Huawei’s U.S. Restrictions Expose a High-Tech Achilles’ Heel for China

China is heavily reliant on imported computer chips, despite efforts to develop its own semiconductor industry.

By Raymond Zhong

A Huawei store in Beijing. The company had stockpiled computer chips for emergencies like the trade restrictions announced last week by the United States.

BEIJING — For all of China’s efforts to become a global force in high technology rivaling the United States, it has mostly failed to produce top-flight contenders in one crucial area: the industry that gave Silicon Valley its name.
Last year, China imported more than $300 billion worth of computer chips, the backbone of all digital products. 

That is more than it spent on crude oil from abroad.
Washington has now turned China’s reliance on American microchips against Huawei, the Chinese telecommunications giant that is labeled a national security threat. 

The Commerce Department last week restricted American firms from selling components and technology to the company, essentially cutting Huawei off from Google software, Qualcomm chips and more.
The department said Monday that it would allow Huawei to continue doing business with American suppliers for 90 days to prevent disruption to mobile networks that use the company’s equipment. 

Yet Washington’s move still strikes at a national soft spot for China that has weighed on the minds of the country’s leaders for decades.
Desperate to reduce the dependence on imports, the authorities in China have pledged tens of billions of dollars to help foster homegrown chip champions. 

The country’s dreams of semiconductor hegemony have added to the trade tensions with the United States, which wants Beijing to scale back what it considers unfair government support for Chinese firms.
Washington has found reason to directly punish one state-backed chip maker, Fujian Jinhua Integrated Circuit Company. 

After Micron Technology, an American rival, accused the Chinese company of pilfering chip designs, the Commerce Department blocked it from buying American components.

Last year, China imported more than $300 billion worth of computer chips, the backbone of all digital products. That is more than it spent on crude oil from abroad.

The fruits of China’s chip drive have been mixed at best. 

Chinese firms’ market share remains modest in most areas of semiconductor production. 

Nearly all of the most complex chips must still be imported. 

Several Chinese state-backed makers of memory chips, which store data, have announced big production plans. 

But the global market for such chips is currently saturated, suggesting grim prospects for turning a profit.
On the whole, government support has helped the Chinese industry, said Gu Wenjun, chief analyst at ICwise, a semiconductor market research firm in Shanghai. 

“But now that the market has become overheated and fickle, the negative effects are increasingly apparent,” he said.
Local governments in China “don’t understand the industry,” Mr. Gu said. 

They are merely using up resources that private companies know how to spend more effectively, he added.
China’s role as the world’s leading assembler of electronics, and its vast consumer market for electronics, has convinced some observers that given enough time, the country would inevitably attract or foster the knowledge for producing advanced chips. 

If China could catch up in making toys and then in producing cellphones, the thinking goes, then why not in semiconductors someday?
For now, surviving without American chips promises to be the ultimate test for Huawei, despite the company’s recent strides in developing its own processors.
In an interview with Chinese media on Tuesday, Huawei’s founder and chief executive, Ren Zhengfei, said that in “peaceful times,” half of Huawei’s chips came from American companies, and the other half it developed itself. 

Huawei has stockpiled chips for emergencies like this, Mr. Ren said.
But the company could never entirely reject American technology, he said. 

Even members of his own family, he said, are iPhone users.
“We will not recklessly get rid of American chips,” Mr. Ren said. 

“We need to grow together.”
Beijing’s angst over foreign semiconductors has a long pedigree.
As Japan, South Korea and Taiwan emerged with formidable chip industries in the 1980s and ’90s, China experimented with various forms of state planning to develop its own abilities. 

In 2014, Beijing set a goal of becoming a global leader in all segments of the chip industry by 2030, and national and local government semiconductor investment funds began springing up across the country.
The results of those efforts are hard to spot, however, in the innards of leading Chinese tech companies’ products.
To crack open one of Huawei’s smartphones or cellular base stations is to see the extent to which advanced technology is a truly globalized endeavor, even as Beijing and Washington have come to distrust each other’s tech providers.
In Huawei’s new P30 Pro flagship phone, for example, American firms supply a number of key components, including parts that help process the radio signals that carry calls and data through the air, according to an analysis by System Plus Consulting, a research firm in France.
The P30 Pro’s memory chips are from Micron and the Japanese company Toshiba. 

The camera technology is from Sony of Japan. 

