TSMC likely to survive US-Huawei dispute

'No assurance' about US licensing sales to Chinese telecom equipment giant, but TSMC lots of options regardless.

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Images: Angela Lang/CNET

Expanded export control rules could prevent Taiwan Semiconductor Manufacturing Company (TSMC) from selling chips to Huawei, according to a senior US official. Industry and legal experts, meanwhile, think TSMC will still be okay -- it could stop using US equipment, sell non-Huawei-designed chips, or rely on other customers if push comes to shove, they say. But others say the situation could get worse if the trade dispute between the US and China continues to escalate.

Huawei is TSMC's largest customer for leading-edge chips for 5G smartphones and base stations, according to Susquehanna Financial Group.

The US government in May 2019 added Huawei and foreign affiliates to its Entity List over alleged national security concerns, prohibiting American companies from transferring technology to the Chinese telecom giant without a licence. The new rules, published Friday by the Commerce Department, cracks down on overseas manufacturing loopholes. Now, foreign firms such as TSMC must obtain an export licence before they are allowed to sell to Huawei or its affiliates any Huawei-designed semiconductors or semiconductor designs produced abroad with certain US technology.

"Roughly 10 to 12% of TSMC's business is China, and I think that is in essence primarily Huawei," said Keith Krach, the US undersecretary for economic growth, energy and the environment, during a media briefing.

"So they will be restricted unless they are granted a licence, and there is no assurance on that, and we don't anticipate that."

Materials already in production as of Friday get a 120-day grace period before the rules go into effect.

Global supply chain disruption

Nebraska Senator Ben Sasse, a member of the Senate Select Committee on Intelligence who pushed the Commerce Department to disrupt Huawei's supply chain, said in a statement after the new rule was announced that they were overdue.

"Modern wars are fought with semiconductors, and we were letting Huawei use our American designs," he said. "This is pretty simple: chip companies that depend on American technology can't jump into bed with the Chinese Communist Party."

Semiconductor Industry Association (SIA) CEO John Neuffer said in a statement to ZDNet that the rule seems less damaging to the US semiconductor sector industry than broad approaches previously under consideration, but it's still not good.

"We are concerned this rule may create uncertainty and disruption for the global semiconductor supply chain," he said.

Huawei, which has repeatedly denied it is a national security threat, did not respond to a request for comment. During a media conference in March, Huawei's rotating chairman Eric Xu said the US Entity List designation had prevented a large number of suppliers from continuing work with the firm. He added that Huawei was stockpiling assets and could still buy chipsets from other manufacturers such as South Korea's Samsung or develop its own if the US restricted semiconductor trade, but the effects on the global supply chain could be "catastrophic".

With the ongoing US-China trade dispute, TSMC has been keeping an eye on any possible restrictions of sales to Huawei for a while, running through different scenarios.

During an April earnings call where TSMC cut 2020 growth outlook due to the COVID19 pandemic, Chairman Mark Liu said TSMC shared the concerns of US semiconductor communities about draft versions of US equipment licence restrictions. Liu said at the time that there could be short-term effects for the firm, including the need to readjust supply chains, but he did not expect long-term growth opportunities and capital expenditures to be affected.

"As part of the global semiconductor ecosystem, TSMC maintains long-term collaborations with equipment partners around the world including those located in the United States," TSMC said in a statement to ZDNet.

"TSMC is working with outside counsels to conduct legal analysis and ensure a comprehensive examination and interpretation of these rules."

US manufacturing won't help

The Commerce Department announced the new export control rules on the same day as TSMC's announcement that it would invest $12 billion into a 5-nanometre chip fab at an undermined site in Phoenix, Arizona, which has been warmly welcomed by the US federal government. This did not win TSMC any brownie points, however.

The timing, according to the US government, was purely coincidental.

"The TSMC will not be granted a licence or not granted a licence based upon their commitment, their intent to build a five-nanometer fab here in the United States," Krach said during the licensing restriction media briefing Friday.

"So that's not part of it at all."

Susquehanna Financial Group said in an industry update Friday that the factory doesn't seem practical or economically feasible, as the planned capacity, 20,000 wafers per month, is less than 25% of US demand.

"This reminds us of the 2017 Foxconn plans to build a mega-display plant in Wisconsin," analysts wrote. "It turned out to be just a headline!"

The US announced in 2017 that Foxconn would invest $10 billion to build an LCD panel factory in Wisconsin. During an investor conference [mp3] discussing first-quarter earnings on Friday, Chairman Liu Young-Way said that the facility is now producing networking and server related products and has changed its plans for making panel products.

"We're in the process of negotiating with the local government," he said.

A spokesperson for the local government told ZDNet that Foxconn would continue to produce LCD panels.

"The network security aspects are in addition to the LCD panels, not replacing them," the spokesperson said, referring to Foxconn's operations as a whole.

A spokesperson for TSMC told ZDNet its intention to build and operate the 5-nanometer fab in the US is based on customer needs and there is a "clear scope to move forward."

'No incentive' for the US to authorise sales to Huawei

Some think TSMC could still sell to Huawei despite the commentary from government officials.

Brett Simpson, an analyst at Arete Research, told ZDNet the rules sound aggressive but the lack of assurances that TSMC will be granted a licence doesn't mean much as there's no detailed judgment criteria available for how these licences are awarded.

Others are doubtful. The US government has been granting licences to sell to Huawei to US firms like Microsoft and Google, but that's because they're US firms. The current administration has made protecting American businesses and jobs a priority, Douglas Jacobson, a Washington DC export controls lawyer, told ZDNet.

Not awarding a licence to a foreign firm wouldn't directly affect the US or a US company.

"There's really no incentive for the US government to authorise TSMC," he said. "It seems highly unlikely."

The US government has little visibility into what TSMC does abroad, but TSMC's growing presence in the country gives it a good reason to follow licensing rules, he added.

If TSMC can't get a licence, then there are still two workarounds to avoid US jurisdiction: Stop using US equipment to make Huawei-designed chips or stop selling chips that are designed by Huawei, he said.

Analysts optimistic about TSMC, but trade dispute could escalate

Industry analysts are currently optimistic about TSMC's future under the rules.

Clark Tseng, an analyst at SEMI, told ZDNet that most Taiwan companies and suppliers are not limited to doing business with Huawei.

"Taiwan companies shall adapt very quickly to the changes," he said.

Brokerage firm Sanford C Bernstein & Co said in a research note Friday that it expects TSMC will make chips for Huawei's competitors who gain share from Huawei.

"The net impact will be benign after the supply chain realigns in a few quarters," analysts wrote. "Any unreasonable dips are good entry points for long-term investors."

An open question, however, is how the Chinese government will respond to the latest escalation in the ongoing US-China trade dispute, which has already sent shock waves throughout the global technology industry.

China's Ministry of Commerce said in a statement Sunday that the United States has been using so-called national security as an excuse for the restrictions, which it claims is an abuse of state power and violation of market principles and fair competition.

It urged the United States to immediately correct its mistaken course of action, adding it would take "all necessary measures" to safeguard the legitimate rights and interests of Chinese enterprises.

While no countermeasures have been specified, Chinese state media on Friday warned that the government is poised to sanction US firms.

"If China counterstrikes by sanctioning US companies such as Apple and Qualcomm, the entire global industry chain will suffer," Flora Tang, an analyst at Counterpoint Research, told ZDNet.

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