolized by U.S. manufacturers and is expected to be a key u.S. pressure.

1. The path of U.S. sanctions against China in the past year?

1, has been implemented:

Add Huawei to the “Entity List” and extend the Temporary License four times in a row, most recently until April 1, 2020.

On May 16, 2019, U.S. President Donald Trump signed an executive order requiring a state of emergency in the U.S. and barring U.S. businesses from using telecommunications equipment produced by businesses that pose a national security risk, and the U.S. Department of Commerce will make specific rules within 150 days.

On the same day, the U.S. Commerce Department said it was considering national security and planned to add Huawei and its 70 branches to its “entity list.”

Subsequently, the U.S. government extended Huawei’s temporary license four times in a row, with the main goal of allowing existing U.S. telecommunications providers, especially in rural areas, to continue to operate existing telecommunications networks “safely”.

2, media reports but not yet implemented:

2.1) It is proposed to reduce the “Minimum Content Standard in the United States” from 25% to 10%.

Reuters reported on December 23, 2019 that the U.S. plans to reduce the “from U.S. technology standards” from 25 percent to 10 percent in an effort to block supply to Huawei from non-U.S. companies such as TSMC.

Reuters reported that TSMC’s internal assessment that TSMC’s 7nm and below processes originate from less than 10% of the technology content in the United States and can continue to be available, but 14nm U.S. technology content of more than 15%, or will be limited. TSMC said it would respond to the approval in accordance with the principle of one-point discussion of each product, and the determination of the technical content would be calculated and declared by TSMC.

2.2) It is proposed to prohibit foreign manufacturers from making chips for Huawei using U.S. semiconductor equipment.

The U.S. Department of Commerce is drafting changes to the so-called “Foreign Direct Products Rule”, which restricts multinationalcompanies from using U.S. know-how for military or national security products, in addition to the U.S. minimum content standard rule, Reuters reported on Feb. 18.

The United States will force all foreign companies that use U.S. chips to make equipment to seek U.S. licenses before shipping.

Mr. Trump tweeted on February 18th that he opposed stricter restrictions on the sale of U.S. products overseas, and there are still divisions within the U.S. government. The U.S. government is scheduled to hold a cabinet meeting on February 28th to study China-friendly policy formulation.

Under U.S. pressure, Huawei's difficult road to change the core

2. What is the relative level of U.S. sanctions against Huawei?

The “entity list” is an important means of U.S. export controls, and the EAR requires the list entity to obtain a license to purchase U.S. or U.S.-containing technical items.

U.S. sanctions against Huawei are based primarily on the Export Control Regulations (EAR) of the U.S. Department of Commerce’s Bureau of Industry and Security (BIS). U.S. export controls, both at the national level and for specific businesses or individual entities.

The Entity List lists a range of entities that have been rejected for trade, and BIS can modify the Entity List by revising the EAR.

If the U.S. government determines that the business concerned is engaged in activities contrary to U.S. national security or foreign policy interests, it may be included in the Entity List after consideration of end-use and end-user issues by the End-User Review Committee of the U.S. Department of Commerce, State, Defense, Energy, and Treasury.

All u.S.-based products subject to the Export Control Regulations are subject to the U.S. Department of Commerce’s Bureau of Industry and Security if businesses are involved in the Physical List.

Chinese companies have been included in the list of export restricted entities on several occasions in U.S. history.

1) On March 7, 2016, the United States included ZTE in its list of export restricted entities.

2) On August 1, 2018, the United States added 44 companies and research institutes involved in the military field to the list of export restricted entities.

3) On October 29, 2018, the United States announced that, for the sake of maintaining national security, it will officially add Fujian Jinhua, a domestic storage company, to the list of export restricted entities from October 30.

4) On June 21, 2019, the U.S. Department of Commerce included the list of entities with Sugon, Tianjin Haiguang, Chengdu Haiguang Integrated Circuit, Chengdu Haiguang Microelectronics Technology, and Wuxi Jiangnan Computing Technology Research Institute.

5) On October 7, 2019, the U.S. Department of Commerce added HaiConway Vision, Dahua Technology, Science and Technology, Viewtechnology, Shangtang Technology, MayaBoco, Eto Technology, Yanxin Technology 8 companies and 19 public security organs and 1 police academy to the list of entities.

