SHENZHEN/SHANGHAI/TAIPEI/ -- In the first few weeks of 2019, 20 engineers from Huawei Technologies arrived in the riverside town of Jiangyin in eastern China on a secret mission. They took up stations at the state-backed Jiangsu Changjiang Electronics Technology, China's largest chip packaging and testing company, where they went to work upgrading the facilities and increasing the site's capacity, ahead of a production surge in the autumn.

"These Huawei staff are on-site almost seven days a week, from day to night, nitpicking and reviewing all the details ... demanding strictly that the local company meets global standards as soon as possible," one chip industry executive familiar with the situation told the Nikkei Asian Review. "It's honestly like preparing for wartime."

All across Asia, companies in the computer chip industry were receiving similar messages from Huawei: Boost your production, and we will buy your product. In a slowing global market, Huawei made a commitment that was impossible to resist: The company guaranteed up to 80% utilization rates for the next two years to potential and current suppliers.

Spooked by the arrest in December 2018 of its chief financial officer, Meng Wanzhou -- daughter of the company's founder and CEO, Ren Zhengfei -- and anticipating an escalation from the White House, Huawei activated a plan to decouple itself from its U.S. suppliers by pushing fellow Asian companies to speed up and scale up.

By May, when the U.S. announced strict new limits that all but prevented American companies from selling technology to Huawei, the Chinese telecom giant was already on a war footing. Others in China have followed its lead, preparing to move wholesale away from their reliance on U.S. technology in what could become a permanent "de-Americanization" of the Chinese tech industry.

"We see a clear trend of Chinese companies decoupling from U.S. suppliers," said Scott Lin, senior vice president of WPG Holdings, the world's biggest semiconductor distributor. "After all, no one wants to be suddenly cut off from supplies."

Now that these plans are in motion, Lin said, "there is no turning back."

Warning signs

Ren, a former engineer from China's People's Liberation Army, founded Huawei in the southern industrial city of Shenzhen in 1987. From its roots as a tiny manufacturer of networking switches, the company has grown to become a global leader in telecom and a national champion in China. Huawei is now the world's largest supplier of telecom equipment, with operations in 170 countries. In 2018, it overtook Apple to become the world's second-biggest smartphones manufacturer. It now employs 194,000 staff, with annual revenues of more than $105 billion -- comparable with Google's parent company, Alphabet.

That size makes it a huge market for suppliers of components and software. Huawei's annual procurement budget is around $70 billion. The company spends $15 billion every year on semiconductors alone; only Apple and Samsung Electronics spend more. In 2018, it bought more than 200 million displays and hundreds of millions of camera lenses.

A lot of those components come from the U.S. In 2018, Huawei procured $11 billion worth of goods from American suppliers. Qualcomm, Intel and Texas Instruments supply Huawei with various types of chips; Skyworks Solutions and Qorvo provide high-end radio frequency technology; Synopsys and Cadence Design Systems provide chip-design tools; Google and Microsoft supply software. Further down the supply chain, chemical companies such as Applied Materials, Corning, 3M and Dow Chemical sell their products into other enterprises that help Huawei to develop advanced panels and build semiconductors.

For our in-depth teardown and more on Huawei's sourcing shift from U.S.-based companies, see here.

Huawei's scale, and its links to the Chinese state, have long been a cause for concern in the U.S. The company has had three bids for American tech companies blocked by U.S. authorities on national security grounds -- 3Com in 2008, Motorola's wireless infrastructure unit in 2010, and 3Leaf Systems in 2011. In 2012, a report by the U.S. House Intelligence Committee alleged that Huawei was spying on American enterprises in an attempt to gain access to advanced technology. The company has consistently denied the allegations.

Things escalated after U.S. President Donald Trump took office. In January 2018, the largest carrier in the U.S., AT&T, dropped plans to sell Huawei's flagship Mate 10 smartphone, following public statements by American lawmakers and intelligence agencies alleging that the Chinese company presented an espionage risk. Later that year, the government barred any public institutions, including the military, from using Chinese-made equipment.

