In the last post, I covered the rise of the EDA tool industry and how an American oligopoly has dominated the industry from early on. In this post, I want to examine what the effects of the Entity List controls placed on Huawei will have on both Huawei and American EDA tool firms. I argue that the dominance of the Big Three EDA tool vendors (Synopsys, Cadence and Mentor Graphics–yes, I know Mentor Graphics is now owned by German Siemens but the bulk of the chip EDA tools’ tech and activity resides in the US) has never really been tested and may prove fragile when other players in the chip industry, principally foundries, are incentivized to work closely with other EDA tools beyond the Big Three. Before going into the details of that argument, I first want to put the damper on any notions that Chinese EDA tool vendors will be the ones to break up the current cozy oligopoly.
EDA in China
Going back to the Seventh Five-Year Plan (1986-1990), China has been trying to foster its EDA industry without much success. The IC Mega-Project started in 2014 and directed some funds toward EDA development but progress has been slow. Huada Empyrean has indeed enjoyed some success: it offers sets of tools covering the complete design flow for analog chips as well as EDA tools for LCD driver chips. No other Chinese EDA companies can offer tools covering complete design flows. Industry interviewees expressed their skepticism concerning the ability of China’s EDA firms, including Huada Empyrean, to compete with the established giants. The market data agrees with them. The total market for local EDA tools in 2019 was only 77 million USD, representing a mere 10 percent of total EDA sales in China.
China’s EDA development is not limited by just the difficulty of matching the product scope the Big Three EDA providers have created over the past few decades. The Big Three’s close links with leading foundries provide them an inside track on keeping up with changes on the manufacturing side and thus allow them to keep their software up to date with the latest process technology ahead of would-be rivals. New Chinese competitors have access only once the new process is developed, and their access will not be as wide as it is for the Big Three.
To make matters worse for would-be Chinese challengers, the Chinese marketplace is shifting away from their strengths. China’s fabless design industry is consolidating into large firms, resulting in more of the EDA tool market being in the hands of firms that can afford the relatively expensive offerings of the Big Three. Furthermore, the design revenues are shifting to digital design areas and away from the relative strength Chinese EDA firms have in analog design.
Piracy is still an issue for these smaller vendors that are reliant on their home market. Part of this is due to the incomplete protections for IP in China, but the larger issue is that some of these smaller vendors allow their products to be downloaded rather than accessed by license keys. This type of access provides easy opportunities for the software to be copied illegally. Presumably, because these smaller firms are desperate for sales, they are more willing to provide more convenient access to their software than the Big Three, which employ the more-protective license key model.
Additionally, the best software application engineers in China do not want to work in obscure EDA when they can make much more money working for Tencent, Alibaba, and other internet firms. Perhaps this will change with the enormous amount of state investment set to be directed towards the IC industry generally. However, as it stands now, only three hundred or so EDA tool development engineers are employed by local Chinese EDA vendors compared with more than five thousand such engineers worldwide at Synopsys. A potential advantage for China’s EDA industry is the fact that foreign EDA tool vendors employ at least 1,500 engineers in China. Offsetting that potential advantage is the fact that the global EDA engineering workforce is approximately forty-five thousand, so China’s total EDA workforce still represents a relatively small portion of the global total. In the short term, being cut off from American-origin EDA tools would be a highly problematic for Huawei. Even in the medium term of years rather than months, it is unlikely that local firms could fill the gap.
Huawei and the EDA Vendors’ Strategic Responses to the Entity List
If the controls as of the August 17 Final Rule are fully implemented and no licenses are granted for selling EDA tools to Huawei, Huawei will not have legal access to the Big Three’s EDA tools. There are no Chinese or other foreign vendors that can fill the gap sufficiently to allow Huawei’s HiSilicon to continue to design chips legally. Because the vast majority of the Big Three’s EDA tools today are accessed via license keys that provide online access to the EDA software, the preferred method for gaining illegal access to the Big Three’s EDA tools is to hack the license keys. With the right technical support, hacking these licenses is feasible as attested to by interview subjects and past cases, such as InnoGrit’s hacking of Synopsys’s license keys (link). If forced into a corner with no choice, Huawei could choose to hack license keys for Big Three’s tools.
Would the EDA vendors try to seek legal remedies? It would be difficult to do so in China given the ill will that full implementation of the export controls would generate there. From the EDA companies’ perspective, Huawei’s continued use of their tools without paying is preferable to Huawei trying to develop alternative EDA tool vendors on the off chance that these alternative EDA vendors emerge as peer competitors (as unlikely as that would be). Turning a blind eye to the hacking in hopes of a loosening of the controls in the future might very well be the smartest move for the Big Three vendors.