Under U.S. pressure, Huawei's difficult road to change the core

The “U.S. Minimum Content Standard” for foreign products in the EAR is generally set at 25%, and in special countries or special products it is 10% or 0%.

The U.S. Export Administration Regulations (EAR) are regulated for goods originating in the U.S., as well as certain foreign-made goods (if the value of U.S. components, technologies, etc. exceeds the specified minimum, or if the foreign product is manufactured directly through U.S. technology or software).

The “Deminimisrule” provision in the EAR sets three minimum content standards for different export control products or export objects: 1) 0% minimum content, 2) 10% minimum content, and 3) 25% minimum content.

Typically, this standard is set at 25%, for Cuba, North Korea, Syria and other countries, it is set at 10%, and for specific products such as chips and high-speed in-technology, hot-spot technology, specific encrypted items, specific military supplies, etc., the standard is set at 0%.

The above minimum content rules are listed in the Export Administration Regulations, so that the BIS can be amended to modify the applicable objects of the three types of standards. It also means that if the U.S. lowers Huawei’s standard sedated from 25 percent to 10 percent, it will actually be treated in the same way as Cuba, North Korea, Syria, and so on.

Under U.S. pressure, Huawei's difficult road to change the core

Third, under the previous sanctions, Huawei countermeasures and how u.S. suppliers can achieve supply to China?

Huawei’s response includes:

1) Large inventory in the early period.

After ZTE was placed on the u.S. rejection list in 2018, Huawei has begun to prepare for it, starting with the preparation of a large number of components, and Huawei’s net operating income from operating activities has long been ahead of net profit, with consistent trend, and in 2018 there has been a larger inflection point.

At the same time, as can be seen from the balance sheet, Huawei’s inventory increased significantly, which is mainly the increase in raw materials, raw materials as a proportion of inventory reached a peak of 37.5% in recent years, so we can reasonably infer that Huawei in 2018 a large number of hoarding related components, in case of need;

2) Supply chain switching.

Huawei has been stocking up on the BCM program since more than a decade ago, and the BCM program, which is derived from IBM, considers that business continuity can still be achieved in extreme cases where there is no upstream supply, is a complete management process for identifying potential threats to the organization and the possible impact of these threats on business operations, including non-U.S. vendor switching and independent research and development in terms of implementation, with the following details.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

U.S. technology companies’ response strategy: By proving that products are not national security, applying for temporary permits, etc., most of them have now resumed supply, even if reduced from 25 percent to 10 percent in the future, it is not expected to affect supply.

Although the “minimum U.S. content standard” is set at 25 percent, and in theory all U.S. companies are banned from supplying Huawei altogether, Mr. Trump said during the June 29, 2019 G20 summit that he agreed to continue selling technology products to Huawei as long as the equipment did not involve significant national security.

The U.S. Department of Commerce later confirmed on its official website on July 9, 2019, that U.S. companies would be licensed to supply Huawei as long as it did not pose a threat to national security.

We combed the supply of major U.S. technology companies to China, and although they experienced a certain period of supply at the beginning of the “entity list” in May 2019, they have generally resumed supply in whole or in part, and special permits have been obtained, including Microsoft and Micron. Those who have not yet obtained a license but are identified as available in whole or in part include Intel, Qualcomm, Celings, Skyworks, Qorvo, TI, etc.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Non-U.S. Overseas Suppliers: Actual supply is not affected by the U.S. entity list. According to our industry chain research, non-U.S. overseas suppliers such as South Korean manufacturers did not actually suspend supply after the U.S. added Huawei to the list of entities. So in the last round of sanctions China was for raw materials that were still available to non-U.S. overseas suppliers.

4. The current degree of Huawei’s dependence on U.S. chips on the base station end?

We do not include U.S. components in the product called go A, Huawei operator BG in addition to a few old products, has achieved a full range of production to A. The core chips of the base station include ADC/DAC chips, FPGAs, DSPs, switching chips, RF PA, LNA, PA drivers, etc.

Most of the world’s 5G base stations are highly dependent on U.S. suppliers, and typically ADC/DAC chips are supplied globally by ADI and TI, FPGAs supplied by Cyrings and Altera, and PA-driven by TI.

