Thematic Report

Global semiconductors – Blacklisted

by Sebastian Hou / May 20, 2019

SHARE

The US Bureau of Industry and Security (BIS) amended the Export Administration Regulations (EAR) by adding Huawei and its 68 non-US affiliates to the Entity List, effective on May 17, curtailing the company’s access to critical US suppliers, which need a special licence to sell products to Huawei and its affiliates.

Export ban – What does it mean?
Huawei consumes 8-9% of the world’s semiconductors. First, despite issuing a 90-day temporary licence, the US Commerce Department says the non-temporary general licence (TGL) to supply Huawei’s new products are extremely difficult to obtain. Second, all US semis suppliers have stopped shipping to Huawei, so 2Q19 guidance may miss, with elevated inventory on top of an already record-high fabless days of inventory in 1Q19. Third, Huawei’s massive inventory prebuild in 1H19 has been officially revealed, confirming our concerns about demand and destocking risk. Destocking will soon happen.

Hope of a strong 2H19 recovery is dampened
We believe this semiconductor downcycle will bottom later than expected. We expect Huawei to increase self-sufficiency from Hisilicon, whose capabilities are stronger than most are aware of – it even has CPU/GPU/FPGA know-how. Huawei/Hisilicon’s insourcing depends largely on whether TSMC is allowed by the USA to keep offering foundry services. So far TSMC sees no problem. Taiwanese fabless may benefit in the near term if the USA allows the island’s companies to ship. We expect more negotiations between the USA and China on the technology war to follow, which will inevitably hurt Huawei and delay China’s 5G ambitions. Thus, the overhyped 5G expectations in 1H19 due to Huawei’s prebuild should be largely reset to more gradual growth.

This news isn’t new
Huawei has been preparing for such an eventuality, stocking up inventory for both basestations and smartphones since 4Q18, which we have highlighted repeatedly in our research. We estimate that Huawei has built up close to six months of smartphone inventory and 9-12 months of 5G basestation inventory.

Huawei’s businesses at risk
Being blacklisted has put Huawei at risk, with 5G basestations at greater peril than its smartphone business. While the company sources many components from different countries, the critical semiconductors (CPU, FPGA, RF, analog), software (Microsoft and Google), IP/EDA tools (Synopsys and Cadence) still come mainly from the USA. Huawei has long expected this day would come, and has prepared to grow its own technologies internally for many years. For semiconductors in particular, we estimate Huawei’s self-sufficiency ratio (supported by HiSilicon) is about 20% including memory, and 30-35% without. We don’t believe all Hisilicon chips are comparable or competitive with the best external chips, so Huawei’s product performance will inevitably degrade, which leaves opportunities for the enterprise/carrier competitors and smartphone peers.

For more insights, follow us on LinkedIn and click to subscribe to CLSA’s monthly newsletter.

Notices And Policies