Huawei Braces for Latest U.S. Hit, but Some Say Loopholes Remain
Huawei Technologies Co. said Monday the Trump administration’s move to thwart its access to semiconductors will damage its ability to maintain its telecommunications networks, but some U.S. specialists say the latest ban has significant loopholes.
The U.S. move is designed to cut Huawei off from non-U.S. companies that manufacture chips used in Huawei’s cellular base stations and servers as well as its own smartphones.
Huawei called the move “arbitrary and pernicious” in a statement Monday, saying the U.S. action “will impact the expansion, maintenance and continuous operations of networks worth hundreds of billions of dollars that we have rolled out in more than 170 countries.”
But some China experts who have closely studied the rule say that it may not accomplish that goal—similar to when the administration last year put Huawei on a blacklist, only to have Huawei’s U.S. suppliers figure out a way around the move by shipping from overseas facilities instead.
U.S. Commerce Department licenses are required when Huawei’s foreign suppliers have “knowledge” that the products are destined for Huawei and its affiliates or that designs for chips make use of U.S. technology and or software, among other requirements.
The semiconductor supply chain is so vast and requires so many different steps that suppliers could argue that they didn’t know the products ultimately benefited Huawei, these people say.
The rules say “you have to stop selling to Huawei directly,” says Willy Shih, a Harvard Business School technology expert. “But how are you going to know where it goes if you sell to a distributor?”
Another way to get around the rule would be to ship to Huawei customers, who could then assemble the chip or other product into a Huawei system, said legal experts. That wouldn’t be a shipment to Huawei, but would benefit the company.
“There are some elements of language which create potential gaps that are exploitable,” said Scott Kennedy, a China specialist at the Center for Strategic and International Studies. “It’s not as blanket and comprehensive” as administration officials had said, Mr. Kennedy said.
A Commerce spokesman said that the knowledge requirement is essential to assure technology companies that they won’t be unfairly targeted.
“This rule stops foreign foundries from knowingly using certain U.S. software, technology or equipment to produce chips for Huawei using Huawei designs,” the spokesman said. “Intermediate steps in the supply chain are irrelevant when there is no mystery as to ultimate destination.”
Friday’s Commerce Department rule came on the first anniversary of it placing Huawei on the department’s entity list, a move that cut Huawei from buying from an array of American suppliers, such as Alphabet Inc.’s Google, without a license.
The latest move directly targets Huawei’s ability to buy chips that it designed itself, since manufacturing such chips often requires American technology. It is the latest in a series of arrows aimed at Huawei by the Trump administration, which accuses the Chinese company of being a cybersecurity threat and stealing corporate secrets, allegations Huawei strongly denies.
In a news conference Monday at Huawei’s annual meeting of analysts in Shenzhen, China, Huawei chairman Guo Ping said the company was still assessing the full impact of the new rule, but said it would inevitably affect its operations.
“The U.S. persists in attacking Huawei, but what will that bring to the world?” Mr. Guo said.
Mr. Guo on Monday said the company bought technology with a total value of $18.7 billion from U.S. suppliers last year. Huawei also invested in its own technology to cope with the move, including accelerating work on its own chips and redesigning numerous products. Huawei makes semiconductors primarily for the company’s own smartphones and cellular networking equipment.
“Such investments have enabled Huawei to survive on the entity list,” Mr. Guo said. “Our business has not been disrupted.”
In taking the new action, U.S. officials acknowledged that the previous ban wasn’t effective.
“Huawei benefited from a loophole that allowed it to make use of U.S. electronic-design software and manufacturing equipment to continue to produce its own semiconductors,” U.S. Undersecretary of State Keith Krach said Friday. “That ends today. The United States is closing this loophole.”
Analysts say Huawei’s latest semiconductors are comparable in size and power to those made by Western rivals, but can’t be easily made without using U.S.-developed technology.
The action highlights Taiwan’s precarious position in the U.S.-China tech war. Though Beijing considers it a renegade province of China, it is home to technology companies that sell to both countries, such as Taiwan Semiconductor Manufacturing Co. The company last week announced plans to build an advanced semiconductor plant in Arizona.
TSMC said it is working with outside counsel to examine the implications of the rule change.
“The semiconductor industry supply chain is extremely complex, and is served by a broad collection of international suppliers,” said a TSMC spokeswoman. “TSMC is working with outside counsels to conduct legal analysis and ensure a comprehensive examination and interpretation of these rules.
Some analysts say it is unlikely that Huawei will be able to quickly turn to other chip manufacturers for its most advanced chips if it loses access to TSMC, one of few companies capable of manufacturing chips with the smallest, most efficient transistors.
“There are no workable alternatives” to TSMC, said Paul Triolo, an analyst at the political risk-consulting firm Eurasia Group. “For now, the fate of Huawei’s advanced chip-design capabilities are firmly in the hands of the U.S. government.”
Mr. Triolo also said it would be hard for the companies supplying these chips to plead ignorance. “These are custom-designed chips,” he said.
The new regulation is considered an “interim final rule”—bureaucratic lingo for a rule that goes into effect without needing public comment. But the industry will have some time to lobby, and Commerce officials could revise the language.
“The purpose of public comment periods is to elicit improvements in new rules,” the Commerce spokesman said. He added that if the rule goes into force, the U.S. “will not hesitate to enforce any circumvention by front companies, or take further regulatory action, to stop Huawei from exploiting U.S. technology and equipment in contravention of U.S. foreign policy or national security interests.”
The Commerce Department said that products on which work had begun already wouldn’t need a license if they are shipped to Huawei within 120 days.
Even if the legal loopholes remain, it is far from clear that companies will try to take advantage of them. The administration has made clear that it considers Huawei a national-security threat, and companies may be wary of aiding Huawei at a time when it is being pilloried by the administration and Congress. Washington alleges that Huawei gear could be used by Beijing to spy globally, which Huawei has repeatedly denied.
“Quite simply, Huawei cannot be trusted to respect the rule of law,” Mr. Krach, the State Department undersecretary, charged. “Huawei is a [China] state-supported firm serving as a tool of the Chinese Communist party.”
Since Huawei is banned from major U.S. business, the company’s most lucrative customers outside China are European wireless carriers, which are still determining two things: whether Huawei has stocked up enough 5G equipment to continue supplying for now, and whether Huawei can eventually make 5G equipment using only Chinese supply chains.
An executive at one major European wireless carrier said that if Huawei can’t make cutting-edge hardware, carriers may eventually look to other suppliers. Huawei’s biggest rivals are Ericsson AB of Sweden and Finland’s Nokia Corp.
“Without access to the advanced chips made by companies such as TSMC, a telecommunications-equipment provider such as Huawei could have trouble making its most advanced 5G cellular hardware,” the executive said. “That could force a wireless carrier to progressively buy equipment from another telecom-equipment maker.”
Some European wireless carriers said they may not need much more Huawei 5G equipment because they have already launched 5G networks and because some governments, citing national-security concerns, cap how much Huawei hardware can be in a system. Huawei equipment can’t make up more than 35% of a British 5G network, for example.
Photo: ‘The U.S. persists in attacking Huawei, but what will that bring to the world?’ Huawei Chairman Guo Ping said Monday. - NOEL CELIS/AGENCE FRANCE-PRESSE/GETTY IMAGES