The supply of RF chips is relatively single, and RF PA and LNA are available in addition to Skyworks and Qrovo, as well as InNXP in Europe and LNA domestic RF companies.

In addition to the core chip, the rest of the ring, high-frequency plate, power semiconductor, high-speed back plate connectorcan can find domestic replacement.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

The most difficult ADC/DAC in the entire a-go section has been completely replaced by Heath. ADC/DAC is the most critical link of converting analog electromagnetic wave into 0101 bit stream, and the function of ADC is to sample the analog signal at high frequency and convert it into a digital signal, and the function of DAC is to adjust the digital signal into an analog signal. The high-speed, high-precision ADC/DAC is the jewel in the crown of the entire analog chip.

There are several core difficulties, sampling frequency, sampling accuracy, and precision cooperation throughout the manufacturing and research and development process.

Huawei replaces the latest a-base station with A-designed chips. Huawei has adopted its own design aDC/DAC on a scale from 4G, and is being contracted by a fab in Taiwan, which has reached a level that lags behind only the latest generation of ADI products and can fully meet the high-performance commercialization of 5G products.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

FPGA Huawei used Serlings and Altera in the early days, and this part has now been completely replaced by its own chips. FPGA chips play an important role at the base station end, but in the current global market, the production of this chip is dominated by several U.S. companies, Chinese companies have little capacity in this area.

In terms of market size, Xilinx and Altera account for more than 80% of the market size. In terms of customer distribution, the main customers are concentrated in Asia and North America, with less than 30% of the U.S. domestic market and more than 40% of its products exported to Asian countries. U.S. companies, which have an almost monopoly position in this field, are highly profitable.

In different manufacturers’ base stations, the role of FPGAs is not the same, in some manufacturers’ 5G base stations, the role of FPGAs is to do FFT (fast Fourier transformation, for signal processing), interface, alarm and other functions. Huawei, in two, has its own FPGA responsible for interface and alarm work, with DSP in charge of FFT.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

FPGA, DSP, and ADC/DAC are not three isolated chips, so what is the relationship between ADC/DAC and FPGA or DSP, please refer to a diagram of analogDevice in the United States. ADC/DAC mainly completes the module number mode conversion, the calculation of this part of the work by DSP/FPGA to complete.

Under U.S. pressure, Huawei's difficult road to change the core

Switching chips are commonly found within the BBU and are used for data exchange between boards and for data exchange with SPNs, mainly from Broadcom and Marvell in the United States. Huawei’s switches and routers started early, routing switching chips early have a complete series, has been able to achieve autonomy.

In addition to Huawei, Seinke Network, a third-party chip supplier in China, is also an important player.

Sembko Networks is the world’s leading provider of Ethernet switching core chips and white brand solutions, dedicated to the deployment and application of SDN and white switch in carriers, enterprise networks, and data center networks. So in this link, there is no shortage of solutions at home.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

All of the above is said to be a progress in the core link of localization, while another important link is the RF chip, divided into three blocks, PA, LNA, RF switch. In addition to the United States, the PA block also has a lot of suppliers in Europe and Japan, such as NXP in Europe, Sumitomo of Japan, while the lower technical barriers of LNA and switching links, has been able to fully achieve domestic replacement, such as a company in Shijiazhuang, a company in Nanjing.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Like RF switches and LNA on mobile phones, RF switches and LNas at the base station are fully domesticated.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

In addition to the core chip, in the high-speed back plate connectors, ring instruments, high-frequency copper plate and other links of domestic manufacturers are also rapidly rising. As Ren Zhengfei told Fortune on October 10, 2019, “The biggest worry in the U.S. is that from 5G to the core network industry, we don’t need American parts at all.” “

V. How dependent is Huawei’s dependence on U.S. chips on the mobile phone side?

Huawei mobile phones through chip self-research and domestic replacement, the degree of supply chain localization has been significantly higher than other manufacturers, while some chips for Japan, South Korea and Europe similar suppliers, de-A has significant results, RF front end still has 1 to 2 chips using U.S. products.

Huawei mobile phone terminal supply chain situation is shown in the following table, in which the application processor and baseband, WiFi and Bluetooth, power management chip, some RF front-end chip through self-research and contracting method scored a breakthrough in localization, but the RF front-end part of the core devices such as PA still have some dependence on U.S. manufacturers.

