Apple faces a number of problems in China, with geopolitical risks mounting and the economy still not firing on all cylinders as many had hoped.
But the biggest challenge of all, according to analysts, could be a resurgent Huawei after a supposedly major semiconductor breakthrough ran afoul of US sanctions.
The latest chip, made by China’s largest semiconductor manufacturer SMIC, has raised concerns in Washington and questions about how it was possible without the company having access to critical technologies.
But there are also questions about whether the process used to make these new chips is efficient enough on a large scale to sustain a Huawei comeback.
What has happened to Huawei?
For years, the US has claimed that Huawei poses a national security risk due to alleged links to the Chinese Communist Party and the country’s military. Huawei has repeatedly denied that such a risk exists.
Starting in 2019, the U.S. government under Donald Trump’s presidency imposed a series of sanctions that cut Huawei off from key technologies, including 5G chips, Google software and its cutting-edge mobile processor, that helped it become the world’s largest smartphone maker.
These US restrictions have all but wiped out Huawei’s smartphone business.
So what’s so special about Huawei’s new chip?
Along with Apple and Samsung, Huawei is one of the few companies to have developed its own smartphone processor. This was done by the Chinese company’s HiSilicon division.
However, the chip was manufactured by Taiwan Semiconductor Manufacturing Co, or TSMC. US export restrictions, which effectively prevented Huawei from using American technology anywhere in the chip-making process, meant that the Chinese company could no longer source its chips from TSMC.
The Taiwanese chipmaker is the most advanced semiconductor manufacturer in the world. There is no Chinese company that can do what TSMC does. That’s why it sent shockwaves through the political and tech world when Huawei quietly released the Mate 60 Pro in China this month, with analysis showing a chip made by SMIC inside.
Along with Huawei, SMIC is on a US trade blacklist called the Entity List. Companies on the list are barred from buying American technology. Meanwhile, SMIC’s technology is considered to be generations behind the likes of TSMC.
So how could this have happened with the huge amount of sanctions on both Huawei and SMIC?
What we know about the Huawei chip
Huawei’s smartphone chip is called the Kirin 9000S, which combines the processor and components for what appears to be 5G connectivity. 5G refers to the next generation of mobile internet, which promises super-fast speeds. Huawei has not confirmed that the phone is 5G-enabled, but reviews have shown that the device is capable of the download speeds associated with 5G.
According to an analysis of the Mate 60 Pro by software company TechInsights, the semiconductor was manufactured using a 7-nanometre process by SMIC, China’s largest contract chipmaker.
The nanometre figure refers to the size of each individual transistor on a chip. The smaller the transistor, the more can be packed onto a single semiconductor. Typically, a reduction in nanometre size can lead to more powerful and efficient chips.
The 7nm process is considered highly advanced in the semiconductor world, although it is not the latest technology.
For years, SMIC struggled to produce 7nm chips. That’s partly because it couldn’t get its hands on a very expensive piece of equipment called an extreme ultraviolet (EUV) lithography machine. These are made by the Dutch company ASML, but the company was prevented by its government from sending these machines to China.
Many thought this would hamper SMIC’s ability to make advanced chips. But it seems to have done it without these tools.
In a blog post this month, Dan Hutcheson, vice chairman of TechInsights, said the 7nm chip “demonstrates the technical progress China’s semiconductor industry has been able to make without EUV lithography tools”.
Huawei was not immediately available for comment on this story when contacted by CNBC.
Is this a big deal or just posturing?
From a technology perspective, it is significant that SMIC has produced chips on a 7nm process without ASML’s EUV machines.
Pranay Kotasthane, deputy director of the Takshashila Institution, told CNBC that it is likely that equipment used for older manufacturing processes is being “repurposed” for these more advanced chips. But he believes the process is likely to be carried out with “less efficiency” than if SMIC were using state-of-the-art equipment.
And that’s a key point. While SMIC can produce 7nm chips, it’s unclear how efficient, profitable and sustainable this is on a larger scale. One closely watched metric is ‘yield’ – the number of chips produced from a given wafer.
If a chipmaker’s yield is low, the process is not considered efficient and can be costly. While the yield of SMIC’s 7nm process for Huawei chips is not known, it is “probably low,” Kotasthane said.
It is a waiting game to see if SMIC can produce the number of chips Huawei needs on a profitable scale.
What will the US do next?
The technological advance has certainly unsettled Washington. The US Department of Commerce issued a statement this month saying it was seeking more information about Huawei’s chip.
SMIC’s 7nm manufacturing process has also exposed some of the weaknesses in the US export restriction strategy, which could lead to further restrictions.
“There will be pressure on the US to rethink its export control strategy, which was based on the assumption that controls would prevent Chinese companies from producing advanced edge chips, while business as usual would continue at the downstream nodes. It’s becoming increasingly clear that this distinction doesn’t work in reality,” Kotasthane said.
He added that Washington could look to other areas of chip design and manufacturing to impose further restrictions.
Apple’s China headwinds grow with Huawei chip
The Wall Street Journal reported this month that Chinese central government employees have been banned from using iPhones and other foreign-branded phones for work, and even from bringing them into the office.
China’s foreign ministry said last week that there’s no rule banning the purchase and use of foreign phones.
As geopolitical tensions between the US and China continue to bubble under the surface, it is perhaps a potential Huawei resurgence that poses the biggest threat to Apple.
“Huawei is expected to be a bigger challenge to Apple in China than the geopolitical issue,” Will Wong, a senior research manager at IDC, told CNBC.
“This is because Huawei not only has the same premium brand image as Apple, but it is also a matter of national pride in China.”
Apple is seen as a high-end smartphone maker, and Huawei has competed directly with the US company in China for years. But Huawei’s sales fell off a cliff when it couldn’t equip its smartphones with 5G technology and the latest chips.
Any kind of resurgence in this area, as appears to be the case with the Mate 60 Pro, could make Huawei’s new phones an attractive option for Chinese buyers once again.
“Huawei’s biggest threat is its continuous development in technology, not only in chips but also in new form factors such as foldables,” Wong added.
