SHANGHAI - Huawei Technologies Co Ltd is gradually shifting production of chips designed in-house away from Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and towards a mainland Chinese firm in preparation for more US restrictions, sources familiar with the matter said.
The move towards Shanghai-based Semiconductor Manufacturing International Corp (SMIC) comes as Washington readies new rules which would require foreign companies using US chipmaking equipment to obtain a license before supplying chips to Huawei - rules that would directly affect TSMC.
It also highlights how US restrictions against Huawei can act as an impetus for Chinese companies to accelerate the development of homegrown technology.
The US government alleges Huawei, the world's biggest maker of telecom network equipment and a major smartphone manufacturer, is a national security risk as its equipment could be used by Beijing to spy, and has barred US firms from selling to the Chinese firm without a license. Huawei has repeatedly denied its products pose a security threat.
Huawei's chip unit, HiSilicon, began to direct some of its engineers towards designing for SMIC rather than TSMC in late 2019, said one of the sources, who was not authorised to speak to the media and declined to be identified.
"Before, Huawei wanted to work with top notch manufacturers, and SMIC was just second-tier," the person said. "We are now moving resources to SMIC to speed up our help to them."
A Huawei spokesman called the shift "common industry practice" in a statement to Reuters. "Huawei considers carefully issues such as capacity, technology and delivery when choosing semiconductor fabrication plants," it said.
TSMC, the world's top contract manufacturer of semiconductors, said it does not comment on individual customers. SMIC declined to comment.
It was not immediately clear how much more production is being outsourced to SMIC. Huawei has also said it would look at South Korean firms, other Taiwanese and mainland Chinese firms as alternative sources for chips.
While SMIC is seen as the strongest mainland China alternative to TSMC, it remains well behind TSMC in its technological expertise and US authorities have already taken measures to prevent it from acquiring the most advanced chip-making equipment.
TSMC does not reveal how much revenue each customer provides but analysts estimate that by late 2019 Huawei accounted for 13 percent to 15 percent of TSMC's sales. Chip production that could be shifted to SMIC likely only accounts for 1 to 3 percentage points of that, they said.
"Right now, there's a still sizeable gap between TSMC and SMIC in terms of skills, stability, and reliability," said Gu Wenjun, senior analyst at Shanghai-based consultancy ICWise.
TSMC, for example, is currently perfecting its 5-nanometre process node technology. SMIC recently introduced 14nm technology in late 2019, which TSMC rolled out officially years earlier.
Experts say HiSilicon's latest Kirin processors, used exclusively in Huawei mobile phones, can only be made by TSMC at the moment, although they add that earlier Kirin processors could be outsourced to SMIC.
Other chips produced by HiSilicon, such as those for so-called IOT devices, power management, or set-top boxes, could be sent to SMIC, they said.
Gaining more business from Huawei would also help SMIC improve its processes as Huawei would be able to pass on valuable knowledge gained in working with TSMC, the analysts added.
(Reporting by Josh Horwitz; Additional reporting by Stephen Nellis; Editing by Jonathan Weber and Edwina Gibbs)