Two years ago, a Huawei i engineering team arrived in Jiangyin, Jiangsu, with an urgent mission: to transform an obscure supplier, SJ Semiconductor, into a formidable competitor in the field of chip packaging and stacking technology.
In the race to build increasingly powerful AI semiconductors, chip packaging technology is nearly as crucial as chip manufacturing itself. TSMC's CoWoS packaging technology is the gold standard in the industry, used by Nvidia, Amazon, and all other top chip designers for their AI products.
However, with U.S. export controls cutting off Huawei's access to TSMC and other foreign suppliers, Huawei has turned its focus to domestic solutions.
"A team of elite engineers from Huawei HiSilicon was dispatched there to help enhance packaging technology, thereby improving the performance of our AI processing chips," a knowledgeable executive mentioned regarding Huawei's chip design division.
According to insiders, SJ Semiconductor can now offer a viable alternative to TSMC's technology, with peak capacity at about one-tenth of TSMC's.
"In this field, this is somewhat easier than advanced chip manufacturing, and they've made some progress," another executive said. "They won't stagnate. Advanced packaging is one of the key technologies needed for AI computing and a lifeline to advanced chip technology."
This is just one example of Huawei's efforts to maintain technological leadership under U.S. blacklist restrictions while pushing forward the development of China's entire tech supply chain. In Shandong, the chip manufacturer Qingdao Entegris Integrated Circuit Co. has also received support from a specialized Huawei team over the past two years.
During this period, Qingdao Entegris built two new factories and began trial production of 14nm chips, far more advanced than their previous products. The company plans to venture into 7nm node production, matching the capability of China's largest chip maker, SMIC, although still lagging behind TSMC's 3nm technology.
In Shenzhen, memory chip manufacturer Shenzhen SwaySure Technology Co., Ltd., developed technology similar to Taiwan's Nanya Technology (the world's fourth-largest DRAM chip supplier). Insiders reveal that Huawei's strategic support has been crucial to SwaySure's rapid technological advancements.
SwaySure is even exploring high-bandwidth memory (HBM) technology, an essential component for AI computing currently dominated by South Korea's SK Hynix, Samsung, and U.S. Micron.
SMIC, Qingdao Entegris, and SwaySure have all been added to the U.S. entity list, with the latter two added last December due to the U.S.'s latest actions to restrict China's technological development.
Since being listed on the entity list in 2019, Huawei has employed hundreds of engineers who once worked at TSMC, Intel, Applied Materials, and KLA, sending them across China to support its manufacturing partners.
According to multiple industry managers, members of these Huawei teams attend technical meetings of Chinese chip manufacturers, serve as technical advisors, and help overcome production and R&D bottlenecks.
"If you look closely at some of the chip makers or tech companies now advancing more sophisticated technologies in China... you'll often see Huawei's involvement," said a chip industry executive. "I don't want to exaggerate, but Huawei remains a leader in many areas of R&D and tech development in China."
Huawei, JCET, Qingdao Entegris, and Hengxuan Technology did not respond to Nikkei Asia's request for comment.
Prosperity Under Pressure
It's been over five years since Huawei was added to the U.S. trade blacklist. During this time, the U.S. has implemented multiple rounds of export controls against hundreds of Chinese chip developers, equipment and materials manufacturers, and R&D centers.
Nevertheless, China's determination to advance its technology industry has not wavered.
U.S. export controls have indeed weakened China's ability to produce the most advanced chips and severed its ties with top international suppliers. However, Nikkei Asia analysis shows that outside of cutting-edge areas, U.S. efforts have actually accelerated China's process of replacing foreign technology supply chains with domestic ones.
China has developed competitive domestic solutions in multiple areas, including certain chips, chip substrates, printed circuit boards, displays, batteries, camera lenses, metal casings, and final assembly. Geopolitical tensions have prompted the Chinese tech industry to prioritize domestic components when local solutions are available.
Moreover, many Chinese suppliers have become global frontrunners, replacing former market leaders from the U.S., Europe, Japan, South Korea, and Taiwan.
Although many governments do not consider these components strategically important, they are still essential for the production of electronic devices and products. Additionally, the emerging parallel supply ecosystem in China increases market competition, raising concerns about supply surplus as global electronics demand recovers slowly.
As China's supply chain grows, so does the global influence of Chinese brands. According to research firm Omdia, Chinese smartphone manufacturers now hold nearly 60% of the global market share. Per TrendForce data, Chinese TV manufacturers, leveraging their dominance in the display industry, have captured a 42% share of the global market.
Declining but Far from Out
Export controls have significantly impacted Huawei's smartphone business, halting its global expansion. Huawei went from surpassing Samsung and Apple to become the world's number one to falling out of the top five.
However, Huawei has bounced back in the domestic market, launching tri-fold smartphones, new satellite communication technologies, and generative AI features for high-end users.
