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Starting Sept. 15, China's telecom giant Huawei — once a symbol of Chinese technology prowess — will be cut off from essential supplies of semiconductors. Without those chips, Huawei cannot make the smartphones or 5G equipment on which its business depends, business analysts say.

The sanctions against one of China’s most successful technology companies were announced in August, when the United States introduced a new set of rules that prohibit foreign chipmakers that rely on U.S. technology from selling any chips to Huawei without first obtaining a special license.

In recent weeks, suppliers from South Korea and Taiwan have all indicated they will comply with the sanctions and cease their supply of semiconductors to Huawei on Tuesday, the day the new moves against the Chinese company comes into force.

“Unfortunately, in the second round of U.S. sanctions, our chip producers only accepted orders until May 15. Production of the chip will stop on Sept. 15,” Richard Yu, chief executive of Huawei's consumer business, said last month. “Because there is no Chinese chip manufacturing industry to support, Huawei is faced with the problem of no chips.”

Richard Yu, CEO of Huawei Technologies Consumer Business Group, holds a Huawei Mate Xs foldable smartphone, as he talks to the audience during Huawei stream product launch event in Barcelona, Spain, Feb. 24, 2020.

Microchips

For all of China’s efforts to become a global leader in high-technology, the factory of the world is yet not able to manufacture top-level contenders in one crucial area — the microchip, the nervous system that runs just about every electronic device.

An important mark of a microchip’s level of sophistication is how many transistors can be placed on its surface. The smaller the size, measured in nanometers, the more advanced the microchip.

China's best manufacturing process is believed to be able to make 14-nanometer microchips, which are several generations behind Samsung and Taiwan Semiconductor Manufacturing Company (TSMC). Samsung reached this standard in 2014. TSMC, the world’s largest contract chipmaker, is already making 5-nanometer chips.

Kunpeng 920 chipset is on display at Huawei's booth during the 2020 China International Fair for Trade in Services (CIFTIS) in Beijing, Sept. 4, 2020.

While some of the most advanced semiconductor manufacturers are based outside the U.S., the industry is heavily dependent upon U.S. suppliers to provide everything from design software to manufacturing equipment.

Washington first placed Huawei on a trade blacklist in May 2019, citing national security concerns. However, this ban did not include most foreign-produced chips. In May, the U.S. extended the ban to cut off Huawei from its non-American suppliers, which affects China's own semiconductor companies whose market is in China.

Early last month, China's leading chipmaker, Semiconductor Manufacturing International Corporation (SMIC), indicated it will abide by the U.S. rules and stop selling chips to Huawei. Like all of the semiconductor foundries, SMIC relies on U.S.-based companies to obtain key production equipment.

"The dominance of U.S.-origin technology in upstream sectors of the global semiconductor supply chain means that Chinese ICT (Information and Communication Technologies) firms across the board are exposed to U.S. export controls, regardless of what happens to SMIC or Huawei as individual companies," John Lee, a senior analyst at the Mercator Institute for China Studies (MERICS), told VOA.

China’s failed attempts

Beijing has a long history of angst about the country's dependence on foreign semiconductors. Its strategic planning related to this key industry dates back to the 1950s, when the State Council convened a group of scientists to develop an “Outline for Science and Technology Development, 1956–1967,” which identified semiconductor technology as a “key priority.”

In recent decades, from the "531 Development Plan" launched in 1986 to the multibillion-dollar National Integrated Circuit Industry Investment Fund that was explicitly established for the chip sector in 2014, the country has poured considerable state resources into its semiconductor aspirations.

A report released in July 2019 by U.S. International Trade Commission said the fund, along with provincial and municipal Integrated Circuit-related funds, are well on their way to reaching the goal of $150 billion.

James Andrew Lewis, senior vice president and director of the Technology Policy Program at CSIS, told CNBC last week that China might outspend the U.S. “1,000 to 1" when it comes to investing in semiconductors.

In 2016, China's President Xi Jinping noted, “The fact that core technology is controlled by others is our greatest hidden danger.”

Xi emphasized the point again last Friday when chairing a symposium of scientists on the development of science and technology during the 14th Five-Year Plan (2021-2025) period.

“Some key core technologies are subject to others,” he said.

Last week, in response to the new U.S. restrictions on Huawei, China announced a sweeping new set of government policies to expand its domestic semiconductor industry by providing extensive support for the next generation of semiconductors in the 14th Five-Year Plan.

In hopes that key technologies from the foreign firms will get transferred to Chinese companies, Beijing has also encouraged U.S. chipmakers to form joint ventures with domestic firms. According to MERICS, the think tank based in Germany, China's quest for foreign technology at times even targets entire industries.

A visitor is seen at a Huawei P40 Pro+ stand at the IFA consumer technology fair in Berlin, Germany, Sept. 3, 2020.

“Almost all of the large semiconductor enterprises in the United States have received investment offers from Chinese state actors,” a research report by MERICS said.

On the other hand, Douglas Fuller, a professor at City University of Hong Kong who studies the technology industry, said China should not be viewed as a failure.

"There are only four firms ahead of SMIC in foundry services — two from Taiwan (TSMC and UMC), Korea's Samsung, and U.S./UAE's GloFo," Fuller told VOA in an email.

As for mass manufacturing, there are only two places with the leading technology —- TSMC in Taiwan and Samsung in Korea, he said.

"Intel is even playing catch-up. Thus, other than Taiwan and Korea, the whole rest of the world is behind the cutting edge of manufacturing tech in this industry, including the U.S., Japan, Israel and all of Europe," said Fuller.

Will Huawei survive?

It remains unclear where Huawei will be able to buy its chips. Taiwanese chipmaker MediaTek said last month it had applied to the U.S. government for permission to continue supplying Huawei after new U.S. rules take effect. In the meantime, Huawei has reportedly stockpiled up to two years' worth of silicon to keep its business running.

"In the short term, it is difficult to see any effective options available to Chinese firms targeted by U.S. export controls on semiconductors," said Lee, whose research focuses on the rise of Chinese digital technology.

As for the future, analysts say the U.S. will unlikely be able to stop China from making basic semiconductors. Given enough time, the country's vast consumer market for electronics and decades of investment will eventually make it a chip producer.

"In the medium to long term, China will probably be able to substitute U.S. technology and develop a complete domestic semiconductor supply chain (though whether it can catch up to foreign firms at the technological cutting edge is another issue)." Lee said in an email.

James Lewis, director of the Technology Policy Program at the Center for Strategic and International Studies (CSIS), wrote in May that Huawei has been harmed by the U.S. effort, "but the Chinese government will not allow it to collapse — Huawei is too important."