On a day it when the news emerged that Huawei has become the world’s largest smartphone maker, overtaking Samsung during April, it has also come to light that the Chinese company, now under-pressure from the US sanctions, is negotiating with the South Korean tech giant for a deal.
As per multiple media reports, Samsung and Huawei are sitting across the table and talking to hammer out a deal whereby the former would fabricate advanced chips for the latter’s 5G equipment, and Huawei would, in a return of favour, give up a good part of its smartphone market share.
The market has been speculating about this development ever since Washington put in place new export rules that came down on Huawei’s ability to source advanced microchips.
The US Commerce Department in May decreed that sale of computer chips to companies like Huawei, which are on its “entity list”, will require a license if they are produced with US technology, even if they are produced overseas by foreign companies.
At a governmental level, Seoul has reportedly conveyed to Washington that the restrictions on semiconductor sales to Huawei and other Chinese companies are “unacceptable”.
Huawei gets down to strategising
After the US rules kicked in, Huawei knew that it needed to rework its strategy. It understands that considering the mood in the US, things are bound to get tougher only.
In the event, it is reportedly trying to nudge Samsung and TSMC (Taiwan Semiconductor Manufacturing Co) towards building an advanced production line that does not use US equipment. But apparently TSMC is not ready to play ball with Huawei for multiple reasons.
But Samsung, emboldened by the political backing in Seoul, is more amenable to Huawei. Samsung is the world’s biggest fabricator of memory as well as logic chips after Taiwan Semiconductor Manufacturing Corporation,
Samsung seems to have collaborated with equipment manufacturers in Japan and Europe to build a small, 7nm (nanometer) production line that doesn’t use US equipment. Samsung hopes to actively attract multiple customers through this move.
The 7nm chips can be a lifeline for Huawei as it is crucial to its core business of telecommuications equipment.
As the U.S. issues trade rules that control American-made semiconductor equipment sales to China, Huawei is reportedly trying to persuade Samsung and TSMC to build an advanced production line that does not use U.S. equipment $AMAT $LRCX $KLAC https://t.co/pVdAo3C0aQJune 16, 2020
Why the deal makes sense
Smartphones are Samsung’s main business, whereas at Huawei, mobile phones contribute a paltry percentage to the company’s profits.
So by leaving the field open for Samsung to get bigger in the smartphones market, Huawei is only helping itself to consolidate its position in the telecommunications handset sector, as Samsung would help make advanced chips for Huawei’s 5G equipment.
Huawei may still be the largest smartphone retailer in China — it also has 39 percent of the region’s mobile device market. But it is still a regional player in this sector.
On the other hand, it is a biggie in the global telecommunications equipment business. Huawei is sitting on huge contracts to build 600,000 5G base stations across the world. Hence it needs to get its house in order in terms of supplies. Market reports say that Huawei has only a year and a half of TSMC fabricated networking gear chipsets on hand. A deal with Samsung would go a long way in solving Huawei’s existential issues.
By easing its legs off the pedal in the smartphones market, Huawei is doing a great help to Samsung which is under pressure to maintain its supremacy there. And Huawei naturally expects a big quid pro quo in chips manufacturing.
On the face of it at least, it looks like a win-win plan for both. But the last word on the matter has not been delivered yet.