Huawei Technologies has stockpiled up to two years’ worth of crucial American chips to shield its operations from Washington’s crackdowns, sources told the Nikkei Asian Review.
Huawei’s stockpiling efforts focused on central processors made by Intel for use in servers and programmable chips from its peer Xilinx, the sources said. These were the “most essential components” for the company’s base station business and emerging cloud business, and it had enough inventory to last between one and a half and two years, they added.
Following the latest US crackdown on May 15, there were no long-term alternatives for these components immediately available to Huawei, the sources said, as Washington had in effect blocked the production of Huawei-designed chips. Analysts, moreover, said that relying on stockpiled chips could eventually hurt the company’s competitiveness.
The company started buying up chips at the end of 2018, soon after Huawei chief financial officer Meng Wanzhou — who is also founder Ren Zhengfei’s daughter — was arrested on the Canadian border, the sources said.
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Huawei revealed last month that it had spent Rmb167.4bn ($23.45bn) stockpiling chips, components and materials in 2019, up 73 per cent from the previous year. The company’s first public confirmation of such efforts came three days after Washington further tightened export control rules to block any non-US suppliers from producing chips to Huawei’s own designs. Nikkei first reported Huawei’s stockpiling efforts last May, when the Chinese company was put on a trade blacklist to restrict its access to American technology.
While Huawei has not revealed the targets of its chip-buying, sources say that the company is particularly anxious to build up inventories from Xilinx, the San Jose-based chip developer with expertise in designing Field Programmable Gate Arrays. FPGAs can be programmed by users with their own algorithms and program computing tasks to meet specific needs. Such programmable chips — for which there are no comparable non-US suppliers — were crucial to Huawei’s base station and telecommunication equipment rooms, as they offer connectivity and architectures for a wide range of base station applications, they said.
“Xilinx’s programmable chips are too hard to be replaced at the moment. Not even Huawei’s own chip designer HiSilicon can design chips that can fully compete against Xilinx’s offerings,” an executive-level source at a Huawei supplier, who is familiar with the company’s stockpiling practices, told Nikkei.
Xilinx’s chips also have strong national security implications as they are widely used in space and defence tech, such as American F-35 fighter jets, satellites and Nasa’s research, according to the company. Bringing the manufacture of Xilinx chips back to American soil is one of the key reasons the Trump administration has pressured Taiwan Semiconductor Manufacturing Company — Xilinx’s production partner and a key Huawei supplier — to set up a chip facility in the US, as Nikkei reported earlier.
Huawei is also trying hard to buy high-end server central processing units, or CPUs, from Intel and its smaller rival Advanced Micro Devices. Both chip developers are based in the US and together control nearly 98 per cent of the global server CPU market. Server processors, which are more complicated and have more computing power than ordinary notebook CPUs, are indispensable for Huawei’s growing cloud business.
The world’s biggest telecom equipment maker and a leading server builder, Huawei has not been able to buy chips directly from US companies without special approval since last May. However, it had been able to continue building its inventory of American chips through other available channels — such as local chip distributors and traders, or even asking its own suppliers to buy the chips for it — sources familiar with the matter said. Huawei had been willing to pay far higher prices than normal for the chips, despite the fact the company could only secure “off-the-shelf” versions without customisation or technical support, they said.
Huawei has also been building up its inventory of DRAM and NAND flash memories from Samsung, SK Hynix, Micron and Kioxia since last year, sources said. Korea Economic Daily reported on Monday that Huawei had sought assurances from Samsung and SK Hynix that it would have a stable supply of memory chips.
“It’s preparing stocks for wartime,” said one of the sources. “The idea is that if the real demand is only 100 units per month, it would order 150 units and store them. Memory chips are easier to build inventories as they don’t really upgrade that often like processor chips.”
Xilinx, Intel and AMD, responding to request for comments, all stressed their compliance with US laws and regulations.
“Xilinx is aware of the recent additions to the Department of Commerce’s Entity List and is evaluating any potential business impact,” the chipmaker said.
Intel, meanwhile, said it “continues to comply with US government export regulations, including the requirements imposed by the BIS Entity List”.
AMD, a smaller rival to Intel, said: “Based on our initial review of the recent revision to the Foreign Direct Product Rule, we do not believe that this rule modifies AMD’s ability to sell products to Huawei.”
Samsung, SK Hynix and Micron declined to comment, while Kioxia said only that it conducted its business in accordance with the rules and regulations of all countries in which it operated.
Huawei also declined to comment.
Having sufficient inventories of these chips is crucial for Huawei to roll out products on time. Huawei’s chip designer HiSilicon unveiled its own server processor chip, dubbed the Kunpeng series, at the start of 2019 as alternatives to Intel and AMD, and it also designed customised chips to replace Xilinx in case it ran out of the programmable chips. But the latest US restrictions mean Huawei is unable to produce those chips.
These in-house designs, moreover, cannot yet match the offerings of those US chip designers, industry insiders say. The fact that China currently does not have the capability to make globally competitive memory chips has prompted Huawei to prepare for the possibility of the US government again expanding the scope of its restrictions to cover those products, they said.
But despite Huawei’s stockpiling efforts, the company’s market position and product competitiveness could still be significantly weakened under the new export control restrictions, analysts said.
Paul Triolo, head of geotechnology research at risk consultancy Eurasia Group, said stockpiling components could only take Huawei so far, as the particular chips targeted by the US action were application-specific and only the existing suppliers could ramp up production at high throughputs. Moreover, those types of chips were constantly being upgraded and redesigned, with the next generation already in the pipeline, he added.
“US actions are likely to focus on Huawei’s infrastructure business, as well as its enterprise and cloud services and AI business lines . . . . These sectors are highly competitive and require the ability to rapidly iterate designs and integrate in the latest and best technologies from a variety of sources,” Mr Triolo told Nikkei.
A version of this article was first published on May 28 by the Nikkei Asian Review. ©2020 Nikkei Inc. All rights reserved.
