Who is Huawei's plan B?

On June 17, Nikkei Asian Review reported that Huawei had notified some suppliers that it would postpone the release of the flagship Mate series of mobile phones, suspend the production of some parts of the Mate series, and cut down the orders of mobile phone parts in the next few quarters. What's more, Huawei will further evaluate the impact of supply chain disruption.

Huawei Mate series is positioned for high-end business market, which will be launched in September each year with the newly developed Kirin chip. It is the highlight moment for Huawei's product in the whole year. However, in fact, not only smartphone chips, but also Huawei 5G network equipment chips and cloud chips will be affected to varying degrees.

At the same time, from May 20 to mid-June, Asia Times has disclosed that South Korea will become a key breakthrough for Huawei. Huawei may reach an agreement with Samsung on chip manufacturing. According to the agreement, Samsung will manufacture chips for Huawei's 5G equipment. Considering that Huawei's core business is telecommunications equipment, the business of smartphone has a lower income compared with the core business, so Huawei will strategically give up the market share of smartphones. Huawei and Samsung will move from competition to cooperation.

As South Korea is China's largest supplier of memory chips, the two countries have a close relationship in terms of industrial supply chain. Affected by the US policy of restricting Huawei, South Korean technology companies will also be hit hard. Commercial enterprises are even more pursuing the maximization of benefits. Samsung Li Jianxi once said that the two keywords of Samsung in the 21st century are digital and China. Besides, Samsung is the only company that can compete with TSMC in the 7nm and 5nm processes. Under this premise, it is possible for Samsung to become Huawei's plan B, which has attracted much attention from the outside world.

Samsung may be the only plan B for Huawei

Samsung's business is mainly divided into four parts, including semiconductor business (memory chips, system LSI, foundry, etc.), IT and mobile communications (smartphones, telecommunications equipment), displays (OLED panels, etc.), visual display and digital home appliances.

In 2019, Samsung's smartphone business began to recover. Affected by the weak industry and the unfavorable factors of falling memory and flash memory prices since 2018, Samsung's memory business has slumped. But the flagship Galaxy Note 10 and other series products have good sales, filling the gap in the semiconductor business. The semiconductor business, IT and mobile communications business have become the top two in Samsung's main business.

The carrier business has always been the foundation of Huawei's business, with the main revenue accounting for more than half of it. The operator's business fell below 50%, and consumer business revenue exceeded operator's business in less than two or three years. Judging from the business genes of the two and their dependence on different businesses, there are common interests between them.

In addition, Samsung completely relies on Japanese and European equipment and technology and is theoretically feasible. According to Asia Times, Samsung has built a 7nm small chip production line with only Japanese and European chip manufacturing equipment to attract more potential customers.

More importantly, Huawei has few options. On the one hand, Huawei's 5G base station chipset Tiangang, and possibly the next-generation terminal processor Kirin 1100, have a manufacturing process of 7nm and below 7nm, while chip manufacturers that can manufacture 7nm and below processes are only TSMC and Samsung. And Samsung's foundry scale is second only to TSMC.

"Both base station chips and mobile phone chips are using the most advanced processes and require high performance. Mobile phone consumers must use the most advanced chips for flagship mobile phones, while base station chips have room for compromise, and it is not easy to find alternative manufacturers. If we can't find a solution for chip supply, Huawei's carrier and cloud computing business shipments will be greatly affected." ICwise Xu Ke told GeekPark (ID: geekpark).

In addition, Bloomberg reported on June 7 that the self-developed chip inventory in Huawei's telecommunications equipment may only be maintained until the beginning of 2021. Forrester research Charlie Dai predicts that Huawei's high-end chips, including smartphone baseband chips, CPU inventory, may only last 12 to 18 months.

SMIC Liang Mengsong once revealed that 7nm small-scale manufacturing will be realized by the end of 2020. However, it takes a long time from R&D to large-scale mass production, and is limited by the source of the equipment. It means that there is uncertainty whether it can provide supply to Huawei. It can be seen that, whether it is the scope of qualified manufacturers or the time, there is not much room for Huawei.

Of course, whether Samsung can finally reach a deal with Huawei is the result of a multi-party game. After all, Samsung and Huawei have been fiercely competitive in the field of smart terminals, and Samsung has been coveting the telecommunications equipment market for a long time.

In fact, the dilemma faced by Huawei highlights the commonality of the chip design industry. On June 20, ZTE issued a clarification that recent media reports claiming its 7nm chip has realized mass production and 5nm chip has started technology importing was misinterpreted. The company also said that it focused on communication chip design and did not have chip manufacturing capabilities. In other words, in terms of advanced chip manufacturing, packaging and testing, most chip design companies do not yet have diversified options.

How to resist the reverse globalization?

As we all know, chip manufacturing steps are numerous and involve many equipment manufacturers. Foundry companies purchase equipment from equipment manufacturers and then manufacture chips. Statistics from Statista show that chip-making equipment companies are mostly American and Japanese, and they hold more than 50% of the global market share.

For example, there are more than a thousand types of equipment from Applied Materials, almost covering the entire semiconductor manufacturing process, and dominating the chip equipment market for many years. ASML in the Netherlands monopolizes EUV lithography technology that is a key device for 7nm and 5nm chip manufacturing.

In terms of the pattern of foundry companies, the 10nm process has become a landmark node for companies to widen the gap. The more advanced the process, the fewer manufacturers. Manufacturers above 10nm include TSMC, Samsung, Intel, and Global Foundries, etc., nibbling the market shares, while under 10nm, only TSMC and Samsung compete.

"Most companies from the United States, Europe, Japan, and South Korea focus on integrate IDM (design, manufacturing, packaging). The reason why Taiwan is leading in manufacturing and packaging is mainly to maximize the efficiency of each link under the division of labor and create more profits. Coupled with the earlier investment in semiconductors, it has accumulated rich practical experience and research and development capabilities, and explored its own positioning, so it has a good performance." Yao Jiayang of TrendForce concluded.

Meanwhile, in the highly concentrated industrial chains such as chip equipment and manufacturing, counter-globalization and division of the original industrial system may continue to deepen.

On June 11, New York Times disclosed that, given that the US chip manufacturing share only accounts for 12% of the global market, US lawmakers are considering investing tens of billions of dollars in the US semiconductor industry in the next five to ten years. They want to maintain its dominant position in the US chip industry chain through attracting chips manufacturing industry returns to the United States.

Not only the United States, Japan has also made some moves. The Japanese government will use a budget of approximately $ 2 billion to help Japanese companies shift production to their home country, which is undoubtedly a blow to chip design manufacturers including Huawei.

Chips are the jewel of the technology industry, and foundry companies are a highly capital-, technology-, and talent-intensive industry, which also serve many Fabless design manufacturers. In the future, some companies like Huawei may inevitably face more difficult challenges and urgently need to actively explore a way out.

"In addition to having market support, the R&D strength is indispensable for the development of the semiconductor market. From the perspective of the demand market in China and the recent development of the chip design industry, it may be a direction worth exploring that strengthening the quality of Chinese chip design industry to drive Chinese manufacturing and packaging and testing foundry industry ." Yao Jiayang said.

If those companies like Huawei want to solve the dilemma, it also needs to break through the chip design, and then gradually penetrate into other fields like manufacturing, packaging and testing to get through the various industrial chains.

This is an article from WeChat official accounts GeekPark(ID: geekpark), written by Qianqian, translated by Chris Yuan.