With the U.S.-China trade war heating up, as Washington’s hard September 15 deadline for the cessation of provision of products to Huawei approaches, the high-tech sectors in Taiwan, the U.S., and China are experiencing considerable turbulence.

In late July, Reuters reported on the appointment of W. Patrick Wilson as vice president of government affairs at MediaTek USA. Wilson was most recently director of the Office of Business Liaison for the Department of Commerce.

One MediaTek executive relates that this is the first time the company has placed a high-level lobbyist in Washington. “Otherwise, what would we do after having put so much effort into it (chipmaking), only to come under sanctions?”

“Right now (MediaTek’s) situation is more perilous than before,” says Wei-Fu Hsu, former chief legal counsel for MediaTek, now retired and living in California.

How so?

Taking on big Huawei orders, yet potentially the next to be sacrificed

This past May 15, the United States Department of Commerce launched a new wave of restrictions against Huawei, mandating that any enterprise that supplies Huawei with semiconductor products containing U.S.-developed technology would require an export license. This has made it extremely difficult for smartphone IC foundries Qualcomm and Huawei subsidiary HiSilicon to supply Huawei. In fact, HiSilicon’s supply of smartphone chipsets is expected to be cut off completely as of September 15.

However, MediaTek consequently became a major beneficiary of the Trump administration’s latest interdiction. Since the latest wave of restrictions on Huawei was introduced, by the peak in late July the stock had risen by 77 percent over a two-month period.

Because, “given the inability to use its own (HiSilicon) and Qualcomm chips, Huawei has no choice but to turn to MediaTek. We forecast that the volume of MediaTek smartphone chipset shipments may grow by over 50 percent over the same period last year,” predicted Sanford C. Bernstein & Co.

However, while investors greeted this unexpected gift with glee, it has put MediaTek on eggshells, afraid of becoming the next to be sacrificed amid the Sino-U.S. conflict.
Still, whatever will be will be. Next, two seemingly unrelated industry news events transpired one after the other, to which Qualcomm pushed back.

Qualcomm Rats: MediaTek Also uses US technology 

During its shareholders meeting, Qualcomm announced that Huawei had paid Qualcomm a US$1.8 billion settlement and reached agreement on long-term patent licensing. That news sent Qualcomm’s stock soaring by nearly 13 percent in after-hour trading.

First, an August 8 Wall Street Journal report exposed Qualcomm lobbying documents aimed at the U.S. government, indicating that Qualcomm hoped to lobby the Trump administration to permit the company to supply Huawei with the latest 5G smartphone chipsets after the September 15 deadline.

This is nothing new. However, at this time Qualcomm formally implicated MediaTek, naming both MediaTek and Samsung in the documents as two fish that had gotten away from the Commerce Department’s restrictions.

“If Qualcomm is subject to export licensing, but its foreign competitors are not, U.S. government policy will cause a rapid shift in 5G chipset market share in China and beyond,” the American chipmaker said. That would hamper American research and leadership on 5G issues, it said, calling that “an unacceptable outcome for U.S. interests.”

One foreign investment analyst offered, “Qualcomm’s attitude is that it wants the U.S. government to clarify its stance…. Either everyone could make chips for Huawei or nobody can.”

One former MediaTek executive relates that the company’s design process extensively employs U.S. technology, putting it in a gray area to begin with. “If the U.S. Commerce Department wanted to make things difficult and not allow shipments, that could happen.”

Several senior tech industry executives and foreign investment analysts believe that Huawei chose to give Qualcomm a huge payout at this time was very likely an “advance payment” for Qualcomm to get the U.S. government to lift restrictions.

“The timing of the settlement is very unusual,” relates a top executive for a major U.S.-based semiconductor maker. Qualcomm and Huawei’s licensing dispute went on for many years, yet they suddenly just paid out the settlement in one lump sum. “Everyone’s thinking: Huawei may have worked it out with Qualcomm, saying if you help me take care of the U.S. government or Biden, I’ll make it worth your while.”

Why is Qualcomm nervous? Product market share overtaken

What’s more, MediaTek staged a major rebound on the Chinese market this year, posing a major threat to Qualcomm.

Analysts at research survey firm DIGITIMES Research note that in the second quarter of this year, MediaTek’s share of the smartphone processor market made by Chinese enterprises reached 38.3 percent, jumping to the top position. Meanwhile, Qualcomm dropped from 41.8 percent in the first quarter to 37.8 percent in Q2, falling to second place.

MediaTek CEO Rick Tsai shared the good news at the second-quarter shareholders meeting, stressing that last quarter revenue of NTB was the highest in 14 quarters, outperforming financial forecasts. Tsai further predicted that the company could achieve a 40 percent share of the Chinese 5G market this year, saying, “This year is a year for growth.”

Still, as soon as word spread of Qualcomm’s partnership with Huawei, Morgan Stanley Securities put out its latest report on August 10, noting that the greatest risk to MediaTek would be if the U.S. government allowed Qualcomm to ship 5G chipsets to Huawei.

However, responding to the September 15 interdiction, Huawei’s HiSilicon will stockpile chipsets through the first quarter of 2021. Accordingly, industry insiders predict that the impact will not be felt across the industry until next year.

Worst case sees Huawei fall, market reshuffle

Most foreign investors believe that, even if Qualcomm is given the green light, or even if MediaTek is also restricted, the impact on MediaTek would not be as great as imagined.

The main reason is that Chinese manufacturers are already fully on board with decoupling from the US; Qualcomm cannot easily gain Chinese manufacturers’ trust, thus using MediaTek to balance risks remains their chief choice.

In the report, Morgan Stanley semiconductor industry analysts noted that, even if Qualcomm’s lobbying efforts succeed and the company can ship 5G chipsets to Huawei, dropping MediaTek's share of chipsets used in Huawei products to 40 percent, it would still not impact MediaTek’s advantage in China. “Qualcomm shipping orders were already a basic assumption of ours for next year. And even if that is revised, MediaTek stock price returns are still attractive.”

Sebastian Hou, head of technology research at CLSA, gives the worst-case scenario.

Hou notes that if neither MediaTek nor Qualcomm are able to ship products, then Huawei would not be able to obtain competitive chipsets from anywhere.

“The worst case would be that Huawei folds. But the market of 200 million smartphones won’t change, and consumers will still be buying mobile phones. So the market would just reshuffle; it might even be good for MediaTek,” he opines.

Hou says that, as the malice between the U.S. and China worsens, Beijing could retaliate by banning orders from Qualcomm, while companies like Xiaomi, Oppo and Vivo could band together and boost orders with MediaTek. That way, MediaTek could still maintain a 40 percent market share in 2021.

Wei-Fu Hsu reminds us that, under the current competitive climate between the U.S. and the PRC, where conflict may be unavoidable, the worst-case scenario - that MediaTek cannot ship products to any Chinese smartphone manufacturer - could emerge. “Trump will practically stop at nothing,” Hsu asserts.

“The more desperate Trump’s election situation gets, the more perilous MediaTek’s plight becomes. Just wait until September and October, when everyone will be on pins and needles,” says Hsu.

---

Have you read?
♦ Taiwan’s Epidemic Prevention Technology: an Inside Look
♦ Gogoro’s EV Dream Facing Major Headwinds
♦ A Breath of Scented Fresh Air for Stale Household Cleaner Brand

Translated by David Thoman
Edited by TC Lin
Uploaded by Penny Chiang