Under U.S. pressure, Huawei's difficult road to change the core

Take Huawei’s Mate30Pro5G phone as an example. About half of the chips for Huawei Hessself self-study, the contract ingress mainly for TSMC, SMIC and so on. Some of the use of Japanese, South Korea and Europe chips, RF still has a small number of U.S. chips.

(1) Application processor and baseband using Kirin series self-research chip, designed by Huawei Heise and manufactured by TSMC foundry, for example, the latest Kirin 9905G chip by TSMC 7nm and EUV process, the subsequent model will also use TSMC 5nm, because SMIC 14nm has entered the production stage, We consider Huawei Heath to be a major customer of SMIC 14nm.

(2) RF front end is the mobile phone chip domestic short board, Huawei has achieved partial replacement through self-research, but not yet complete. Huawei’s Mate30Pro5G model, which was included in the list of entities, compared with the previous model, is mainly the front-end part of the RF, no longer using the U.S. Skyworks/Qorvo chip, instead of 3 self-research front-end/PA modules (Hi6D03, Hi6D05, Hi6D22), 6 self-researchLNA/RFswitch, 2 Japanese Murada PA modules, 1 High U.S. Q33. Despite a decrease in the integration of the Skyworks/Qorvo scheme, the de-Aization of key RF areas has been significant. In the event of a supply cut-off, Huawei is believed to have the appropriate inventory support, and is expected to quickly promote a complete replacement.

(3) Storage chip currently non-U.S. suppliers are mainly South Korea Samsung,SK Hynix, Japan Kioxia (formerly Toshiba Storage) and other manufacturers, domestic suppliers such as Hefei Changxin, Changjiang storage technology mature still need time.

Under U.S. pressure, Huawei's difficult road to change the core

(4) WiFi and Bluetooth, power management chip, etc. at present Huawei HiSilicon has basically achieved self-study.

(5) Image sensors can be supplied by Sony of Japan, Samsung of South Korea or China’s Weir shares (Beijing Howie), fingerprint recognition sensors by the domestic Goodix technology, Siliwei (Mega Innovation) and other supplies, all kinds of precision sensors mainly by European manufacturers such as Rufa Semiconductor, Bosch and so on.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Vi. The important point in time for follow-up observations and our deduction judgment?

The Trump administration had planned to meet on February 28th, local time, to discuss further restrictions on exports of technology to China. Cabinet-level officials, including Commerce Secretary Wilbur Ross, Defense Secretary Mark Esper and Treasury Secretary Steven Mnuchin, will discuss whether to restrict the supply of U.S. semiconductor devices to Huawei. And additional restrictions on chip exports that include some U.S. technology content.

However, the meeting has since been postponed. The delay may be due to deep divisions within the US ahead of a cabinet meeting, with some officials inclined to take a hard line against China and others, while others are more concerned about trade.

Citic Securities argues that a new round of sanctions against China could be carried out to some extent, which would be one of the chips the U.S. has to prepare for the second phase of China-U.S. negotiations.

The Sino-US trade dispute begins in mid-2018 and will be followed by the first phase of China-U.S. trade negotiations on January 15, 2020, followed by a second phase of negotiations, which is currently in a buffer period for reaching the first agreement and is a point in the “cycle” of trade disputes that is still low in tension.

The second phase of the negotiations, which deal with more central issues such as intellectual property protection and compulsory technology transfer, is expected to be more difficult than the first. So for the U.S., Huawei remains one of its main bargaining chips, and a second round of trade friction is likely to shift from tariffs to technology. So we think the U.S. sanctions against Huawei may still be in place to some extent.

Industry research shows that in the past year, Huawei in the IC design side has basically achieved self-research alternative or non-U.S. supplier switching, the U.S. side continues to put little pressure, and may even be due to the decline in the performance of U.S. chipmakers to relax regulation, while the manufacturing side Of Huawei highly relies on TSMC, and upstream semiconductor equipment, EDA software is still monopolized by U.S. manufacturers, It is expected to be the focus of U.S. pressure. At present, Huawei has achieved a large number of self-study of chips, but the manufacturing sector still relies on TSMC, stable and other Taiwanese manufacturers in China, is the main bottleneck in its industrial chain.