Huawei also claims its HarmonyOS (as an alternative to Google's Android) is now free from U.S. "interference," applicable from smartphones to cars and industrial computers.
"The most exciting news for us is Huawei's return in the smartphone sector. It's always the first company to adopt our latest technologies," said a supplier executive.
Omdia's chief mobile device analyst, Ze Ke Li, noted that China already has the most comprehensive mobile device manufacturing ecosystem globally.
He added, "Even companies like Apple and Samsung rely on Chinese suppliers for cost-effective solutions... Among all players, Huawei remains a leader in fundamental R&D in optics, camera technology, materials science, and thermal management. However, Huawei does face significant hurdles in producing enough high-end mobile chip processors."
Huawei's consumer electronics head, Yu Chengdong, stated that Huawei can now source all components and chips needed for its latest Mate 70 series domestically.
Meanwhile, Huawei's telecom equipment business remains solid. In 2023, this sector accounted for more than half of its revenue, despite U.S. efforts to persuade its allies to exclude it.
According to Dell'Oro Group data, Huawei remains the global market leader, with a market share exceeding 30% last year and the first half of this year. According to Huawei, it has deployed 5.5G connection technology networks in domestic and international cities, including the UAE, an upgrade to its 5G products.
In AI computing, where U.S. export controls are particularly stringent, Huawei's Ascend chip platform is China's second choice but still lags far behind Nvidia's products.
Huawei launched the Ascend series in 2018. According to multiple industry executives, the government and state-owned enterprises are now encouraging Chinese companies to prioritize Ascend chips over foreign ones. Many Chinese tech companies on the U.S. blacklist, including iFLYTEK and SenseTime, have become Huawei's most loyal supporters.
Haitong Securities estimates Huawei's share in China's AI computing market will reach 25% this year, while Nvidia holds about 70%.
Huawei's strength in chip design is evident in products like the Kunpeng 920 server CPU. Antonia Hmaidi, a senior analyst at the Mercator Institute for China Studies in Berlin, told Nikkei Asia that even without access to the most powerful chips, China might explore alternative ways to boost computing performance.
She further explained, "In many applications, if you're willing to consume more power — and China is a power-rich country — you can achieve your goals with larger, less advanced chips. We'll see more packaging innovations and new cooling technologies."
She said, "This approach isn't economically optimal, and we can't claim these solutions match the performance of the most cutting-edge chips. But for China at the moment, it's sufficient."
The "China Team" Strategy
As the U.S. tries to persuade Japan, the Netherlands, and other allies to join its efforts to curb China's chip development, Beijing is also trying to rally international allies, particularly those involved in the Belt and Road infrastructure projects.
As a representative of the "China Team," Huawei is leveraging its advantages in Southeast Asia, the Middle East, Africa, and parts of Europe where U.S. influence is weaker.
Huawei aims to focus on these markets to continue expanding its global presence.
In 2023, China was the largest foreign investor in several Southeast Asian countries, far exceeding U.S. activities in the region. At the same time, China is increasing investments in the Middle East, which was previously a primary investment target for Western countries.
On December 12, Huawei held its first global smartphone launch event outside China in two years in Dubai. Dubai was also one of the first overseas markets to adopt Huawei's 5.5G connection technology for key network infrastructure.
Anil Kurana, Executive Director of Georgetown University's Batara Global Business Center, stated, "Huawei's goal is to build its own ecosystem, which is not simple and takes time. But Huawei's advantage lies in leveraging China's influence over countries in the Global South. From a governmental perspective, this provides an opportunity for the Chinese Communist Party and government to expand their influence."
Due to Western bans, Huawei's accessible market size in telecoms is shrinking. But Stefan Pongratz, Vice President at Dell'Oro Group, pointed out, "Huawei remains aggressive in markets where it is allowed to compete, such as the Middle East, Africa, Latin America, and parts of Asia, which helps offset its losses in market share in Europe."
He further noted that Huawei still offers cost-effective products while maintaining a technological edge.
Huawei Cloud has recently become a key business area, growing nearly 22% in 2023. Huawei is working with governments and telecom operators in Malaysia, Thailand, Indonesia, and the Maldives to provide digital infrastructure and cloud services.
Moreover, Huawei has helped the Uzbekistan government build one of the largest data centers in Central Asia.
Baron Von, Senior Research Director at Dell'Oro Group, pointed out, "Huawei is very active in developing countries, primarily serving the overseas expansion of Chinese companies. Not just building data center infrastructure but also telecom infrastructure... almost an entire suite of solutions."
Kurana also mentioned Huawei's global ambitions: "Countries like Malaysia, Nigeria, or Chile want to build data centers and cloud services; they need a solution that is both high-performance and affordable enough."
A Matter of Time
For U.S. officials and policymakers, export controls have become a primary tool to curb China's technological and military ambitions.
They believe Beijing's ultimate goal is technological and military self-sufficiency, regardless of export controls.
