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.”

"You have to punch a bully in the face"

White House plans China trade crackdown Thursday

By ADAM BEHSUDI and ANDREW RESTUCCIA
President Donald Trump is slated to outline the results of U.S. Trade Representative Robert Lighthizer's investigation into allegations that China violates U.S. intellectual property rights by forcing American companies to transfer valuable technology to Beijing.

The White House is preparing to announce on Thursday a plan to eventually hit China with tariffs and other trade restrictions, according to two administration officials.
President Donald Trump is slated to outline the results of U.S. Trade Representative Robert Lighthizer's investigation into allegations that China violates U.S. intellectual property rights by forcing American companies to transfer valuable technology to Beijing.
Lighthizer’s office has determined that the United States loses at least $30 billion a year to China’s forced technology transfers. 

As POLITICO reported last week, the administration is weighing a package of tariffs equivalent to that amount of Chinese imports or more.
Trump’s senior advisers have been debating which remedies to impose in response to the investigation for months, and they have drafted proposals for tariffs, investment restrictions and even visa limits aimed at China.
But it’s unclear whether the president will unveil specific retaliatory measures Thursday. 

People familiar with the internal debate said there are still ongoing discussions about exactly which actions the administration should take. 

Trump could instead simply instruct key agencies to finalize the proposals in the coming weeks or months.
The timing of the Thursday announcement could slip, especially if a snowstorm shuts down much of Washington midweek. 

The White House declined to comment Tuesday.
The administration is seeking to target goods that are “meaningful to China,” especially products and technology Beijing is seeking to boost through the Made in China 2025 initiative aimed at growing its high-tech sectors, an administration official said.
Two sources briefed on the administration’s planning said the White House is considering imposing tariffs on between $30 billion and $50 billion in Chinese imports. 

Those goods would be hit with one tariff rate across the board — with the intention of blocking most of those imports from entering the U.S. market, the sources said. 

But administration officials said the final numbers are still in flux.
The U.S. trade actions might eventually bring China to the table to talk about American concerns with Beijing’s industrial overcapacity, state subsidies and lack of market access for U.S. companies.
Still unclear is whether the White House has any specific thresholds for progress on those issues and what China might do for the U.S. to reverse the tariffs or investment curbs, according to administration officials and outside advisers.
“It’s a little bit of a red herring for the business community to be overly critical that there aren’t clear off-ramps for China, because it’s really unclear if the Chinese would even take them,” said one outside adviser to the administration who has been briefed on the planning of the trade actions against China.
The adviser added that leaders gathered this week at China’s National People’s Congress, the country’s rubber-stamping legislative body, appeared to “quintuple down” on their industrial policies geared toward elevating the country’s economy.
Still, the business community has urged congressional trade leaders to press Lighthizer, who is scheduled to testify on Capitol Hill this week, on what kind of outcome the administration hopes to achieve. 

Trump was granted the authority to impose the trade restrictions under Section 301 of the Trade Act of 1974.
“The overall focus of the Section 301 investigation should be to bring China to the negotiating table for a meaningful resolution of specific, sector-by-sector issues with the ultimate goal of removing the offending practices and policies. Premature, unilateral sanctions alone are unlikely to achieve this objective,” National Foreign Trade Council President Rufus Yerxa wrote in a letter sent Tuesday to Republican and Democratic leaders of the House Ways and Means and Senate Finance committees.
The expected 300-page report the administration is putting together as part of its probe into China’s intellectual property and technology transfer policies makes some recommendations on what China should do to curb those practices, a source familiar with its contents said.
But the tariff action Trump is ready to move ahead with seems geared more toward gaining leverage against China than achieving a methodical engagement, said an administration official involved in the planning.
“There’s a recognition that you have to punch a bully in the face,” the official said. 

“That’s the best explanation of what’s going on here.”