Teardown analysis reflects impact of U.S. sanctions on former No. 2 player

NORIO MATSUMOTO, HIDEAKI RYUGEN and TAKASHI KAWAKAMI, Nikkei staff writers

TOKYO/GUANGZHOU — Huawei Technologies has sharply increased the use of parts made in China in its latest smartphone as U.S. sanctions banning American companies from selling to the Chinese telecommunications group continue.

Nikkei, together with Tokyo-based research specialist Fomalhaut Techno Solutions, took apart Huawei’s Mate 40E, which is compatible with fifth-generation networks, and found that Chinese-made parts account for roughly 60% of the total value of components — twice as much as the Mate 30, the previous model.

Huawei remains reliant for some key semiconductors on U.S.-made chips it has in stock. That vulnerability makes it likely that the company will fall even further behind rivals as time passes.

Samsung captured the biggest share of the global smartphone market in the first half of 2021, according to International Data Corporation, a U.S. company. Huawei ranked second but has since crashed out of the top five rankings.

The Mate 40E was released in China in March. Nikkei and Fomalhaut identified the origin of each component to make their analysis.

Fomalhaut estimated the manufacturing cost of the Mate 40E to be $367 — virtually the same as the Mate 30, which went on the market in September 2019. The value of Chinese components was 56.6% in the Mate 40E, up from 30.0% previously.

The increase is mostly attributable to an organic electroluminescence display made by China’s BOE Technology Group that replaces a display from Samsung Electronics. The component accounts for nearly 30% of the overall value of the smartphone.

“Although BOE lags two years or so behind Samsung in technology, Huawei is actively increasing the use of BOE-made parts to compete with Samsung in the smartphone market,” said Yoshio Tamura, president of Asian Operations at Display Supply Chain Consultants, a U.S. research company told Nikkei.

Huawei used to have no option but to use Qualcomm chips as the “brain” of its smartphones. The teardown found the performance of the Kirin 990E chip — designed by Huawei subsidiary HiSilicon and manufactured by Taiwan Semiconductor Manufacturing Co. — equivalent to similar American chips. It was also used in the Mate 30.

HiSilicon is also the source of the Mate 40E’s antenna switch — a communications chip — as well as one of the power control chips. Other Chinese components include the fingerprint sensor and battery.

Fomalhaut Director Minatake Kashio said the teardown confirmed “further advances in self-production and procurement of homemade components” that Huawei embarked upon prior to the U.S. sanctions.

In early 2019, President Donald Trump’s administration banned Huawei from conducting business with American companies. In the autumn of 2020, the U.S. added an effective ban on the supply of semiconductors that used U.S. technology to the Chinese company. Huawei’s smartphone business continues to struggle under the administration of President Joe Biden, which has kept up the pressure.

Huawei has been shifting its procurement onshore as it runs down its U.S. inventory. American parts accounted for just 5.2% of the total value of the Mate 40E, but that was actually up from 2.6% in the Mate 30. There are six kinds of U.S. semiconductors in the new model compared to two in the old one.

The teardown found no American components compatible with 5G networks. But the Mate 40E has Qualcomm chips for core functions, such as processing communication ciphers. The device also contains a 4G semiconductor from Qorvo, a U.S. manufacturer. Kashio believes Huawei “possibly used U.S.-made chips it had procured and accumulated before the sanctions.”

Since U.S. sanctions apply to Kirin chips from TSMC, Huawei will have to decide how fast its uses up its stock and where to find another source.

The smartphone parts shortage is not only affecting quality but also limiting Huawei’s production capacity. Huawei’s 5G units, including the Mate 40E, are generally out of stock at sales outlets, according to people familiar with the situation.

The P50 family of smartphones Huawei launched in August only includes 4G models with no 5G version.

The teardown revealed that 15.9% of Mate 40E components by value are Japanese made. This was a fall from 24.5% in the Mate 30 as a memory device produced by Kioxia, formerly Toshiba Memory, was replaced by a Samsung product.

There are, however, a number of components that are only produced by Japanese companies, including sensors and signal processing devices. The Mate 40E has an image sensor in its camera from Sony Group. The teardown identified components from other Japanese companies, including Murata, TDK, Taiyo Yuden and Asahi Kasei.

“If [Huawei] asks us to supply parts, we have to comply even under the U.S. sanctions,” an official at a Japanese supplier told Nikkei. “There are even cases of executives asking directly. We will make shipments within an allowable range.

South Korean components made up 37.2% of the Mate 30, but this plunged to 11.5% in the Mate 40E, behind Chinese and Japanese parts. With the Samsung display replaced by a BOE product, only a storage unit and some memory chips remain.