"Export controls are very effective," said Martijn Lathouwers, General Manager of the Dutch data analytics firm Datenna. "Huawei is clearly struggling. If you look into chip yield rates, you'll find the economics are poor. While they can produce a small number of chips with the desired performance, this semiconductor manufacturing approach is not sustainable."
Lathouwers added that the earlier export controls are implemented, the more effective they are, "Washington realizes they have leverage now. If they wait, that leverage will wane over time."
On December 2, the Biden administration initiated the most comprehensive round of export restrictions, targeting Huawei-related local chip equipment manufacturers, materials, and gas suppliers as well as multiple chip manufacturers. The new rules also cut off China's access to high-bandwidth memory chips, crucial for AI computing.
However, compared to when the U.S. first restricted exports of chip manufacturing tools to China in 2022, the Chinese semiconductor industry's response to this new round of controls has been relatively calm. At that time, many U.S. chip production equipment manufacturers had to suddenly stop supporting their Chinese customers to avoid violating the new rules. This time, some Chinese equipment manufacturers have even announced that they've replaced U.S. components in their systems.
Simultaneously, the U.S. is increasingly focusing on the low-end chip market. The first related review report released in December showed that only 17% of the American companies surveyed could confirm their products did not contain Chinese-made chips.
The report acknowledged a lack of transparency in U.S. companies regarding chip origins and pointed out that many firms "are not aware of the risks posed by reliance on Chinese manufacturers, from global shocks to cyber threats."
Some U.S. legislators are now considering expanding restrictions to other electronic components like display panels to further curb China's technological capabilities. But such measures might be too late, as China's main bottlenecks are in the production of cutting-edge chips and related equipment and materials.
In many other areas, China has achieved self-sufficiency and faces issues of supply overcapacity due to recent aggressive expansion.
For example, according to the Information Technology and Innovation Foundation (ITIF), China controls over 70% of the LCD market and about 50% of the high-end OLED market, pushing competitors like Samsung, LG, and Sharp to exit or scale back. In the field of RF chips, a key communication component, Chinese firms have largely replaced U.S. and Japanese suppliers, dominating the domestic market.
China also has competitive manufacturers in chip substrates and printed circuit boards, meaning these areas no longer pose supply bottlenecks potentially hindering China's technological development. In Bluetooth and Wi-Fi connectivity chips, some Chinese suppliers can offer chips at prices as low as 1 yuan (about $0.14), significantly undercutting any foreign chip developer's competitive levels.
Industry executives interviewed by Nikkei Asia revealed that the price of heat spreaders, a cooling component in high-end smartphones and laptops, has dropped from $12 to $2 per unit in just one year.
Antonia Hmaidi of the Mercator Institute for China Studies noted that competing with profit-unconcerned rivals is challenging.
She pointed out, "An important characteristic of Chinese semiconductor and tech companies is that they don't need to be profitable. There's a risk in the future that China could become the sole producer of some traditional chips."
Development Slows but Remains Robust
Huawei is still one of China's most influential tech companies, with a global workforce of 207,000, compared to Google's 182,000, Intel's 125,000, and Apple's 164,000. Over 50% of Huawei's employees work in R&D, with last year's R&D spending exceeding 23% of its annual income, approximately 164.7 billion yuan ($22.7 billion), ranking it among the top 10 companies globally in R&D investment.
Industry insiders and observers say Huawei remains the most important driver in China's semiconductor and AI computing sectors.
In Shanghai, Huawei is building a massive R&D center for chip design and semiconductor equipment development.
Meanwhile, Huawei-supported chip production and packaging plants are expanding across China, backed by strong government support.
"When the U.S. blacklists a company, that company is likely to re-emerge under a new name," said a chip industry executive. "And these circumvention efforts are not only coming from Chinese companies but increasingly from China's allies."
Indeed, TSMC paused shipments to at least two chip design clients last October, suspecting attempts to bypass U.S. export controls on Huawei.
Industry insiders note that Huawei was once a significant customer for nearly all top-tier electronic component suppliers, from TSMC, Qualcomm to Samsung, SK Hynix, and Sony, always using the suppliers' most advanced solutions, sometimes even more aggressively than Apple.
The U.S. crackdown has instead pushed Huawei to transfer this experience domestically, enhancing China's overall supply chain output and cost-effectiveness.
Now, second-tier suppliers like SJ Semiconductor and Qingdao Entegris have the opportunity to benefit from Huawei's experience, honing their technical capabilities, which has advanced China's supply chain development by several years.
"The U.S. and Europe underestimated China, but one should never underestimate China," said a former TSMC executive. "China has over a billion people, a good engineering education system, and the drive and incentives to develop its domestic chip and tech industry. As Huawei shifts from TSMC to Chinese chip makers like SMIC, it actually helps these Chinese chip manufacturers to accelerate their learning curve, which is very valuable for China."
Source: Nikkei Survey
Originally posted on LinkedIn.