I believe, however, that Huawei probably would not have to choose the blunt instrument of hacking license keys. The final rule issued on August 17 offers an either–or clause, where either knowledge on the part of the provider of the good or service (e.g. EDA software) to Huawei is required, or Huawei and its affiliates “touching” the product somewhere along the supply chain is sufficient to make the product controlled. However, to be legally liable, a firm still has to have knowledge that it supplied Huawei or dealt with a Huawei-touched supply chain as explained to me by a DC lawyer deeply versed in the Entity List. These requirements have already encouraged creative circumvention. On July 13, a well-placed representative for small foreign EDA tool vendor had already told me that at least one Entity List company had set up a shell company with no apparent links to the Entity List–designated firm to serve as a legal front for EDA licenses.
Other tactics may emerge if the major EDA vendors do not passively accept these onerous regulations. Some have speculated that Synopsys’s new joint venture with AMEDAC (全芯智造), formed in September 2019, is designed as a vehicle to add plausible deniability to any charges of dealing with Huawei and its Entity List–designated affiliates. Speculating as to how this exchange might work, AMEDAC could provide tools to a Huawei front company. By adding two intermediaries between Synopsys and Huawei, Synopsys could claim to not know what AMEDAC was doing, and AMEDAC could deny any knowledge of supplying Huawei. There are rumors that another of the Big Three has set up a partnership that looks suspiciously like a vehicle for circumvention. With the broader controls incorporated into the August 17 final rule, these joint venture gambits might not provide enough legal cover to be worth the risk, however.
The other big issue is that even if Huawei could somehow get its hands on EDA tools via shell companies, could Huawei actually find a foundry willing to fab its chips. It seems unlikely that Samsung or TSMC would take on a mysterious client company with suspiciously sophisticated tech as long as those foundries are dependent on American capital equipment (an issue that will be covered in the next post). Such a high-risk-low-reward tradeoff seems unappealing. After all, Huawei being displaced from chip design doesn’t mean the market for chips will shrink so TSMC is probably telling the truth in stating that the end of Huawei orders won’t have too much impact. Foundries in China arguably would be more willing to take on the risk of fabbing for Huawei shell companies, but they can’t offer the cutting-edge processes that TSMC and Samsung have so they are only a partial solution.
Ultimately, Huawei can probably survive without designing its own chips. In this scenario, it would revert to its 2010 business model of building telecom equipment mainly with chips from outside vendors. To the extent that some of Huawei’s current competitive advantages are silicon-based, Huawei would lose these advantages. The other major downside is that it could not work directly with chip vendors as under this scenario Huawei would have to get chips through gray channels that the US Department of Commerce would find difficult to track.
Dangers for American EDA Dominance
For an anti-Huawei hawk, the US government’s plan to use EDA tools as a chokepoint to strangle Huawei looks intuitively appealing given American dominance in EDA tools and the critical position of these tools in the chip value chain. However, there are great dangers in trying to weaponize this part of the chip value chain. First, we do not know how quickly one of the big EDA vendors could be displaced by new entrants because the United States has not put other countries with economic clout in the position of being forced to seek alternatives. This policy would encourage others, not just China, to consider alternatives. More critically, this policy could force foundries to question priority of positioning (i.e. which EDA vendors have priority when working on new process nodes). The Big Three EDA vendors derive a lot of their expertise at the design–foundry interface from their favored position as the firms working with the foundries early on for each new node (see my September 24 post). If the foundries face enough uncertainty, they may include a new close partner or two to hedge their bets, leading over time to eroding positional power on the part of American EDA tool vendors. If the Entity List controls are limited to Huawei and the other much smaller firms, then the likelihood is lower that the foundries will erode the Big Three’s positional advantage through hedging. Any further expansion of the Entity List targets would just further encourage foundries to include less politically problematic EDA tool vendors as one of the favored partners working on the design-foundry interface for the newest process node. And of course, a de-Americanized fab (again, to be addressed in the next post) would beg for a non-American EDA partner to be brought into the mix.
 EDA tool vendors are often plagued by illegal overuse of EDA tools, e.g., a contract that specifies access for one user for one server, but the tool vendor discovers that the server is utilizing the tool 24-7. However, in the context of being completely cut off from legal access to the EDA tools, this form of IP theft is irrelevant.
 Huawei just has to be a purchaser, end user, intermediate consignee, or ultimate consignee. In other words, Huawei just has to somehow be involved in the relevant product’s supply chain.