The Trump administration's war on Huawei may be bad news for the U.S. dominance in semiconductors, and that could affect how far the administration will go in punishing the Chinese company.
President Donald Trump’s efforts to squeeze China is having the unintended effect of prompting various foreign companies to ditch U.S. technology products. At the center of the struggle is the administration’s decision to blacklist telecommunications firm Huawei.
Cabinet-level officials, including Commerce Secretary Wilbur Ross, Defense Secretary Mark Esper and Treasury Secretary Steven Mnuchin are expected to meet this month to discuss export control measures against Huawei and China, said people familiar with the planning. If the jockeying behind the scenes is any indication, the administration is facing criticism that more restrictions could strangle U.S. jobs and competitiveness.
Industry groups are warning that the existing sanctions are compelling Chinese electronics manufacturers beyond Huawei to find alternative suppliers of semiconductors for basic consumer items ranging from laptops to heart rate monitors.
That is worrying the U.S.' homegrown industry, which is lobbying to stop efforts to tighten export restrictions even more against Huawei fearing it will drive foreign customers even further from U.S. products that are widely available from companies in Japan, South Korea and Taiwan.
“If we go further down this path we’re going to pose grave damage to U.S. national security by eroding our leadership position in this fundamental technology,” said an industry executive, who declined to be identified because of the ongoing talks on the issue. “Many other Chinese companies outside of Huawei are fearful they are next.”
The stakes are high for U.S companies, as China accounts for about 36 percent of roughly $193 billion in sales made by U.S. semiconductor companies worldwide last year, according to the Semiconductor Industry Association. Much of that revenue is reinvested in research and development of more sensitive chipsets vital for next generation fighter aircraft and other weapons.
Huawei's blacklisting has hit the bottom lines of major U.S. chipmakers like Micron and Qualcomm and is also hurting overseas business for Google, which supplies its Android operating system to the Chinese smartphone maker.
After urging by administration officials and pressure from lawmakers, Trump put Huawei on an export blacklist known as the entity list last year, effectively cutting off the ability of U.S. semiconductor companies to supply the Chinese tech giant.
Although some U.S. companies have been granted permission to continue to do a limited amount of business with Huawei, the administration is considering restrictions to close existing loopholes that allow some business to continue.
Commerce is looking to tighten the controls even further by restricting U.S. chipmakers from supplying Huawei through subsidiaries in foreign countries, according to sources familiar with the proposals.
One rule would further restrict how much U.S.-origin content can be incorporated in a foreign-made product bound for China, cutting the threshold from 25 percent to 10 percent. That could restrict how much U.S. technology goes into circuit boards or larger components manufactured in third countries.
Another proposal would prevent U.S. companies from having any products based on American technology produced in other countries. The current rule only limits that to sensitive U.S. technology controlled for national security reasons.
The Pentagon pushed back against that move. Commerce eventually withdrew the proposals, but the ideas are still subject to internal debates. The Defense Department is supporting the semiconductor industry’s argument that further eliminating an important source of revenue on commercially available semiconductors will hobble the ability of U.S. companies to invest in research.
Xilinx, a Silicon Valley-based chipmaker that produces semiconductors for the F-35 Joint Strike Fighter program, announced last month that it would cut 7 percent of its workforce because of lower revenue as a result of trade restrictions.
"China is not going to take over the semiconductor industry tomorrow, not even within five years. Frankly, probably not within 15 years," said the industry executive. "So lets not assume defeat and pull up the drawbridge and run away from the China market when that market is what’s fueling our innovation."
Huawei has been blocked from supplying U.S. companies with equipment for the next generation telecommunications networks known as 5G over fears that it would provide a backdoor for the Chinese government, but the U.S. industry argues that restrictions on exports of semiconductors and components widely available in other countries is doing more harm than good.
“Most companies are afraid to speak up because they will be accused of being unpatriotic,” said a former government official, who asked not to be named because of their closeness to the issue.
For its part, Huawei has stockpiled components and ramped up development and production of its own in-house chipmaker, HiSilicon.
The company has largely diverted its supply chain for hardware components away from the U.S. to sources in Japan, South Korea and Taiwan.
Some U.S. companies are still able to export chips to Huawei after being granted temporary export licenses. A spokesperson for Commerce’s Bureau of Industry and Security said the agency wasn’t legally allowed to disclose how many licenses it had granted Huawei suppliers.
"We’re also willing to go our own way and rely on our own sources in China and also East Asia and Europe rather than the U.S., but the company still wants to continue to do business with the U.S. and with chipset manufacturers here," said Glenn Schloss, vice president of corporate communications for Huawei.
Huawei is now looking at how it can replace Google’s Android operating system. The U.S. tech giant has yet to secure an export license that would allow it to supply software for new Huawei devices.
“The business relationship with Google is very, very important,” Andy Purdy, Huawei’s chief security officer, told POLITICO. “We're reluctantly pursuing an alternative to it that we will achieve — and we will end up probably making a whole lot more money than we did before.”
American semiconductor firms are eyeing their competition closely. In the last year, Chinese smartphone makers Oppo, Xiaomi and Vivo have set up their own chip-design units. Gree, an air conditioning manufacturer, and Chinese electric car maker BYD have done so as well.
Even those who want a strong stance toward China said the administration's fixation on Huawei is deflecting attention from the need for broader export restrictions for "emerging" U.S. technologies.
“The entity list is a farce,” said Derek Scissors, a resident scholar and China expert at the right leaning American Enterprise Institute. “You can just move your business offshore. That’s just encouraging us to send business elsewhere. That doesn’t make any sense. If you want to sanction a Chinese firm, sanction them properly. The entity list doesn’t do that and Congress has been successfully distracted by that nonsense.”
He said debate over Huawei is distracting attention from Commerce’s delay in drawing up new export control rules on critical technologies like artificial intelligence and quantum computing. Those rules are required under a law Congress passed in 2018 that tightened U.S. investment restrictions and reauthorized the nation’s export control system.
But other China hawks say the drive by Chinese companies to abandon U.S. technology is inevitable given Beijing’s drive to advance technologically.
“It’s Trump that’s really trying to work to keep these two systems coupled,” said Steve Bannon, former strategist for Trump. “It’s the Chinese that have come to the decision. I think export controls are obviously a part of it and a big part of it, but it’s even deeper than that. They’re [China] the ones that have been decoupling.”
"Export controls are the things that told them, 'we’re not going to be supplicants,'" he added.
He said China made a decision as far back as 2018 to seriously cut dependence on U.S. tech products after ZTE, another major Chinese telecommunications company, faced certain closure as the result of a U.S. export ban put in place for sanctions violations. Trump told Chinese President Xi Jinping he would reverse the order after ZTE agreed to pay a hefty fine among other punitive measures.
“They understood they were absolutely imperiled,” Bannon said. “Xi had to call in a favor and he’s not in the business of calling in favors. Trump could have collapsed ZTE within 30 days. They know that and we know that.”