Huawei’s Profit Decline in Q3 Draws Focus on TSMC Chips in Products

On March 22, 2024, a senior U.S. official pointed out that China's largest chip manufacturer, SMIC (Semiconductor Manufacturing International Corporation), is producing 7nm chips for Huawei, a telecom giant under sanctions, which may violate U.S. law. Following the news, SMIC's stock price plunged by over 5% by the day's close. (Video screenshot)

[People News Report] On Thursday (31st), Huawei announced that although its revenue for the first three quarters grew nearly 30%, its profit declined. Huawei’s founder, Ren Zhengfei, said that Huawei is still struggling. Recently, it was revealed that Taiwan's TSMC chips appeared in Huawei products subject to sanctions, drawing concern from U.S. congress members.

According to a report by First Financial, Huawei’s revenue in the first three quarters increased by 28.3% year-on-year, but its net profit dropped by 13.8%. Although Huawei did not disclose the performance of each segment in its quarterly report, market research agencies indicate that its mobile terminal, automotive business, and computing system based on the Ascend platform have been key to the recovery of Huawei's performance in the first three quarters of this year.

According to Radio Free Asia, Ren Zhengfei recently remarked, “To this day, we still cannot say we are going to survive. Ninety-nine percent of Chinese companies can cooperate with the U.S.; they are not under sanctions. Their chip computing power is higher than ours, and they can buy better things than we can. In these circumstances, can we survive in the coming years? Don’t think that because we are gathered here today, we have grand dreams; we are still struggling.”

Huawei’s Sanctions: High Chip Costs Erode Profits

Lin Hsiu-min, adjunct lecturer at Soochow University’s Department of Business Administration and a tech columnist, told Radio Free Asia that publicly available data shows a significant increase in revenue from Huawei’s consumer and automotive products, especially its 5G smartphone series. The Mate Pro series, launched last year, marked Huawei’s return to the high-end market. However, the yield rate of Huawei’s SMIC 7nm chips is relatively low, and the cost is much higher than competitors like OPPO and Xiaomi, which use 5nm chips. “Revenue seems to have risen significantly, but the higher costs are eroding real profits and causing rapid declines.”

Rumors of Huawei Using "White Gloves" to Order TSMC Chips

According to Reuters and Bloomberg, TSMC recently found that chips produced for a specific client had ended up in Huawei’s hands. Huawei allegedly placed orders with TSMC through “white gloves.” TSMC stated that the company has always complied with all regulations, and in mid-October, it stopped supplying to a suspicious customer and reported the incident to the U.S. Department of Commerce. The relevant departments are currently conducting a thorough investigation.

High Cost of Huawei’s Indirect Chip Acquisition

“Huawei’s increased operating expenses are also due to its ‘computing power’ issue,” Lin Hsiu-min analyzed, particularly pointing out the high manufacturing cost of Huawei’s Ascend 910B. The “Ascend 910B” reportedly places orders indirectly with TSMC, requiring multiple channels to complete the processing, resulting in huge expenses, and ultimately making the cost per chip possibly astronomical. “These additional operational expenses have increased Huawei’s costs.”

U.S. Congress Concerned About Chip Regulation

On the 31st, Reuters reported that U.S. Democratic Senator Mark Warner criticized the Biden administration for its “apparent lax monitoring” of TSMC. Warner wrote to President Biden, stating, “The use of TSMC’s chips by Huawei has serious implications for U.S. national security.” He continued, “I urge you to take immediate action to assess and strengthen the effectiveness of existing control measures.”

The White House and Huawei did not respond to requests for comment. TSMC also declined to comment. The Department of Commerce, responsible for export policies, stated that “no previous administration has taken a tougher stance against China (CCP) than the current Commerce Department.”

SMIC Still Unable to Achieve Commercial Value

Liu Peizhen, director of the Taiwan Economic Research Institute’s Industrial Database, told Radio Free Asia that as the global leader in advanced processes, TSMC’s high competitiveness is highly coveted by various countries. This incident highlights two main issues. First, U.S. controls on Chinese semiconductors still have loopholes, and it is likely the U.S. will strengthen policy measures in the future. TSMC also needs to enhance internal controls to prevent problematic orders. However, TSMC cannot enforce international laws on its own, and public power intervention is required to ensure industry safety.

“Secondly, China’s (CCP) domestic advancement has been stalled by the U.S.’s bottleneck policies,” said Liu Peizhen. “SMIC’s technology is still immature with low yield rates. Current production is nominal and lacks commercial value, forcing Huawei to rely on third parties to obtain TSMC’s advanced chips to enhance its performance.”

Lin Hsiu-min Warns of CCP Semiconductor Penetration

Lin Hsiu-min noted that since U.S. sanctions, the CCP’s semiconductor sector has focused more on penetration than technical strength. Besides planning billion-dollar schemes to defraud TSMC, the CCP also aims to promote narratives within Taiwan, such as “China’s (CCP’s) semiconductors will surpass the U.S.,” intending to influence Taiwanese society and perception. “Those who truly understand the semiconductor strength of the CCP versus Taiwan, or the free regions like the U.S. and Taiwan, realize that the gap between them is vast.”

Professor Huang Chih-tsung of the Department of Public Finance at National Chengchi University stated in an interview that the issue of companies using “white gloves” reflects the profit-driven nature of businesses, which cannot rely solely on ethical persuasion. Thus, mandatory controls are essential. The U.S. has already begun investigating this issue and confirmed such operations, although related companies deny involvement. It is expected that the U.S. will take stricter measures to prevent sensitive technology from flowing to the CCP.