In late April 2022, an article from Financial Times revealed that the US government received reports that China memory chip manufacturer, Yangtze Memory Technologies Corp (YMTC), has been supplying smartphone and electronics components to Huawei. The reports allege a breach of the US’ foreign direct product rule (FDPR), where YMTC’s chip components were said to have been found in the Huawei Enjoy 20e mobile phone. While it is unclear whether YMTC had sought, or attempted to seek, export licenses for the alleged technology transfers, US national security concerns still loomed as a result.

Notably, the initial timing of the report was said to have come at the industry’s surprise. Much of the unexpectedness was due to the fact that, even though YMTC have been relatively active in their field of operation over the past few years, the company were said to have actively implemented export control frameworks and policies in their businesses. In particular, a pan-supply chain review was said to have been by the company to locate the origins of components in their production process. According to some, this was partially conducted to enable the company to seek local Chinese suppliers instead of relying on foreign ones, which may subject them to sanction regulations such as the FDPR. Based on the FDPR, foreign-produced products may fall within the jurisdiction of the US export control system through the use of US technology, software, or components throughout their creation and manufacture, and as a result render them subjects to relevant regulations.

Nonetheless, YMTC’s alleged commercial transactions with Huawei may have been part of the latter’s approach towards R&D in response to the US sanctions they face. Following parallel expansions in other industries such as smart cars, advanced computer engineering, and more, Huawei remain involved in the smartphone technology market through investing in their R&D model, allowing them to build up IP portfolios and related spin-off businesses, which may have led the company to seek cutting-edge domestic chips, such as materials sourced by YMTC, as part of the process. 

However, Huawei’s efforts to develop a domestic semiconductor supply chain to support electronic and smartphone products may face tough obstacles, as indicated by changing trends in the China smartphone and electronics semiconductor market. In particular, Nikkei looked into a recent smartphone produced by Chinese smartphone brand Honor, which showed that there is simultaneously a growth in US-originated components used (10% increase to 39%), and a decrease in China-originated components (27% to 10%). Notably, parts from HiSilicon, Huawei’s chip developing arm, were no longer featured by Honor, with the company relying on chips from US-based manufacturers Qualcomm and Qorvo instead. Similar patterns were said to have been observed in other local big names, such as Xiaomi and Oppo.

This seemingly rising reliance of the Chinese smartphone manufacturing sector on US technology may help explain the increase of the US’ presence in monitoring sanction compliances by Chinese companies in the smartphone market, and Chinese companies in the smartphone component supply chain market, such as YMTC. This is especially so, since with greater involvement of US know-how in smartphone tech development processes, there is a higher degree of jurisdiction that the US can exercise through the FDPR. Given this trend, companies that are involved in the smartphone technology supply chain should be aware that US sanction and compliance enforcement is likely to be more aggressive in the near future within the area. After all, as YMTC’s developing case study has shown, while active compliance in export control may help companies build a good record, it does not make them immune from having to bear potential future liabilities when oversights arise.