Closing the Book on Huawei’s Global Aspirations

Connor Fairman is a research associate in the Digital and Cyberspace Policy program at the Council on Foreign Relations.

On August 17, the U.S. Department of Commerce announced that non-U.S. companies were prohibited from selling items produced with U.S. technology to Huawei. The decision follows restrictions imposed by the Commerce Department in May against companies using U.S. technology to manufacture Huawei-designed chips, which left open the possibility for the company to purchase widely available chips designed by other companies. This latest effort has been cited by some as the “nail in the coffin” for the company, as U.S. technology is integral to multiple stages of the semiconductor supply chain, including design, manufacturing, and testing.

Although Huawei has built up an estimated two-year reserve of U.S. chips needed for its 5G base stations and cloud computing business, it lacks a similar stockpile of components that go into their smartphones, including memory chips, camera lenses, and 5G processor chips. Less than a month ago, it appeared that the company’s access to these items was unfettered, as it inked an agreement to continue licensing patented technology for its mobile phones from San Diego-based Qualcomm in late July. Now, the language of the Commerce Department’s announcement suggests that even this deal, which would have supplied Huawei with Qualcomm technology used by most mobile phones, will be negated. Analysts predict that if Huawei runs out of the components that go into their handsets, shipments could drop by as much as 75 percent next year.

The Commerce Department’s actions follow a multi-year U.S. campaign to exclude Huawei from several markets that it hoped to supply 5G equipment to, including those of the Five Eyes, India, and several countries in the European Union. These are some of the largest markets outside of China and will result in massive revenue loss for the company. While Huawei remains an important telecommunications gear supplier in Southeast Asia, Latin America, and Africa, many countries in these regions will likely finally forgo partnering with the company for 5G, fearful that it will not be able to supply and maintain gear for their networks under the new restrictions.

For years, the Chinese government has attempted to boost its domestic semiconductor industry, with mixed success. Despite tax incentives and multiple rounds of funding by the China National Integrated Circuit Industry Investment Fund since 2014, Chinese chipmakers are still unable to produce the chips that power high-end smartphones and 5G equipment. Estimates for how long it would take them to catch up to foreign counterparts range from three years to “generations.”

Huawei cannot afford to wait that long, and it is quickly running out of options. As it races to ensure that it receives chips ordered before the Commerce Department’s new restrictions by the September 14 deadline, it could sue the U.S. government, citing unfair treatment, as it did on multiple occasions in 2019. However, this would likely be a fruitless endeavor, as U.S. courts have generally sided with federal agencies in previous suits. The best option for the company now is to attempt to convince U.S. chipmakers to lobby on its behalf in Washington.

After Huawei, the group most threatened by the newest restrictions is the U.S. semiconductor industry. John Neuffer, president of the Semiconductor Industry Association, complained that they will significantly disrupt the U.S. semiconductor industry, which relies heavily on chip sales to China to fund further research and innovation in the United States. Qualcomm, which was already lobbying for the rollback of the Commerce Department’s May restrictions when the new sanctions were announced, is likely step up efforts to challenge the U.S. decision on the grounds that it would severely damage the company’s global competitive edge.

Given that U.S. chipmakers and industry groups are unlikely to change the U.S. government’s mind and there will not be a sudden breakthrough in Chinese chipmakers’ abilities, the Commerce Department’s actions are likely the death blow against Huawei. Even its most secure markets will switch to new suppliers to prevent the inevitable disruption that will occur when its two-year stockpile of U.S.-made chips dries out. In the context of the U.S.-China tech war, the dashing of Huawei’s global aspirations is but one battle, and the United States should expect a punitive retaliation against its technology companies by the Chinese government.