This chipmaker was a winner in the U.S. crackdown on Huawei. Now, it’s another victim

The Taiwanese chipmaker MediaTek was poised to be one of the largest beneficiaries of the United States’ yearslong campaign against Huawei, the Chinese telecom giant. Now it finds itself as a likely victim of the latest round of the U.S.-China tech war.

On Monday, the U.S. Department of Commerce announced that it would restrict Huawei and 38 of its affiliates from obtaining any semiconductor chips that are produced with American technology or software.

The U.S. government argues that the measure is in the interest of national security; it accuses Huawei of feeding data directly to the Chinese Communist Party (CCP). “We will not tolerate efforts by the CCP to undermine the privacy of our citizens, our businesses’ intellectual property, or the integrity of next-generation networks worldwide,” U.S. Secretary of State Mike Pompeo said in a statement in support of the new order.

In response to the ban, Chinese foreign ministry spokesperson Zhao Lijian said on Tuesday that “China firmly opposes the deliberate smearing and suppression of Chinese enterprises including Huawei by the U.S.” He also said U.S. allegations that Huawei poses a threat to U.S. national security are “totally baseless.”

Previous actions had already restricted Huawei’s access to semiconductors, but the new order aims to further starve Huawei of chips by eliminating work-arounds that allowed it to buy chips designed by third parties.

The measure escalates the Trump administration’s crackdown on Huawei, with some seeing it as a “death sentence” for the tech giant, but it also places chipmakers like MediaTek in the crosshairs of U.S. regulators for the first time.

The MediaTek loophole

In May, the U.S. government issued an order that banned U.S. technology from being used to produce chips designed by Huawei. The world’s largest chipmaker, Taiwan Semiconductor Manufacturing Company (TSMC), endured the brunt of that edict, since it custom-made chips for Huawei with a manufacturing process that relied on American technology.

TSMC complied with the U.S.’s order and signaled it would drop Huawei as a client, despite Huawei accounting for 13% of its revenue.

The May directive severed Huawei’s supply of custom-made chips, but it still gave Huawei a fallback option: buying off-the-shelf chips designed by a third party.

Enter MediaTek. MediaTek also uses U.S. technology, but it designs its own chips, whereas TSMC manufactures chips designed by the end user, in this case, Huawei. That key difference made MediaTek a possible lifeline for Huawei. Instead of sourcing custom-made chips from TSMC, Huawei could order generic chips from MediaTek and put them into Huawei devices.

On a July 31 earnings call, MediaTek CEO Lih Shyng Tsai declined to speak about its business with Huawei. But on the same call, Tsai said that MediaTek expected to supply chips to 40% of all 5G phones in China by the end of the year.

Achieving that ambitious feat could only happen if MediaTek’s chips are “widely adopted” by Huawei, Brady Wang, a semiconductor analyst at Counterpoint Research in Taipei, wrote in a note about the call.

MediaTek did not respond to Fortune’s request for comment.

Investors certainly saw the loss of Huawei’s custom chips as MediaTek’s gain. Company shares, listed on the Taipei stock exchange, nearly doubled from April to July this year.

The chip crash

That was then.

MediaTek’s fortunes changed dramatically with Monday’s order, which essentially closed the loophole that MediaTek fit so nicely into.

The new directive says that any overseas chipmaker that uses U.S. technology and sells chips to Huawei—no matter if the chips are specifically designed for Huawei or generic chips for Huawei’s use—must obtain a U.S. license.

U.S. Commerce Secretary Wilbur Ross said the ban was specifically meant to target Huawei chip suppliers that hadn’t been addressed in previous U.S. actions.

“As we have restricted its access to U.S. technology, Huawei and its affiliates have worked through third parties to harness U.S. technology in a manner that undermines U.S. national security and foreign policy interests,” said Ross. “This multipronged action demonstrates our continuing commitment to impede Huawei’s ability to do so.”

MediaTek’s stock plunged by nearly 10 percentage points in Taipei on Tuesday after the announcement. That day, MediaTek said in a regulatory filing that the ban would not have a “significant impact” on the company’s short-term operations. But investors appeared to remain skeptical; the company’s stock price continued its downward slide on Wednesday.

“After the new U.S. restrictions, Huawei’s travails are now also the travails of MediaTek,” Wang told Fortune. Among Huawei’s chip suppliers, MediaTek will be hardest hit, Wang said, as it was expected to design the largest share of chips in Huawei’s 5G phones.

The new U.S. order slammed MediaTek, but it wasn’t alone. Shares of other Asian chipmakers similarly fell on Tuesday. In Taiwan, stock of chipmakers Novatek and Realtek, which both supply Huawei, each dropped by more than 6%.

The fate of MediaTek and its peers reflects the enormous scope of the new U.S. order. Virtually every chipmaker depends on U.S. technology or equipment at some point in its supply chain. Policing the use of U.S. technology is aimed at withholding more chips from Huawei, but, in doing so, it also cuts nearly the entire chipmaking market off from Huawei, the world’s third-largest chip buyer.

“Every foreign-made semiconductor of any type anywhere in the world is now subject to U.S. license requirements if a Huawei company is in any way involved, directly or indirectly, in the transaction,” Kevin Wolf, a former senior Commerce official, told the Washington Post.

The U.S. government must still decide whether or not to grant MediaTek and its counterparts the special licenses to supply Huawei with chips. In the meantime, however, it’s clear that as the U.S. expanded its dragnet in pursuit of Huawei, it also ensnared plenty of smaller fish.

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