The processor, the brains of the phone, was developed by Huawei itself.
Huawei’s semiconductor division, HiSilicon, has surprised industry observers with the progress it has made in developing processors and baseband chips, which connect phones to data networks. 

Yet even HiSilicon may be affected by the Commerce Department’s restriction. 

Many of the leading providers of chip design software are American.
For other kinds of components, Huawei should not have much trouble finding non-American substitutes if it is fully cut off from American suppliers. 

In memory chips, for instance, Micron is a leading global supplier, but so are Samsung and SK Hynix of South Korea.
In general, the more advanced the silicon, the more likely it is that Huawei will have to compromise on quality to avoid American providers like Broadcom, which supplies specialized chips for Huawei’s data centers, and Nvidia, which makes high-end graphics processors for Huawei’s laptops.
The company’s options may also be limited when it comes to the critical components that help smartphones process radio signals. 

American companies, including Skyworks and Qorvo, lead the market for these “radio frequency” parts, which are technologically demanding to produce.
“It’s just very difficult unless this is your bread and butter,” Liam K. Griffin, Skyworks’s president and chief executive, said on a conference call this month with analysts. 

“We have years and years of experience here working with this.”

Nation of Thieves

Inside a Heist of American Chip Designs, as China Bids for Tech Power
By Paul Mozur

JINJIANG, China — With a dragnet closing in, engineers at a Taiwanese chip maker holding American secrets did their best to conceal a daring case of corporate espionage.
As the police raided their offices, human resources workers gave the engineers a warning to scramble and get rid of the evidence. 

USB drives, laptops and documents were handed to a lower-level employee, who hid them in her locker. 

Then she walked one engineer’s phone out the front door.
What those devices contained was more valuable than gold or jewels: Designs from an American company, Micron Technology, for microchips that have helped power the global digital revolution. According to the Taiwanese authorities, the designs were bound for China, where they would help a new, $5.7 billion microchip factory the size of several airplane hangers rumble into production.
China has ambitious plans to overhaul its economy and compete head-to-head with the United States and other nations in the technology of tomorrow. 

The heist of the designs two years ago and the raids last year, which were described by Micron in court filings and the police in Taiwan, represent the dark side of that effort — and explain in part why the United States is starting a trade war with China.
A plan known as Made in China 2025 calls for the country to become a global competitor in an array of industries, including semiconductors, robotics and electric vehicles. 

China is spending heavily to both innovate and buy up technology from abroad.
China is veering into intimidation and outright theft to get there. 

And they see Micron, an Idaho company whose memory chips give phones and computers the critical ability to store and quickly retrieve information, as a prime example of that aggression.
Three years ago, Micron spurned a $23 billion takeover offer from a state-controlled Chinese company. 

Today it faces a lawsuit and an investigation in China, which accounts for about half its $20 billion in annual sales.
Then Micron was the target of the heist in Taiwan, according to officials there and a lawsuit the company has brought against the Taiwanese company that employed the engineers, UMC, and the Chinese company it says wanted access to the technology, Fujian Jinhua Integrated Circuit Company.
Other companies may face similar predicaments to Micron.
One state-backed factory in the city of Wuhan, owned by Yangtze Memory Technology Company, or YMTC, will be turning out chips that look similar to those made by Samsung, the South Korean chip maker, said Mark Newman, an analyst at Sanford Bernstein.

Micron memory chips. The chips give phones and computers the critical ability to store and quickly retrieve information.

“The YMTC one is virtually identical to Samsung’s, which makes it pretty clear they’ve been copying,” Mr. Newman said.
A Samsung spokeswoman declined to comment, and YMTC officials did not return calls for comment. 

Earlier this year, Xi Jinping visited YMTC’s production facilities, one way China’s leaders show their endorsement for projects.
China defends Made in China 2025 as necessary for its economic survival. 

It still depends on other countries for crucial goods like chips and software, and China is offering funding for homegrown labs and for entrepreneurs who hope to grab a piece of the future.
But Trump administration officials in a report earlier this year recounted how Chinese officials have at times helped local companies get intellectual property from American firms, including in the energy, electronics, software and avionics sectors.
American business groups worried about Made in China 2025 point to Micron. 

The account of its struggles was based on Taiwanese and American legal documents.
In 2015, representatives from Tsinghua Unigroup, a Chinese chip maker with major state backing, approached Micron with an acquisition offer, which the company rejected. 

