NVDA NVIDIA Corporation

By Yoko Kubota and Dan Strumpf 

Huawei Technologies Co. has spent 15 years and billions of dollars building an advanced semiconductor company, with the aim of making the Chinese telecom giant self-sufficient. A U.S. blacklisting stands to set it back years in that goal.

Huawei's chip subsidiary HiSilicon Technologies Co. has grown into one of China's biggest and most advanced chip companies. Its processors power everything from Huawei's data centers and smartphones to its base stations for forthcoming fifth-generation wireless networks.

HiSilicon supplies more chips than anyone else for Huawei, reducing its parent company's reliance on American chip stalwarts like Qualcomm Inc., Intel Corp. and Nvidia Corp., and helping erode the dominance of American chip makers. But HiSilicon is among dozens of Huawei affiliates on a U.S. Department of Commerce export blacklist that blocks any company from supplying it with American technology without a license, which won't be easy to obtain.

Because HiSilicon relies on some suppliers for American software and intellectual property to design and make semiconductors, its ability to keep producing better chips is at risk. While experts say the short-term effects of the export ban will be minimal, in the longer run, as technology evolves, it threatens to curtail HiSilicon's progress.

"Beyond a year from now, there is a big risk if the ban is not lifted," said Sebastian Hou, analyst at the Hong Kong-based investment bank CLSA. "It would be very challenging for HiSilicon to design next-generation chipsets because a lot of software and intellectual property is still licensed and bought from American suppliers."

A Huawei spokesman declined to comment for this article.

Semiconductors have emerged as a choke point in the U.S.-China tech battle. China needs American semiconductor technologies, while U.S. chip makers rely on Chinese buyers. The threat to HiSilicon shows China's tech industry has a way to go to establish a self-sufficient supply chain.

With the U.S. blacklisting, HiSilicon stands to lose access to technology from ARM Holdings PLC, the U.K.-based provider of basic chip designs. It also will prevent HiSilicon from using the latest software from U.S. suppliers Synopsys Inc. and Cadence Design Systems Inc., making it harder to produce next-generation chips.

On Friday, China's Commerce Ministry said it is setting up an "unreliable entity list," and that foreign companies, organizations and individuals that disrupt supplies to Chinese companies would be named.

HiSilicon President Teresa He told Huawei employees in a May 17 memo that all new products must have plans for technological self-sufficiency. "We must not only be open to innovation but also achieve independence in technologies," Ms. He said.

China's reliance on U.S. chips was highlighted after last year's U.S. ban on exports to Huawei's chief Chinese rival, ZTE Corp., crippled the company. ZTE was able to get back to business after the U.S. and China reached a deal that included the company paying a $1 billion fine.

Experts say Huawei is less reliant on American technology than ZTE, in part because of HiSilicon. In 2015, HiSilicon supplied more than one-fifth of Huawei's chips by value, according to CCID, an official think tank in Beijing. Analysts estimate the figure has only grown since then.

In Huawei's high-end P20 Pro smartphone launched last year, about 27% of the semiconductor content came from HiSilicon, while only 7% came from American companies, according to ABI Research. In the case of ZTE, more than half of the electronic components in its top-of-the-line smartphone ran on American components when its ban hit.

Established in 2004, Shenzhen-based HiSilicon has more than 7,000 employees globally. Its revenue rose 38% in 2018 to $7.9 billion, according to market research firm TrendForce. About 90% of HiSilicon's revenue comes from Huawei, research firm Gartner said. Huawei reported more than $100 billion in revenue last year.

HiSilicon is among an elite group of global chip makers that have succeeded in engineering transistors down to seven nanometers in size, the industry's current gold standard.

In smartphones, HiSilicon's Kirin-branded chips power image-recognition and other artificial intelligence functions. In the future, its Balong chips will connect those phones and other devices to forthcoming 5G networks, while its Tiangang chips will power Huawei's 5G base stations.

The looming trouble for HiSilicon is in obtaining new licenses to access design tools offered by Synopsys and Cadence, both based in California. The companies' products are used to produce the blueprints for circuits, and U.S. officials have said applications for licenses to export these products to Huawei and its affiliates will be reviewed with a presumption of denial.

In a conference call with investors , Synopsys co-CEO Aart de Geus said the company was following "exactly the rules set by the government," including no longer providing on-site support to HiSilicon. Cadence didn't respond to requests for comment.

The loss of ARM's business likely won't be felt immediately. Huawei's CEO Ren Zhengfei said in May it has obtained a long-term license and that the ARM halt "doesn't have an impact." An ARM spokeswoman said the company is speaking with the U.S. government to ensure compliance, while a spokesman for ARM China, a separate entity, said the company is seeking solutions that comply with the law.

While other chip makers and HiSilicon's suppliers shift to future versions of ARM technology or products from the software companies, the U.S. blacklisting will leave HiSilicon stuck with older tools, hindering its ability to compete on the frontiers of chip design and extending the time it takes to develop its products.

In terms of developing new advanced chips, "I foresee 36 months of midterm setback for Huawei," said Shumpei Kawasaki, CEO of Software Hardware & Consulting and a former chip designer at Hitachi Ltd. and Renesas Electronics Corp.

Alternative technologies to ARM, Cadence and Synopsys exist, including open-sourced RISC-V that was originally developed at the University of California, Berkeley. Some of RISC-V's design data is accessible in open platforms and doesn't require signing an agreement to use that, Mr. Kawasaki said.

In the long run, an export ban would push China toward a separate set of chip-design tools and standards and lead HiSilicon to step away from internationally dominant chip architecture and tools, Mr. Kawasaki said.

--Wenxin Fan contributed to this article.

Write to Yoko Kubota at yoko.kubota@wsj.com and Dan Strumpf at daniel.strumpf@wsj.com

(END) Dow Jones Newswires

June 02, 2019 05:45 ET (09:45 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.