Huawei Chip Production

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It’s a “good news, bad news” situation for Huawei. The Chinese electronics giant just surpassed Samsung to become the world’s largest smartphone maker, but it might be running out of steam. Huawei CEO Richard Yu has told investors that the company will have to stop making its custom Kirin ARM chips because of ongoing sanctions from the United States. That could lead to a reversal in Huawei’s upward trajectory.

Huawei’s troubles started in 2018 when it attempted to launch the Mate 10 Pro on US carriers. The government allegedly pressured ATT and Verizon to back out of the deal, citing Huawei’s connections to the Chinese government and efforts to undermine US intellectual property. Regulators and intelligence agencies were particularly concerned about Huawei building 5G network infrastructure that might contain backdoors for the Chinese government.

Huawei pulled back from the US market following the Mate 10 debacle, but the US raised the stakes in May 2019 when it added Huawei to the Commerce Department’s “entity list,” which blocks most US firms from doing business with the company. That led to Google severing its relationship with Huawei, which is why the company’s phones no longer have Google’s apps. Despite that, Huawei has a great deal of inertia in Asia and Europe. The sanctions are catching up to it, though.

The chip drought is a result of the Commerce Department’s expanded order from May 2020. This change blocked shipments of semiconductors to Huawei, even from companies based outside the US. If a silicon manufacturer uses US software or technology, they have to abide by the new rules. TSMC halted chip orders for Huawei’s HiSilicon subsidiary, which makes the Kirin ARM chips. According to Yu, he expects Kirin production to end on September 15th, possibly forever.

The upcoming Mate 40 smartphone will be the last device to launch with a Kirin chip. Without its custom ARM chips, Huawei will have to scrounge up off-the-shelf components, which will make its devices less competitive and increase costs. That is, of course, the goal of the ban.

Huawei has denied all the claims, but this is one of the few issues on which everyone in the US government seems to agree. Even a new Democratic administration likely would not reverse the sanctions. So, Huawei is in for a rough ride, and market inertia won’t save it.

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