Exclusive: U.S. prepares crackdown on Huawei’s global chip supply – sources


(Reuters) – Senior Trump administration officials have agreed to new measures to restrict the global supply of chips to China's Huawei Technologies, sources familiar with the matter said, while the White House accelerates criticism of China for coronavirus.

ARCHIVE PHOTO: The Huawei company logo is depicted at Shenzhen International Airport in Shenzhen, Guangdong province, China on July 22, 2019. REUTERS / Aly Song / File Photo


The move comes as ties between Washington and Beijing become more tense, with both sides exchanging barbs about who is to blame for the spread of the disease and growing turmoil over the expulsion of journalists from both countries.

Under the proposed rule change, foreign companies using chip-making equipment in the U.S. would be required to obtain a license in the U.S. before supplying certain chips to Huawei. The Chinese telecommunications company was blacklisted last year, limiting the company's suppliers.

One of the sources said the rule change aims to reduce chip sales to Huawei by Taiwan Semiconductor Manufacturing Co (2330.TW), a major chip producer for Huawei's HiSilicon unit, as well as the world's largest contract maker.


It is unclear whether President Donald Trump, who seemed to back down on the proposal last month, will approve the rule change. But if completed, it could be a blow to Huawei and TSMC, affecting American companies as well, sources said.

"This will have a much more negative impact on American companies than on Huawei, because Huawei will develop its own supply chain," said lawyer Doug Jacobson. "Ultimately, Huawei will find alternatives."

A person familiar with the matter said that the U.S. government has made a major effort to ensure that impacts on U.S. industry are minimal.


The move could anger Beijing, which has spoken out against a global campaign by the United States to force allies to exclude Huawei from its 5G networks for espionage concerns. Huawei denied the allegations.

Most chip manufacturers rely on equipment produced by American companies like KLA Corp (KLAC.O), Lam Research (LRCX.O) and applied materials (AMAT.O), according to a report from last year by Everbright Securities in China.

Equipment manufacturers did not immediately respond to requests for comment.

The decision was made when US officials from various agencies met and agreed on Wednesday to amend the Foreign Direct Product Rule, which subjects some products made abroad based on US technology or software to US regulations, said sources.

Participants likely included senior officials from the National Security Council and the US Department of State, Defense, Energy and Trade. None of them responded to requests for comment.

Huawei declined to comment. TSMC said that "it is unable to answer hypothetical questions and does not comment on any individual customer".

One of the sources said that the rule change aims to restrict the sale of sophisticated chips to Huawei and not to older, commoditized and widely available semiconductors.

"It is impossible to determine the impact until we know the technical limits that can be applied," said Washington attorney Kevin Wolf, a former Commerce Department official.

"Different foundries produce different chips with different capacities, so you don't know which ones are most affected until you know the technical limits," he said.


The United States blacklisted Huawei in May last year, citing national security concerns. The entity listing, as it is known, has allowed the U.S. government to restrict sales of products made in the U.S. to the company and some more limited items made abroad that contain US technology.

But under current regulations, major foreign supply chains remain out of reach of U.S. officials, fueling frustration among China's government hawks and instigating an effort to tighten the company's export rules, Reuters reported in November.

Hawks' efforts came at risk last month when Trump reacted strongly against the proposed crackdown, after Reuters and the Wall Street Journal said it was being considered a measure to block global chip sales to Huawei.

“I want our companies to be allowed to do business. I mean, things are put on my desk that have nothing to do with national security, including chip makers and several others. So, let's give up and what will happen? They make these chips in a different country or in China or elsewhere, "Trump said.

Additional reporting by Mike Stone in Washington, edited by Chris Sanders, Nick Zieminski and Dan Grebler


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