In May this year, the White House moved to cut Huawei off from its American suppliers. Huawei was put on the U.S. Department of Commerce's "Entity List," blacklisting it for U.S. companies. Qualcomm, Micron Technology, Texas Instruments, Qorvo, Lumentum Holdings, Synopsys and Cadence Design Systems, as well as Google -- whose Android operating system Huawei uses -- all confirmed that they would have to stop working with Huawei. Some later resumed limited shipments. In August, the Department of Commerce added a further 46 Huawei affiliates, including more than 10 key research facilities, to the blacklist. The sanctions were designed to cripple Huawei's ability to compete and to innovate.

"Huawei is at the center of the U.S.-China tech cold war primarily because of concern over the firm's dominance, globally, of next-generation wireless technology," said Paul Triolo, the head of geotechnology research at consultancy Eurasia Group.

If the plan was to slow Huawei's technical progress, it may have backfired. Instead, it appears to be accelerating China's desire to develop homegrown alternatives to American technology.

Huawei had anticipated the Americans' game plan. In March 2016, the U.S. government put ZTE, another Chinese telecom company, on the Entity List, after it was found to have sold equipment to Iran in defiance of sanctions. ZTE had been under investigation since 2012, but the escalation spurred Huawei to formulate a concrete contingency plan, sources told Nikkei. As soon as Meng was arrested in Canada, the company began to stockpile key components and to qualify new suppliers.

De-Americanization

For years, RichWave, a little-known Taiwanese maker of Wi-Fi front-end modules -- an important piece of communications technology within smartphones and other devices -- has been trying to engage with Huawei. RichWave competes with far larger American rivals, such as Skyworks, Qorvo and Broadcom, all of which have successfully negotiated their way into Huawei's supply chain. RichWave, though, just could not get certified as a supplier.

This summer, the company suddenly got the green light from Huawei. It began shipping products in August.

"Our relationships with this Chinese client just skipped the traditional business engagement process and jumped to direct replacement [of other suppliers]," said Kick Huang, RichWave's general manager for China. "And we are not the only beneficiary in this trade war."

Huawei's outreach to Chinese and other Asian suppliers has been far-reaching. Nikkei has learned that alongside Jiangsu Changjiang Electronics Technology, other leading chip assembly and testing providers, including ASE Technology Holding, Siliconware Precision Industries, Powertech Technology and King Yuan Electronics all received the nod from Huawei to expand their production inside China, as did printed circuit board makers Unimicron Technology.

Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker, has been asked by Huawei to put new customized chips into production with the aim of replacing chips from Intel and Xilinx, sources familiar with the matter said. Win Semiconductors, a contract manufacturer of power amplifiers, optical parts and radio frequency components, has received increased orders from HiSilicon Technologies, Huawei's chip design arm. MediaTek, the world's second-largest mobile chipmaker after Qualcomm, and Japan's Murata Manufacturing have also gained orders, multiple industry sources confirmed.

FIH Mobile -- a subsidiary of Hon Hai Precision Industry, commonly referred to as Foxconn -- and BYD, a Chinese manufacturer, have won new contracts to assemble Huawei smartphones. Huawei's previous major manufacturer, U.S.-based Flex, suspended some shipments after the American ban came into effect.

Some suppliers confirmed that Huawei has also been secretly preparing its own technologies for years, but has not put them into large-scale use. The company has been trialing its own radio frequency components for a decade, one tech executive with direct knowledge of the trials told Nikkei. The Chinese company began to put several of those designs into mass production in the spring of 2019.

"It's not like most outsiders think -- [that] Huawei only started to develop those crucial RF parts after the supply was cut off," the executive said. "The quality and performance may not be 100% as good as [U.S. supplier] Skyworks; but it is workable, and maybe users won't feel a big difference."

Many second- and third-tier suppliers, who previously would have had no chance to enter Huawei's supply chain, have now been handed a once-in-a-lifetime opportunity to move up the ladder, Roger Sheng, a veteran tech analyst at consultancy Gartner in Shanghai, said. The shift away from American manufacturers may outlast the trade war, he added: "Even if the U.S. later allows Huawei to use American components, it's never going to go back to the old days, like nothing had happened."

Spooked by the December 2018 arrest of chief financial officer Meng Wanzhou, Huawei Technologies activated a plan to decouple itself from its U.S. suppliers. © Reuters

Moves towards "de-Americanization" are spreading. This year, Xiaomi, another leading smartphone supplier, has invested in several local chip-related companies, including Bluetooth and audio chip startup Bestechnic, and design service provider VeriSilicon Holdings. Alibaba Group Holding also unveiled its own artificial intelligence chip platform, based on open-source technology, in July.

