New U.S. rule aimed at Huawei's influence focuses on semiconductor suppliers

The U.S. administration on Friday moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, in an action that could ramp up tensions with China.

The U.S. Commerce Department said it was amending an export rule to "strategically target Huawei's acquisition of semiconductors that are the direct product of certain U.S. software and technology."

Reuters first reported the news ahead of the department's release. The department said its "announcement cuts off Huawei's efforts to undermine U.S. export controls."

The rule change is a blow to Huawei, the world's No. 2 smartphone maker, as well as to Taiwan's Taiwan Semiconductor Manufacturing Co Ltd. (TSMC), a major producer of chips for Huawei's HiSilicon unit as well as mobile phone rivals Apple Inc. and Qualcomm Inc.

TMSC announced late Thursday it would build a $12-billion US chip factory in Arizona.

TSMC said Friday it is "working with outside counsels to conduct legal analysis and ensure a comprehensive examination and interpretation of these rules. We expect to have the assessment concluded before the effective date," the company said, noting thatthe "semiconductor industry supply chain is extremely complex, and is served by a broad collection of international suppliers."

Huawei, which needs semiconductors for its widely used smartphones and telecoms equipment, is at the heart of a battle for global technological dominance between the United States and China.

China says it may restrict Apple, Boeing

Huawei, which has warned that the Chinese government would retaliate if the rule went into effect, did not immediately comment on Friday. U.S. stock market futures turned negative on the Reuters report.

"The Chinese government will not just stand by and watch Huawei be slaughtered on the chopping board," Huaweichairman Eric Xu told reporters on March 31.

But the reaction from China was swift, with a report saying it was ready to put U.S. companies on an "unreliable entity list," as part of countermeasures in response to the new limits on Huawei, China's Global Times reported on Friday.

The measures include launching investigations and imposing restrictions on U.S. companies such as Apple Inc., Cisco Systems Inc. andQualcomm Inc., as well as suspending the purchase of Boeing Co. airplanes, the report said.

The Global Times is published by the People's Daily, the official newspaper of China's ruling Communist Party. While the Global Times is not an official mouthpiece of the party, its views are believed to reflect those of its leaders.

The United States is trying to convince allies to exclude Huawei gear from next generation 5G networks on grounds its equipment could be used by China for spying. Huawei has repeatedly denied the claim.

Huawei has continued to use U.S. software and technology to design semiconductors, the Commerce Department said, despite being placed on a U.S. economic blacklist in May 2019.

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Under the rule change, foreign companies that use U.S. chipmaking equipment will be required to obtain a U.S. licence before supplying certain chips to Huawei or an affiliate like HiSilicon.

In order for Huawei to continue to receive some chipsets or use some semiconductor designs tied to certain U.S. software and technology, it would need to receive licences from the Commerce Department.

Taking advantage of a loophole: Ross

Commerce Secretary Wilbur Ross told Fox Business "there has been a very highly technical loophole through which Huawei has been in able, in effect, to use U.S. technology with foreign producers."

Ross called the rule change a "highly tailored thing to try to correct that loophole."

Ross said in a written statement Huawei had "stepped up efforts to undermine these national security-based restrictions."

The Commerce Department said the rule will allow wafers already in production to be shipped to Huawei as long as the shipments are complete within 120 days from Friday. Chipsets would need to be in production by Friday or they would be ineligible under the rule.

The United States placed Huawei and 114 affiliates on its economic blacklist citing national security concerns. That forced some U.S. and foreign companies to seek special licences from the Commerce Department to sell to it, but China hawks in the U.S. government have been frustrated by the vast number of supply chains beyond their reach.

U.S. wants to shift rural areas from Huawei tech

Separately, the Commerce Department extended a temporary licence that was set to expire Friday to allow U.S. companies, many of which operate wireless networks in rural areas of the United States, to continue doing business with Huawei through Aug. 13. It warned it expected this would be the final extension.

Reuters first reported the administration was considering changes to the Foreign Direct Product Rule, which subjects some foreign-made goods based on U.S. technology or software to U.S. regulations, in November.

Most chip manufacturers rely on equipment produced by U.S. companies like KLA, Lam Research and Applied Materials, according to a report last year from China's Everbright Securities.

The U.S. administration has taken a series of steps aimed at Chinese telecom firms in recent weeks.

The U.S. Federal Communications Commission (FCC) last month began the process of shutting down the U.S. operations of three state-controlled Chinese telecommunications companies, citing national security risks. The FCC also in April approved Alphabet Inc. unit Google's request to use part of an 12,000-kilometre undersea telecommunications cable between the United States and Taiwan, but not Hong Kong, after U.S. agencies raised national security concerns.

This week, President Donald Trump extended for another year a May 2019 executive order barring U.S. companies from using telecommunications equipment made by companies deemed to pose a national security risk, a move seen aimed at Huawei and peer ZTE Corp.