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TSMC Caught in the Crossfire as US Renews Focus on Huawei

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The US Bureau of Industry and Security (BIS) announced on 15 May that it plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. BIS believes Huawei, and 114 of its overseas-related affiliates, are undermining U.S. export controls. Therefore, BIS is amending its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.

Specifically, this targeted rule change will make the following foreign-produced items subject to the Export Administration Regulations (EAR):

  1. Items, such as semiconductor designs, when produced by Huawei and its affiliates on the Entity List (e.g., HiSilicon), that are the direct product of certain U.S. Commerce Control List (CCL) software and technology; and
  2. Items, such as chipsets, when produced from the design specifications of Huawei or an affiliate on the Entity List (e.g., HiSilicon), that are the direct product of certain CCL semiconductor manufacturing equipment located outside the United States. Such foreign-produced items will only require a license when there is knowledge that they are destined for re-export, export from abroad, or transfer (in-country) to Huawei or any of its affiliates on the Entity List.

However, to prevent immediate adverse economic impacts on foreign foundries utilizing U.S. semiconductor manufacturing equipment that has initiated any production step for items based on Huawei design specifications as of May 15, 2020, BIS also agrees that foreign-produced items are not subject to these new licensing requirements so long as they are re-exported, exported from abroad, or transferred (in-country) by 120 days from the effective date. In general, the security-controlled items on the Commerce Control List (CCL) from BIS includes all semiconductors and semiconductor manufacturing equipment and design software.

Analysis

TSMC is a law-abiding company that also values its relationship with key customers. However, TSMC is listed both in Taiwan and the US stock markets, so it must be regulated by Taiwan and United States regulations. In addition, the majority of TSMC’s manufacturing equipment is from American companies. According to our latest statistical data, the share of the top three US semiconductor equipment companies (including AMAT, Lam Research, KLA) in total was more than 40% in 2019.  Another leading semiconductor equipment company is the Dutch company, ASML, but it also has a US listing. So US-listed companies have a decisive influence.

TSMC will feel compelled to follow the new US BIS restrictions and will not take new orders from Huawei after the cut-off date – 15 May 2020, and will need to clear the WIP (wafer in process) within 120 days.

Counterpoint Market Share of Top 6 Semiconductor Wafer Fab Equipment Companies, 2019

Notably, the ban will affect not only TSMC but also other vendors in the semiconductor supply chain, such as electronic design automation (EDA) vendors, fabless and other foundries. The top three EDA vendors are all US companies, and Hisilicon is bound to be affected for the design of new chips.

The impact of the new regulation on TSMC’s business

Huawei is used to relying on TSMC to produce:

  • High-performance APs for smartphones, including Kirin 980 (7nm), 990 (7nm), and 1020 (5nm).
  • Chips for 5G base station, including Tiangang (7nm).
  • Chips for data center and cloud computing, including Kunpeng (7nm), Ascend 310 (12nm), and Ascend 910 (7nm).

We believe the new regulations will not have a significant impact on TSMC’s short term business since the BIS gave enough buffer time for TSMC and Huawei to clear their WIP. Huawei accounted for about 10-15% of TSMC’s business in 2019, thanks to the urgent orders in response to the US trade war. The share of Huawei’s smartphone accounted for 16.6% in 2020 Q1 according to the latest research from Counterpoint’s Market Monitor service. However, as long as demand remains, other smartphone companies, such as Xiaomi, Oppo and Vivo, will likely fill the gaps.

On the other hand, the new restriction will still impact on TSMC’s business in the long run. The impact on TSMC from the loss of Huawei as a key customer will be the future development of new processes (e.g. 3nm, 2nm). Huawei has been a good customer of TSMC and is willing to work with TSMC on new process development. For example, at 16nm, Huawei was the first customer to place an order with TSMC. Also, Huawei is one of the key customers in 7nm and 5nm. The development of new processes is very costly and risky, so only large companies (such as Apple, AMD, Huawei, Qualcomm) can afford to pay towards the initial development costs. Besides, a variety of products from different customers can help to optimize process parameters and yields for the development of new processes. MediaTek and Qualcomm may benefit if Huawei’s mobile phone market share is replaced by other vendors. However, Mediatek prefers to use mature processes, rather than newer more costly and potentially riskier processes. As a result, TSMC will have one less partner who can co-develop new processes. Also, the ASP of the mature process is less than that of the new process, so TSMC’s revenue will likely suffer more.

Furthermore, this restriction will also impact the development of China’s 5G and affect the demand for chips for 5G infrastructure. Huawei launched the world’s first core chip specifically designed for 5G base stations in early 2019, the Huawei Tiangang. And Huawei has achieved more than 50% market share in the recent 5G base station bidding; it will not be easy to quickly replace Huawei.

BONUS Podcast! US-China Tech Cold War, Paints Uncertain Future for Huawei

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Brady Wang has more than 20 years working experience in high-technology companies from semiconductor manufacturing to market intelligence, and strategy advisory. Brady’s major coverage in Counterpoint is semiconductors. Prior to joining Counterpoint, Brady Wang worked for Gartner for 11 years. He started his career at TSMC as an engineer for 6 years.

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