U.S. could stop TSMC from shipping Huawei's 5G modem chips
Huawei is the second-largest TSMC customer and its business with TSMC soared 80% year-over-year in 2019. Apple is the foundry’s largest account generating $8.2 billion in revenue for the company last year, up 23% from the previous year’s figure.
A change in the Direct Product Rule could hurt both Huawei and TSMC
Huawei remains on the U.S. Commerce Department’s Entity List and still cannot access its U.S. supply chain (which it spent $18 billion on back in 2018). As a result, its phones cannot use Google Mobile Services and Google’s Android apps (such as the Play Store, Search, Maps, Gmail, Drive, Duo, Photos, and more) are not allowed to run on Huawei’s newer phones. That doesn’t matter in China where Google’s apps are banned anyway but does affect sales of global units. The company still managed to ship 240 million phones last year which was more than Apple, but still behind Samsung.
The Direct Product Rule allows the U.S. to put export controls on products made by foreign companies that contain 25% or more U.S.-origin content by value. TSMC falls below this line which means that the Trump administration cannot have a say in who receives chips shipped by the foundry. But the administration has been weighing a revision to the rule that would lower the threshold to 10%. At that percentage, TSMC would not be allowed to ship any chips to Huawei which would certainly make things difficult for the manufacturer. After all, TSMC not only makes Huawei’s Kirin chipsets, it also produces its Balong modem chips as well. And considering that Huawei is its second-largest customer (and growing rapidly), such a move by the U.S. would affect TSMC as well.
If TSMC loses a large chunk of business, it might not be able to spend so much money on the R&D and the facilities required to continue the development of powerful integrated circuits. These components have allowed mobile devices to become more and more powerful over time.
Huawei has been slowly moving the production of chips for its non-flagship devices to China’s largest foundry, SMIC. But the latter is several process nodes behind TSMC, which is churning out 5nm chips this year. That means that the transistor density of TSMC’s 5nm integrated circuits contain more than 171 million transistors per square mm. SMIC’s 14nm chips have approximately 43.5 million transistors per square mm. The more transistors that fit inside a chip, the more powerful and energy-efficient it is.
If the Direct Product Rule threshold is lowered to 10%, Huawei will have to rely on its inventory of chips to manufacture high-end phones. Huawei could possibly turn to Samsung as the latter’s foundry is number two in the world. But it isn’t clear whether any chips rolling off of Sammy’s assembly lines would also be affected by the proposed change in the Direct Product Rule.