US shuts Qualcomm door after Huawei has bolted

The US is holding up a stop sign, but the Chinese motorist has long since disappeared in a dust cloud. The reported revocation by the Department of Commerce (DoC) of a license that allowed Qualcomm to serve Huawei must rank as one of the most pointless and pathetic legislative moves of all time. At this stage, it will do nothing to slow down Huawei while leaving Qualcomm free to earn billions from other Chinese customers.

Whether that's wrong depends on geopolitical perspective. But US authorities have evidently decided Huawei remains a much bigger technology threat to western security than a whole flotilla of other Chinese companies that Qualcomm still counts as customers. They were proudly named by Cristiano Amon, Qualcomm's CEO, during his last earnings catch-up with analysts. OnePlus, Oppo, Vivo and Xiaomo are all there, as is Honor, a smartphone business previously owned by Huawei.

Unlike MediaTek, a Taiwanese rival, Qualcomm secured an export license to sell 4G chips to Huawei in late 2020, just before a change in US administration. Back then, it was a lifeline for the sanctions-battered Chinese vendor. HiSilicon, its in-house chips division, had been slowly replacing Qualcomm for years. But new US restrictions cut HiSilicon off from TSMC, the Taiwanese foundry it used to make those chips. An exemption from rules for Qualcomm kept Huawei's smartphone-producing consumer division on its feet. An authoritative source estimates Qualcomm has made about $1.2 billion from chip sales to Huawei since receiving that license.

No 5G chips allowed

Qualcomm's license, however, did not allow it to sell 5G chips, as Qualcomm has pointed out in filings with the US Securities and Exchange Commission (SEC). In a world turning to 5G, this means the value of the license has been diminishing fast, especially since Huawei's revelation of its own 5G chip in September last year.

"[If] you look at Huawei, as you've seen, they have launched multiple tiers of 5G devices already with their own chips," explained Akash Palkhiwala, Qualcomm's chief financial and operating officer, in answer to analyst questions on the recent call. "And clearly, we don't participate in those devices." The license covering 4G chips is "at the low end of the spectrum," he went on to say. Before news surfaced of the DoC decision, Qualcomm had been expecting no revenues from Huawei's product business starting in October 2024.

Even with the 4G help of Qualcomm, Huawei's consumer business crashed after US sanctions came into effect. Sales were down 50% in 2021, to about 243 billion Chinese yuan (US$33.6 billion), falling another 12% in 2022. The partial recovery that happened in 2023, when consumer revenues grew 17%, to more than RMB251 billion ($34.7 billion), seemed to owe just about everything to the Mate 60 Pro, the device Huawei unveiled in September that year.

To the annoyance of US hawks, teardowns carried out by western analysts revealed a 7-nanometer chip of the kind made by TSMC. The Taiwanese foundry produces them with a state-of-the-art process called extreme ultra-violet lithography (EUV). ASML, a Dutch company, has a monopoly in this EUV market and is forbidden by Dutch export rules from selling its EUV machines to Chinese foundries like SMIC. But SMIC was previously able to buy an older ASML technology called deep ultra-violet lithography. While less efficient than EUV, it appears to have done the job for HiSilicon.

Huawei's consumer revenues are still much lower than they were in 2020, but growth seems likely to continue, judging by analyst reports. New research by Omdia, a Light Reading sister company, shows Huawei shipped 13.1 million smartphones between January and March, twice the level it sold a year earlier, and credits the Mate 60 Pro for this performance.

The danger to Qualcomm stems not from the loss of Huawei as a customer but from a possible Huawei resurgence in China at the expense of Qualcomm's other customers there. Although Qualcomm does not break out China sales in quarterly SEC filings, the revenues it earned from shipments to China last year accounted for 62% of the $35.8 billion it reported in headline sales. And those China sales were down a fifth.

This had more to do with a smartphone malaise than any Huawei-related problems, and not all those chips go to Chinese customers. Qualcomm's geographical breakdown is based on the destination of the semiconductors being shipped. China sales, then, might cover chips sold to Samsung for assembly on Chinese soil in smartphones finally marketed to Europeans.

Qualcomm's sales were up 3% for the recent March-ending half, to about $19.3 billion, compared with the year-earlier period. It was bullish about Chinese business on its recent call, claiming revenues from Chinese original equipment makers were up 40% year-over-year for the recent half. If Huawei steals share from rivals, Qualcomm might also suffer.