China strives for chip self-sufficiency, but US still holds trump card

China continues to accelerate its efforts to reduce its reliance on U.S. chips as the world’s two largest economies head toward conflict again.

Huawei Technologies Co.’s chip designer HiSilicon Technologies Co. saw its first-quarter sales surge 54% from a year earlier, making it the first to break into the world’s top 10, according to market research firm IC Insights. Chinese companies in the ranks of semiconductor suppliers. The report shows that more than 90% of HiSilicon’s sales revenue comes from Huawei.

The Trump administration’s restrictions on U.S. companies selling to Huawei have forced the Chinese company to find other countries’ suppliers to replace U.S. suppliers. China’s smartphone shipments fell sharply by 20% in the first quarter due to the coronavirus outbreak, but Huawei’s market share rose to 43% from 36% a year earlier, according to International Data Corporation (IDC). As a result, HiSilicon also surpassed Qualcomm Inc. (QCOM) in the Chinese market to become the largest supplier of system-on-chip (SoC), an integrated circuit that includes a central processing unit in a smartphone. HiSilicon’s Kirin chips are used in Huawei smartphones, including Huawei’s flagship P40 Pro. The rollout of 5G networks in China will also boost HiSilicon, whose chips power Huawei’s base stations.

But Huawei is still not fully self-sufficient. HiSilicon is a so-called fabless semiconductor company. It does not have its own production plant, but relies on foundry companies such as Taiwan Semiconductor Manufacturing Co. (Taiwan Semiconductor Manufacturing Co., 2330.TW, referred to as TSMC). To produce chips, the Trump administration is preparing to introduce regulations that would limit TSMC’s sales to HiSilicon. In anticipation of tightening of such restrictions, Huawei may already be stockpiling chips.

Huawei may transfer some orders to Semiconductor Manufacturing International Co., Ltd. (Semiconductor Manufacturing International Co., 0981.HK, referred to as: SMIC), but SMIC’s technology still lags behind TSMC, Samsung, etc. Industry leader. Still, SMIC’s Hong Kong-listed shares have risen 43 percent this year, and investors expect more orders from other Chinese companies. SMIC’s share price was boosted last week when it announced a plan to list on Shanghai’s science and technology innovation board, or raise billions of dollars. The company may command a much higher valuation on the STAR Market.

But if the Trump administration decides to step up its crackdown on China, SMIC’s capabilities could end up being compromised. The U.S. Department of Commerce said at the end of April that it would expand the export control list of U.S. products and technologies to China; products and technologies on the list need to be reviewed by national security experts before being exported to China. SMIC relies on foreign semiconductor manufacturing equipment, including some from the United States.

Over the past two years, Huawei has made steady progress in the race for 5G supremacy and technological self-sufficiency, despite pressure from the United States. Still, the US still has a powerful trump card at the top of the relevant value chain if it wants to use it.