Technology infrastructure has become a heated battleground for the US and China. We talked about TSMC’s plan to build a new fab in Arizona, and the latest restriction on Huawei’s subsidiary HiSilion earlier this week. But what is the US trying to achieve exactly? We want to share some of the most popular theories and our assessment of the situation today.

Theory 1: Protect national security

This is the official explanation provided by the White House, claiming that Huawei has been building backdoors in their products and spying on users. Restricting Huawei’s access to US technology is a necessary step to protect national security. However, there hasn't been any evidence of Huawei actually involving in such activities, and the major US carriers are not using Huawei equipment anyway. This is nothing more than an excuse to legitimize US’s sanction on Huawei in our opinion.

Theory 2: Create leverage in trade negotiation

This is a more likely reason in our view, and it’s a negotiating tactic Trump has repeatedly used in the past. The US first put Huawei on the US entity list in May 2019, shortly after the escalation of the US-China trade war. The restriction significantly limited Huawei’s ability to source semiconductor components from US companies and created a challenging situation for Huawei.

While the administration was repeatedly leveraging Huawei during the negotiation in the following months, it also stressed multiple times that trade-war and Huawei as two separate issues. Interestingly, when the US and China reached the phase 1 deal in late 2019, Huawei was not part of it. It is almost certain that China wanted to resolve this issue badly, but the fact that it’s not in the phase 1 deal showed that creating leverage in trade negotiation is only part of the reason or simply a byproduct that’s nice to have.

Theory 3: Slowing down China’s momentum in 5G infrastructure and smartphone

The most popular theory currently is that the US is trying to slow China down from successfully building a large 5G infrastructure networks, and delay the 5G rollout in China. Huawei is the largest telecom equipment provider and second-largest smartphone provider in the world. Cutting off Huawei’s supply chain will no doubt negatively impact China’s progress in 5G.

However, Huawei is not the only solution China currently has. On the smartphone side, Xiaomi, Oppo, and Vivo are all aggressively rolling out 5G smartphones, yet there is no restriction putting on them by the US so far. On the infrastructure side, ZTE is another major telecom equipment provider supporting the aggressive 5G deployment by the carriers. While ZTE was under US sanctions back in 2018 for doing business with Iran, it is mostly back to business as usual after paying the fine and a management overhaul, with no major limit for it buying key components from US suppliers. Albeit we think this theory is valid, it is far from a complete picture.

If none of the theories above captures the complete picture, what’s the missing piece? The biggest difference between Huawei and the other companies mentioned above is Huawei’s semiconductor design unit, HiSilicon. After decades of continued investment, HiSilicon turned itself from a cost center to Huawei’s biggest asset, became the first mainland-China based company to breaks into the top 10 semiconductor companies globally. More importantly, it has the ability to design many of the key semiconductor chips used for smartphone and telecom equipment, while other Chinese companies like Xiaomi and ZTE heavily rely on US suppliers including Qualcomm and Xilinx.

China has made it clear that achieving semiconductor self-sufficient is a top strategic priority over the next decade, and HiSilicon is the first domestic company able to compete globally. As we have said many times before, the semiconductor is at the heart of the technology infrastructure that is crucial for the digital economy in the future. The US is currently in a solid lead in advanced semiconductor design, from smartphone/PC processors all the way to machine learning/artificial intelligence processors. If China successfully develops an advanced local supply chain, it will not only impact the US semiconductor industry but likely the entire technology sector. This is probably not something the US would hope to see, and exactly the reason why we believe the real goal of targeting Huawei is to stop China’s ambition in technology infrastructure and semiconductors in particular. If we were right, pressuring HiSilion is likely just a start.