Lofty expectations for 5G-driven sales have finally started to offer the shares of global chipmkers some respite from the doldrums, as their shares have lagged the Nasdaq's 'Big Tech'-driven rally, with companies based in Taiwan and mainland China particularly hurt by President Trump's crackdown on Huawei, as well s the simmering trade tensions between the world's two largest economies.
Recently, the US has moved to close loopholes allowing Huawei to use chips made with American technology, even if they are produced abroad, by foreign companies. The latest step in Washington's crackdown is creating serious logistical pressures for Huawei at a critical time: around the world, the rollout of 5G technology is nigh, with the upcoming generation of smartphones all expected to be 5G enabled.
While Huawei has been smart at adapting to each new round of Trump Administration sanctions, the latest round of sanctions are leaving it with fewer and fewer options. A few weeks ago, we reported how Taiwan's largest contract chipmaker has had to terminate Huawei's business because of the US sanctions, a major blow to both companies.
Now it appears even more rival chipmakers that were supposed to benefit from Huawei's misfortune will instead find themselves unable to continue doing business with Huawei, cutting them off from a critical and extremely lucrative customer for a new set of 5G enabled chips that the company had just released.
MediaTek is one of Taiwan's most successful companies, and its founder, Tsai Ming-kai, the Taiwanese billionaire once known as China’s "bandit phone king", has been on a roll as of late. But unfortunately, what looked like impeccable timing for the rollout of its new "Dimensity" chipset has been rendered moot, since - in addition to being unable to produce its own chips - MediaTek could face Treasury Department sanctions that would cripple its business if it sells any of these chips to Huawei, according to Trump Administration sanctions rolled out last Monday.
Here's more from the FT:
The founder and chairman of chip design house MediaTek had already seen his personal wealth jump by 80 per cent last year. The launch of the company’s “Dimensity” chipset for 5G smartphones and Washington’s blacklisting of Chinese technology group Huawei from buying from US chipmakers had sent MediaTek’s shares soaring. This year, things looked even brighter.
The US in May barred chip manufacturers from selling to Huawei any custom-made semiconductors produced with US equipment. For Huawei, the most obvious solution was MediaTek’s off-the-shelf smartphone chipsets, a development that would have boosted the Taiwanese company’s fortunes immensely.
But that dream was shattered last week when the US Department of Commerce closed the loopholes in its May sanctions against Huawei by prohibiting the sale without a licence of chips made using US software or equipment to the Chinese company. Given the prevalence of US technology in the semiconductor industry, this would include chipsets sold by MediaTek. "If the May rules had played out, MediaTek would have been the beneficiary, at least in the short run," said Phelix Lee, an analyst at Morningstar in Hong Kong.
Analysts quoted in the FT report explained that, if Huawei is unable to secure new supplies of microchips for its phones and 5G networking equipment, it could delay the rollout of 5G worldwide, destroying what is perhaps the only conceivable tailwind for MediaTek's business.
Spun off from Taiwanese chipmaker United Microelectronics Corporation in 1997, MediaTek has climbed the supply chain ladder, moving from CD drives and DVD drives to TV sets and finally smartphones. Now, it's Taiwan’s largest, and the world’s fourth-largest, chip design company.
MediaTek has more at stake than many other Huawei suppliers, mostly due to its heavy reliance on mainland China. The company broke into handset chip design when it designed chips allowing producers of "knock-off" smartphones in Shenzen to create more sophisticated products. These "bandit" phones are how MediaTek's founder got his nickname, the "Bandit Phone King".
Its biggest break came after it started offering a turnkey solution for mobile phones in 2004 that enabled scores of no-name workshops manufacturing knock-off handsets — “bandit phones” — in the southern Chinese city of Shenzhen to produce more sophisticated products. The platform, which included a chipset and reference designs for phone features that the small factories would not have been able to develop themselves, earned Mr Tsai the nickname of the “bandit phone king”.
It also helped create a breed of Chinese companies that would later morph into formidable rivals for multinational brands such as Apple and Samsung in China and other emerging markets. Adapting its turnkey chipset business model to the smartphone era was difficult but MediaTek again managed to build a strong emerging-markets position on the back of China’s rising handset brands.
In 4G, MediaTek was weaker than it had been in the previous generation of mobile services technology. But it promised a comeback in 5G. The Dimensity’s price tag is expected to be significantly lower than that of Qualcomm’s latest Snapdragon chip, with long battery power and high energy efficiency.
It's just the latest reminder of how the Trump Administration's crackdown on Huawei will impact more than just Huawei. And for investors in American chip companies, that's definitely not a bad thing.