It later also turned down several partnership offers from Chinese companies out of concern for protecting its technology, said a person with knowledge of the situation, who asked not to be identified because the person lacked authorization to speak publicly
That was when one Chinese company resorted to theft, Micron said in documents filed last December in the Federal District Court for the Northern District of California.
Micron’s accusations focus on efforts by Fujian Jinhua Integrated Circuit, a state-backed chip maker, to build a $5.7 billion factory in China’s Fujian Province. 

Two years ago, Jinhua tapped UMC, a Taiwanese company, to help it develop technology for the factory. 

Instead of going through the lengthy steps required to design the technology, UMC and Jinhua decided to steal it.
A UMC spokesman denied the allegations and declined to comment further. 

Jinhua did not respond to requests for comment.
First, UMC lured away engineers from Micron’s Taiwan operations with promises of raises and bonuses.

Then, it asked them to bring some of Micron’s secrets with them.

The engineers illegally took with them more than 900 files that contained key specifications and details about Micron’s advanced memory chips.
Micron grew suspicious after discovering one of its departing engineers had turned to Google for instructions on how to wipe a company laptop.

Later, at a recruiting event in the United States aimed at Micron employees, Jinhua and UMC showed PowerPoint slides that used Micron’s internal code names when discussing future chips it would make.
Micron’s campus in Boise, Idaho. The state’s two senators worry that a patent lawsuit brought against the company in China could block Micron from selling some products there.

Alerted by Micron, the Taiwanese police tapped the phone of one Micron engineer, Kenny Wang, who was being recruited by UMC. 

According to an indictment in Taiwan against Wang and others, UMC reached out to Wang in early 2016 using Line, the smartphone messaging app, while he was still working for Micron. 

UMC explained it was having problems developing its memory chip technology. 

Wang then grabbed the information it needed from Micron’s servers, and later used it to help UMC’s design. 

The police said Wang received a promotion at UMC.
When investigators showed up at UMC’s offices early last year, employees rushed to hide what they had taken from Micron. 

Wang and another former Micron employee gave laptops, USB flash drives and documents to an assistant engineer, who locked them in her personal locker. 

She then left the office with Wang’s phone — the one that the police had tapped, which was quickly tracked down.
UMC filed its own criminal complaint against Wang last year, which Taiwanese prosecutors rejected. Wang and other engineers who were charged said they had taken the trade secrets for personal research. 

Wang did not respond to emails and phone calls for comment.
In January, Micron was hit with a patent infringement suit by Jinhua and UMC over several types of memory. 

As part of the suit, the companies requested the court ban Micron from making and selling the products and pay them damages. 

The case is being heard by a court in Fujian Province. 

The Fujian provincial government is an investor in Jinhua.
In a letter sent to President Trump, Senators James Risch and Mike Crapo, Republicans of Idaho, expressed concern about the entire case and specifically the rapid pace with which the patent lawsuit has proceeded. 

The case could block Micron from selling some products in China.
“If the case against Micron moves forward, and the Chinese government once again rules in favor of itself, it would cause substantial damage to Micron and the U.S. tech industry as a whole,” said the letter, which was viewed by The New York Times.
In May, China’s market regulator opened a price-fixing investigation into Micron, along with South Korean memory makers SK Hynix and Samsung Electronics. 

Memory prices have jumped over the past year, because of spiking demand and limited production by the three companies, which dominate the market. 

Another China regulator, which has said it is also monitoring the price jump, also gave a multimillion-dollar grant to Jinhua.
Jinhua and other Chinese chip makers face hurdles in catching up. 

Production of semiconductors involves a highly complex and automated production process that controls everything down to the atomic level.
Jinhua and others are spending big to get there. 

In Jinjiang, a city in Fujian Province once known as a shoe-manufacturing center, Jinhua’s new factory is almost finished. 

Rising five stories and stretching several football fields long, the structure boasts 100,000 square feet of new office space.
Economic planners in Jinjiang said they were hoping to attract more talent from Taiwan. 

In addition to adding more flights there, the town was in the process of building out a bilingual international school, a hospital with international accreditation, and new upscale apartments. 

The new plant is just a short drive from the airport.
“Most of Made in China 2025 is likely to succeed. Not all technologies are rocket science,” said Dan Wang, a technology analyst in Beijing with Gavekal Dragonomics, a research firm. 

“With enough subsidies, Chinese firms have a good shot at catching up to the technological frontier.”