Huawei: 5G Comeback Kid, Or Sucker For New Sanctions?

Key Takeaways:

• Huawei reportedly plans to relaunch 5G phones by year-end, using chipsets designed by its HiSilicon unit and manufactured by leading Chinese contract chipmaker SMIC
• Huawei smartphones retain a competitive edge from their strong brand image in China, but remain at risk due to potential for future U.S. sanctions

By Trevor Mo 

5G or not 5G?

That’s the question that’s been swirling around Huawei Technologies for much of the last year, amid reports the former smartphone superstar might re-enter the 5G smartphone market after being locked out three years ago by U.S. sanctions. The Financial Times reported as early as last October that Huawei could relaunch 5G phones in 2023, and Reuters reported earlier this month a return looks set by the end of this year.

Such a return would mark a major comeback for Huawei, which was forced to leave the field in 2020 after losing access to critical American technologies for the latest generation of high-speed wireless communications. But a comeback is far from certain, and we’ll examine some of the challenges Huawei will face shortly. First, we’ll look at how Huawei would make such a return in the face of continued U.S. sanctions.

The company is expected to use domestically manufactured central processing chips in its new devices, replacing the imported ones it previously used, according to the Reuters report, which cited research firms covering China’s smartphone sector. Specifically, the company will hire SMIC(0981.HK; 688981.SH), China’s largest contract chip maker, which will manufacture the 5G chips based on designs from Huawei’s in-house chip design subsidiary, HiSilicon.

Once a leading smartphone brand alongside Apple AAPL and Samsung (005930.KS), Huawei’s phone sales plummeted after U.S. sanctions in May 2019 denied it access to advanced chips from American suppliers like Qualcomm QCOM. A year later, Washington further tightened restrictions by preventing international chip foundries from manufacturing chips designed by HiSilicon. Most notably, the U.S. pressured leading global contract chip maker TSMC TSM to stop accepting orders from the Chinese tech giant.

Huawei disappeared from the top of the global smartphone rankings after that. Its sales have fallen steadily from 240 million units at its 2019 peak, when the company was the world’s second largest brand with 17.6% of the market, according to research firm Canalys. Since then, most of Huawei’s phones have been models based on older 4G technology using more basic chips that aren’t affected by U.S. sanctions.

The company has tried to enter several new business areas to offset the loss of much of its huge smartphone business, most notably autonomous driving. But most of those efforts have failed to gain much traction, with the result that the company’s revenue flatlined last year and in this year’s first quarter.

With that background in mind, we’ll look next at what resuming 5G production could mean for Huawei’s stalling business, as well as potential obstacles it faces. It’s worth noting that a comeback was probably always in Huawei’s mind, as reflected by its reluctance to shutter its large and costly retail Chinese store network despite declining sales.

In a sign of growing confidence, the company earlier this month raised its 2023 smartphone shipment target to 40 million units from 30 million at the start of the year, multiple local Chinese media reported. A China-focused analyst at a leading global research firm told Bamboo Works the increase is almost certainly due to a return of 5G shipments.

Competitive Chips

The big question for Huawei’s 5G return lies in whether SMIC can make 5G chips competitive with rival products now on the market, most of those made by TSMC and other foundries with better technology. Huawei plans to use SMIC’s N+1 process to produce 7 nm chips typically used in 5G phones. While U.S. restrictions bar SMIC from acquiring critical foreign-made machinery used to make 7 nm chips, the N+1 process allows for the manufacture of 7 nm-caliber chips using simpler technology that isn’t affected by the restrictions.

“Until we see the final products, it is still early to say how competitive those chips will be,” the China-focused analyst told Bamboo Works. “But Huawei may face two issues: production yields and chip heat dissipation.”

Though improvements in heat dissipation can occur over time, low production yields – basically, the number of chips that are ultimately usable from each batch manufactured – may pose the greatest challenge at the beginning. Lower yields make each usable chip more expensive, potentially lowering Huawei’s 5G phones’ cost competitiveness compared with rival products.

The analyst forecast that if all goes according to plan, Huawei 5G phone shipments could total 8 million to 10 million units initially, though the exact timeframe remains unclear.

Aside from chips, Huawei could also face challenges from changes to the smartphone market in the years since it left 5G. The company’s home China market has shrunken markedly, with shipments down 11.8% in the first quarter of this year – the fifth straight quarter of double-digit declines, according to industry research firm IDC.

The slump owes to consumers keeping smartphones longer than they once did, and IDC expects the current three- to four-year replacement cycle to grow further in the near-term.

Despite the challenges, Huawei still holds a major competitive advantage over domestic rivals like Xiaomi (1810.HK) and Oppo due to its premium image among Chinese consumers. That could allow it to continue targeting the higher-margin, premium phone market.

That brand loyalty is reflected in growing traction for Huawei phones recently despite its lack of 5G models. The company shipped 6 million smartphones globally during the first quarter of this year, up 14.3% from the same year-ago period, according to data from industry group Omdia, even as most of the world’s top five brands posted declines for the period.

But Huawei’s longer-term outlook remains challenged by factors beyond its control. Early this year the company announced breakthroughs in its chip design capabilities using in-house developed electronic design automation (EDA) tools. Such tools are fully self-controlled, rather than relying on third-party software and other products that could face future sanctions, making Huawei’s design of 14 nm and smaller chips more sanction-proof for its upcoming 5G chipsets.

At the end of the day, Huawei’s 5G return will depend as much on whether SMIC can continue improving its manufacturing capabilities as on Huawei’s own technological achievements in chip design. That makes the situation look precarious, since the U.S. and its allies are showing increasing willingness to tighten export controls on the sophisticated chip-making equipment Chinese companies can buy in a bid to slow the nation’s chip-making progress. A further tightening of U.S. restrictions could once again throw Huawei out of the 5G arena, dealing a potentially fatal blow to its comeback for the foreseeable future.