Huawei Technologies is gradually shifting production of chips designed in-house away from Taiwan Semiconductor Manufacturing (TSMC) and towards Shanghai-based Semiconductor Manufacturing International (SMIC) in preparation for more U.S. restrictions, Reuters reported.
TSMC is the world’s largest contract chipmaker, with expected quarterly revenues of $10.2 billion in Q1 2020. SMIC is the fifth largest foundry with expected quarterly revenues of $848 million in Q1 2020, according to research firm TrendForce.

The move towards SMIC comes as Washington readies rules which would require foreign companies using U.S. chipmaking equipment to obtain a license before supplying chips to Huawei – rules that would directly affect TSMC.

The U.S. government alleges Huawei, the world’s biggest maker of telecom equipment and a major smartphone manufacturer, is a national security risk as its equipment could be used by Beijing to spy, and has barred U.S. firms from selling to the Chinese firm without a licence. Huawei has repeatedly denied its products pose a security threat.

Huawei’s chip unit, HiSilicon, began to direct some of its engineers towards designing for SMIC rather than TSMC in late 2019.

A Huawei spokesman called the shift “common industry practice” in a statement to Reuters. “Huawei considers carefully issues such as capacity, technology and delivery when choosing semiconductor fabrication plants,” it said.

TSMC, the world’s top contract manufacturer of semiconductors, said it does not comment on individual customers. SMIC declined to comment.

Huawei has also said it would look at South Korean firms, other Taiwanese and mainland Chinese firms as alternative sources for chips.

TSMC does not reveal how much revenue each customer provides but analysts estimate that by late 2019 Huawei accounted for 13 percent to 15 percent of TSMC’s sales. Chip production that could be shifted to SMIC likely only accounts for 1 to 3 percentage points of that, they said.

TSMC is currently perfecting its 5 nanometre process node technology. SMIC recently introduced 14nm technology in late 2019, which TSMC rolled out officially years earlier.

HiSilicon’s latest Kirin processors, used exclusively in Huawei mobile phones, can only be made by TSMC at the moment, though they add that earlier Kirin processors could be outsourced to SMIC.

Other chips produced by HiSilicon, such as those for IOT devices, power management, or set-top boxes, could be sent to SMIC.

Most chip manufacturers rely on equipment produced by U.S. companies like KLA, Lam Research and Applied Materials, according to a report last year from China’s Everbright Securities.
“There is no production line in China that uses only equipment made in China, so it is very difficult to make any chipsets without U.S. equipment,” Everbright wrote.

Meanwhile TSMC today announced consolidated revenue of $10.31 billion (+45.2 percent) and net income of NT$116.99 billion (+90.6 percent) for the first quarter ended March 31, 2020.

“Our first quarter business declined less than seasonality, due to the increase in HPC-related demand and the continued ramp of 5G smartphones,” said Wendell Huang, chief financial officer of TSMC.

TSMC is expecting that its revenue will be flattish, as weaker mobile product demand is expected to be balanced by 5G deployment and HPC-related product launches in the second quarter of 2020.