The Supply Chain Matters blog continues to highlight ongoing political and global trade developments that have impacts to high-tech and consumer electronics supply networks in strategic dimensions.
We have featured a number of prior blogs highlighting how escalating trade developments and actions related to both the U.S. and China, and specifically focused on Huawei Technologies, are providing increasing concerns relative to semiconductor and high-tech supply networks.
We began highlighting such concerns in our published 2020 Predictions for Industry and Global Supply Chains published in January of this year.
Much of this has been manifested by a May 2019 Executive Order signed by President Trump declaring a national emergency that bars U.S. companies from using telecommunications equipment made by firms posing a deemed national security risk.
In May of this year, that executive order was renewed, while the U.S. Commerce Department clarified such restrictions to now include foreign semiconductor manufacturers whose operations either utilize U.S. based software, or U.S. software-based manufacturing equipment, from shipping associated products to manufacturers posing a national security threat without securing a U.S. license. The Trump Administration further issued new rules that bar Huawei and its suppliers, from using any U.S. based technology and software without obtaining a specific license.
The latest iterations of such escalating tensions are indications from U.S. Commerce Department officials that blocking Huawei’s use of deemed U.S. semiconductor devices also includes off-the-shelf designs that Huawei may be now seeking to circumvent U.S. restrictions.
Earlier this month, Caixin reported that Huawei will stop producing its flagship Kirin chipsets due to the escalating pressures on suppliers of chip components. The China telecom producer reportedly had relied on software produced by U.S. firms such as Cadence Systems and Synopys to design said chips and then outsource fab production to Taiwan based TSMC, which also utilizes production equipment designed by U.S. companies. TSMC in-turn indicated it will not supply chips to Huawei after September 15th.
That announcement came as industry watchers were noting that the China-based telecom producer was instead moving to procure existing off-the-shelf 5G smartphone components from existing producers in Taiwan and Europe.
According to a report from Business Network CNBC: “A new separate rule requires companies listed on an economic blacklist to obtain a license when a company like Huawei on the list acts as a purchaser, intermediate consignee, ultimate consignee, or end-user.” U.S. Secretary of State Mike Pompeo had indicated that the Commerce Department added 38 Huawei affiliates to the U.S. economic blacklist, raising the total to 152 affiliates of the China telecommunications producer.
These added rules are thus efforts to restrict access to non-U.S. produced chips as well. In its reporting, Bloomberg headlined this move as “Trump Just Took the Nuclear Option on Huawei” and an indicator that beyond an incremental measure, it threatens to kill Huawei. The report pointed to a legal workaround would have been to let Huawei procure available chips from Taiwan based MediaTek, but that was not enough for the Trump Administration. Further opined by the Bloomberg report: “And if the new rule is to be strictly interpreted, then even the use of generalist technologies like PC’s running on Microsoft Corp.’s Windows and Intel Corp. processors could be prohibited.”
Bloomberg columnist Tim Culban further opined that the essence of all of these actions is to compel China to develop and alternative supply chain for advanced telecommunications and deemed crucial high-tech products. Culpan had predicted over a year ago that the high-tech technology sector would become bifurcated. He described a “Digital Iron Curtain” and further indicated:
“Just as the world was divided along military lines 70 years ago, the digital Iron Curtain will force political leaders to decide whether they’re Team China or Team America.”
Supply Chain Matters also highlighted for our readers a reports by Business Insider and others indicating the likely bifurcation of global smartphone and telecommunications supply networks.
What Ongoing Developments Imply
Such increased tensions surrounding the U.S. and China in the specific area of high-tech supply networks imply two related areas to monitor.
One will be how China retaliates in the notions of controlling access to its own domestic market for high tech products, or in the access of U.S. high tech producers to China’s existing and vastly developed high-tech component supply networks. There could be added shoes to fall in this area. Similarly, prominent U.S. based high-tech producers could likely be targets for added scrutiny by China’s regulators, possibly disrupting existing supply or market access agreements.
For existing industry supply chain management or strategic procurement teams, the implication remains a highly sensitized cycle of geo-political tensions center on the strategic technology access and volume manufacturing that may turn more regionally centric.
Bottom-line, there is no longer a sense that high tech supply networks can assume business as usual.
Bob Ferrari
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