Once the manufacturing link can not be TSMC, stable and other foundry orders, and SMIC production capacity still needs a certain amount of time to climb, then its large number of self-developed chips will not be able to achieve mass production and application, so it is expected or will become the entry point of this U.S. sanctions policy.

In addition, in the semiconductor equipment, the current U.S. manufacturers occupy about 40% of the semiconductor equipment market share, which in deposition, etching, ion injection, CMP, cleaning, testing and other key processes, application materials, pan-forest, Ketian and other U.S. manufacturers have leading process technology advantages and stability, after long-term mass production testing, Therefore, in the short term is difficult to replace; in the area of EDA software, the CURRENT IC design edA tools are still basically monopolized by Cadence, Synology, Mentor three American companies, in the short term is difficult to completely replace.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

7. The impact of Huawei’s sanctions on the domestic chip industry chain?

Focus on IC manufacturers, recommend SMIC, focus on Huahong Semiconductor. The manufacturing link in Huawei’s chip industry chain is a more important part, huawei base stations and terminals in a large number of chips using self-research methods, and Huawei does not have the chip manufacturing capacity, so mainly by TSMC, SMIC and other chip foundry to complete. TSMC is a leader in technical capabilities, mainly bearing Huawei’s Kirin processors, high-performance computing chips, RF chips and more.

SMIC also carries a large number of power management chips, RF chips, low-end master chips and so on. If Huawei is unable to obtain TSMC due to U.S. sanctions, we believe that some orders may be forwarded to SMIC for similar process production. Huawei is also expected to increase its cooperation with SMIC for supply chain security reasons if the U.S. sanctions policy does not completely cut off TSMC supplies.

The process and product application correspondence of ordinary silicon processes in IC manufacturing are similar to pyramid structures, with a large number of cost-sensitive chips built from mature processes and high-performance products made from advanced processes. The mature process at the bottom of the pyramid is now basically possible by SMIC, Huahong Semiconductor and other domestic foundry production, and the advanced process at the top of the pyramid still needs to rely on TSMC, Samsung and other international factories to complete.

Under U.S. pressure, Huawei's difficult road to change the core

Although SMIC’s advanced process technology capability lags behind TSMC about 2 generation nodes, but the process node combination is basically complete and the technical capacity of the first domestic, with Huawei long-term cooperation, is the only domestic can afford to undertake the transfer of orders manufacturers.

TSMC 7nm was mass produced in 2018 and 5nm imported in 2020. SMIC has complete process capabilities in mature processes above 28nm, 14nm of advanced processes has begun to climb capacity, and 7nm is expected to be mass produced from the end of 2020 to early 2021.

If the “Us Technology Content” reduction policy affects TSMC’s supply to Huawei, we believe that Huawei may, on the one hand, transfer some high-end chips to TSMC’s more autonomous technology nodes, such as TSMC 7nm and 5nm, as soon as possible, and may transfer projects above 14nm or may be affected to SMIC.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Focus on IC equipment manufacturers, focus on the north of China, micro-company. Equipment manufacturers for the fab to provide the bottom support, the use of domestic equipment is conducive to increasing the wafer plant’s technical autonomy, so in the long run, The North Hua creation for the domestic semiconductor equipment sales of the largest scale, the most comprehensive varieties, first-class technology manufacturers, will continue to benefit from SMIC International and other domestic fabs to increase the trend of domestic equipment procurement. North Huatron equipment has been used in SMIC 14nm production line, while joint lying 7/5nm equipment, worthy of attention.

Micro-company is one of the few domestic single-class semiconductor equipment to achieve the international top-level manufacturers, its focus on etching equipment, especially silicon etching field, has passed TSMC 5nm verification, first-class technical capabilities, recommended long-term attention.

Under U.S. pressure, Huawei's difficult road to change the core

Under U.S. pressure, Huawei's difficult road to change the core

Domestic IC design manufacturers long-term benefit domestic replacement. From the perspective of the industrial chain, if the United States active sanctions can indeed stimulate and stimulate the domestic semiconductor industry domestic replacement of the progress and possibilities. Domestic end manufacturers such as Huawei have been more aggressive in looking for domestic suppliers than they have been before. Ic design is expected to have a number of companies continue to benefit from the trend of domestic replacement, such as the field of memory chip mega-innovation, image sensor technology weir shares, RF front-end field Ofwins, analog chip shares, etc.