(Bloomberg) – Since its founding over three decades ago, Taiwan Semiconductor Manufacturing Co. has built its business by working behind the scenes to shine customers like Apple Inc. and Qualcomm Inc. Now the low-key chip maker has landed squarely in the middle of the trade war between the United States and China, an incalculably precious asset that the two parties are fighting to control.
The Trump administration opened a new front in the conflict on Friday by banning any chipmaker using U.S. equipment from supplying the Huawei Technologies Co. to China without U.S. government approval. This means that TSMC and its rivals will have to shut down Huawei unless they get waivers from the U.S. Department of Commerce. TSMC has already stopped accepting new orders from Huawei, Nikkei reported on Monday.
The move threatens to wreak havoc throughout the complex ecosystem that produces technology for consumers and businesses around the world. An attack on Huawei threatens not only its workers and its position as a world leader in the manufacture of smartphones and telecommunications equipment, but also hundreds of suppliers. The Chinese government has promised to protect its national champion, with threats of reprisals against American companies that depend on China such as Apple Inc. and Boeing Co.
“China is likely to retaliate, and investors should prepare for a possible escalation in the trade war,” analysts at Sanford C. Bernstein & Co. headed by Mark Li wrote on Friday.
Read more: US tightens rules to cut supply of Huawei chips
Huawei’s suppliers in Asia fell on Monday, with AAC Technologies Holdings Inc., Q Technology Group Co., Sunwoda Electronic and Lens Technology, all down 5% or more. TSMC, which derives about 14% of its revenue from Huawei, fell 2.5%.
The U.S. already blacklisted Huawei last year, preventing U.S. companies from supplying the Chinese company unless they obtain a license. Latest initiative tightens restrictions to prevent chip makers – US and foreign – from working with Huawei and its secret chip design unit HiSilicon on the advanced semiconductors they need to make smartphones and communications equipment . The Trump administration considers Huawei a serious security threat, an allegation the company denies.
“We need to change our rules operated by Huawei and HiSilicon and prevent US technology from allowing malicious activity contrary to US national security and foreign policy interests,” said Secretary of Commerce Wilbur Ross in a tweet.
Huawei responded by accusing the United States of ulterior motives.
“The so-called cybersecurity reasons are just an excuse,” wrote Richard Yu, chief of consumer electronics for the Chinese tech giant, in his account on the WeChat messaging app. “The key is the threat to technological hegemony in the United States” posed by Huawei, he added.
The U.S. move is likely to hurt not only Huawei and TSMC, but also a handful of U.S. players, including hardware manufacturers Applied Materials Inc., KLA and Lam Research Corp. themselves, wrote analysts for Morgan Stanley. Huawei production disruptions will also hurt U.S. customers of Micron Technology Inc. and Qorvo Inc. of Texas Instruments Inc., they said. But “it should be reiterated that any escalation in trade tensions is negative for all stocks,” they wrote in a research report.
It would have been impossible to imagine TSMC becoming such a coveted piece among the world’s great powers when it was founded in 1987. Morris Chang, born in China and trained in the United States, started the business as so-called foundry, manufacturing semiconductors for any customer who did not want to build their own manufacturing plant, or fab.
At the time, the business was not as glamorous as making the chips yourself. At the time, the sector was dominated by companies like Intel Corp. and Advanced Micro Devices Inc., which manufactured processors for personal computers. “Real men have fabs,” said AMD co-founder Jerry Sanders, adding that it was an insult.
But in the years that followed, the foundry industry became much more strategic for the tech industry. Apple and Huawei customers at Qualcomm and Nvidia Corp. have discovered that they can innovate faster if they focus on chip design and then turn to foundries like TSMC to produce them. Innovators in emerging technologies like artificial intelligence and the Internet of Things are also dependent on foundries to open up new markets.
Today, many chips for mobile phones, autonomous vehicles, artificial intelligence and all other key technologies are manufactured in foundries. TSMC has become the world’s largest foundry by investing heavily in increasingly advanced factories, with annual capital expenditures of approximately $ 16 billion this year.
It can now manufacture at 5 nanometers, about double the width of human DNA, while the largest Chinese foundry, Semiconductor Manufacturing International Corp., or SMIC, is 14 nanometers. This makes TSMC chips much more powerful and energy efficient.
Huawei and HiSilicon will have few good options if they are cut from TSMC. One option is to get off-the-shelf chips from MediaTek Inc. in Taiwan and Samsung Electronics Co. in South Korea, an option that Huawei’s current president Eric Xu mentioned in late March. But even that may no longer be viable with the new trade restrictions.
The SMIC itself is keen to climb the technological ladder, considering a secondary listing that could raise more than $ 3 billion in addition to a large injection of state capital.
Read more: China injects $ 2.2 billion into local flea business amid US borders
But it’s a longer-term business and Huawei’s products are likely to suffer, putting them at risk of falling behind those of their competitors like Apple or Xiaomi Corp.
For TSMC, it is becoming increasingly difficult to remain neutral in the midst of growing tensions between the United States and China. The company defines itself as “the foundry of all”, in fact the Switzerland of the technological industry. It supplies Chinese customers like Huawei and the US military, while relying on US producers of semiconductor manufacturing equipment like Applied Materials and Lam Research.
TSMC took another step closer to the United States last week, saying it would build a $ 12 billion chip factory in Arizona. The Defense Ministry has expressed concern that factories abroad are vulnerable to cyberattacks and that domestic manufacturing would ensure a more reliable supply of chips.
The proposal appears to be carefully calculated to address these security concerns without undermining the benefits or its political balance. Army suppliers, such as Xilinx Inc., could use the US plant, but the facility would likely represent less than 5% of revenue, so margins will not be compromised.
However, it is not clear whether plans for an American factory will win clemency from TSMC in supplying Huawei.
“TSMC will not be granted or licensed because of its intention to build a 5-nanometer plant here in the United States. It’s not part of it at all, “Keith Krach, undersecretary for economic growth, energy and the environment at the State Department, told reporters. “There is no assurance on this and we do not expect that. “
Meanwhile, China seems to be preparing to respond to the new restrictions imposed on Huawei. On Friday, the Global Times – a Chinese tabloid run by the flagship Communist newspaper – announced that Beijing was ready to take countermeasures, including placing restrictions on Apple, suspending the purchase of Boeing aircraft and putting American companies on “uncertainty”. list of entities. ”
The list will cover “foreign entities that are causing actual or potential damage to Chinese businesses and industries,” the newspaper said.
(Updates with the Nikkei report in the second paragraph)
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