"Huawei is the most obvious and aggressive case," WPG's Lin said. "But it is not the exception."

Real impact

Even as prepared as it was, Huawei has been hurt by the U.S. attacks on its supply chain and its customer base. The U.S. has been lobbying its allies to try to restrict Huawei's markets, and the constant negative newsflow has inevitably cast a pall over its performance. Ren has said he expects the company's revenue to fall by $30 billion this year. It has had to retreat from the American market almost entirely, while European market smartphone shipments fell by 16% in the second quarter, according to research company Canalys.

Despite the hits to its overseas sales, Huawei has proved surprisingly resilient, said Arisa Liu, an analyst at the Taiwan Institute of Economic Research. "But Washington could still come up with new ways and tighter controls. If it's a prolonged [clampdown], some Huawei projects will still be delayed and its tech development will be slowed. But ... it's not dying or crashing."

Perhaps the biggest question hanging over the company is over the software that it uses on its phones. Google's Android operating system has an 80% share of the global smartphone market, and is used by Samsung Electronics, Xiaomi, Oppo and LG Electronics. That huge user base has translated into a massive ecosystem of mobile apps, and the services that Google offers alongside it -- Google Play, Gmail, YouTube and Google Maps -- are a major draw for users.

Without a permit from the U.S. government, Huawei's new smartphones launched after the ban may not have access to Google's mobile services.

In August, Huawei introduced its own "Harmony" operating system. Although Huawei said it will prioritize using Android on its phones if allowed to do so, it claims it is very simple for mobile app developers to build apps on its new OS, and that it would "only take one to two days" to migrate Android to Harmony if needed.

Harmony was initially slated to roll out on smart televisions, watches and speakers, not on handsets -- a fact that market watchers said shows that the process of replacing Android might not be so simple. At this week's IFA 2019 electronics expo in Berlin, though, Huawei's consumer business head Richard Yu told Chinese media that it may introduce the Harmony smartphone version with the flagship P40, due to be announced next March.

Huawei has acknowledged that it needs an ecosystem of services to get Harmony off the ground, and has said it will invest $1 billion to support developers to build apps on its platform.

Privately, some Huawei employees acknowledge how sizable the task is. "We have fully prepared for some tough times if we need to use our own operating system," one manager told Nikkei. "An OS really needs massive [numbers of] users and accumulated time for feedback and debugs so that it can run smoothly. We believe all the Chinese developers will be on our side, but it will still take some one to two years for the ecosystem to thrive."

Domestic consumers might be patient, but losing access to Google's services could have a real impact on Huawei's international smartphone ambitions. "Without Android and those popular Apps, it's likely that Huawei would be forced to become only 'China's Huawei' instead of the more powerful 'Global Huawei' that it is currently," a tech executive told Nikkei.

National pride

One undeniable factor behind Huawei's resilience is the support that it has received from Beijing. The company's name means "China can make it," and there is a sense that protecting the company from foreign aggression has become a national project.

In the face of the trade war, Chinese consumers are buying local. Huawei's share of the domestic smartphone market advanced to a record high of 38% in the quarter ending in June 2019, according to Canalys.

Beijing moved a licensing round for fifth-generation networks forward to June, accelerating the rollout of the technology to give a boost to Huawei, which will provide much of the infrastructure for the new networks. And the Chinese government is set to unveil its own blacklist, seen as a warning to international companies not to cut off supplies to Huawei.

American logistics company FedEx is in Beijing's sights, after being accused of sending packages of Huawei equipment to the wrong destinations, and of holding onto more than 100 parcels of Huawei-related shipments, rather than shipping them to China.

Ren himself has said that he would rather the government not back down in the trade war, even if Huawei is held hostage. In any case, Beijing is unlikely to see the company as a bargaining chip. Market watchers and tech industry executives said that Huawei's success underpins China's ambition to become a technology superpower; it is too big to fail.

"It's the most successful Chinese tech company by revenue, by technology and by execution. It's the national pride," said Jonah Cheng, chief investment officer at J&J Investment, and a former UBS tech analyst. "For most Chinese people, hitting Huawei is an attempt by the U.S. to destroy the whole of China. ... China is unlikely to give in and allow Huawei to fall."

Nikkei staff writer Yifan Yu in Palo Alto, U.S., contributed to this report.