On Sept. 15, new restrictions barring sales of U.S. components to Chinese tech giant Huawei went into effect. Those rules would have prevented Intel (INTC 1.53%), AMD (AMD -0.34%), and other American chipmakers from selling any new chips to Huawei.

But shortly after that deadline passed, Intel and AMD announced they had obtained special government licenses that will enable them to continue selling chips to Huawei. Let's see how Intel and AMD obtained those licenses, and what they mean to the tech war between the U.S. and China.

A wafer of chips with a Chinese flag in the background.

Image source: Getty Images.

Why does Huawei need American chipmakers?

Huawei installs Intel and AMD's x86 CPUs in its PCs and servers, as well as Intel's Altera FPGA (field programmable gate array) chips in its 5G base stations. Huawei develops its own Arm-based CPUs via its HiSilicon subsidiary, but those chips are less powerful than Intel and AMD's chips. Huawei depends on Taiwan Semiconductor Manufacturing (TSM -0.81%) to produce those chips -- but the Taiwanese contract chipmaker stopped taking its orders to comply with tighter U.S. regulations earlier this year.

Those restrictions also cut Huawei's smartphone business off from Qualcomm's (QCOM -1.36%) mobile chips. To make matters worse, NVIDIA's (NVDA -3.22%) planned takeover of Arm Holdings could eventually cut HiSilicon and other Chinese chipmakers off from Arm-based designs -- which account for over 95% of all smartphone chips worldwide.

Simply put, the U.S. could have cut Huawei off from the industry's most powerful PC and mobile chips with its latest restrictions. That's why the 11th-hour license approvals for Intel and AMD were surprising -- the U.S. clearly had Huawei on the ropes, but it's now backing up and giving the Chinese tech giant time to recover.

Why would the government grant Intel and AMD licenses?

The details regarding the new licenses are vague, but they'll reportedly allow Intel and AMD to sell "certain" types of chips to Huawei.

Servers in a data center.

Image source: Getty Images.

AMD's EESC (enterprise, embedded, and semi-custom) chief Forrest Norrod recently said that, based on its recent license approvals, the chipmaker wouldn't experience a "significant impact" from the latest trade restrictions. Intel has been less forthcoming about the overall impact to its business, and merely confirmed it could sell chips to Huawei again.

AMD's statement suggests that both chipmakers will continue selling PC and server CPUs to Huawei. Intel already supplies server-class CPUs to Inspur, China's top server company, and stated back in July that the latest trade restrictions wouldn't affect those shipments. Intel previously supplied supercomputer-class chips to the Chinese government, but the Obama administration banned those shipments five years ago. Therefore, Intel's PC and data center businesses in China should remain fairly stable.

However, Intel's FPGA business, which generates most of its programmable solutions group (PSG) revenue, faces a less certain future in China because its Altera chips power Huawei's 5G stations (these are a major flashpoint in the escalating tech war between the U.S. and China). Intel's statement about "certain" types of chips hints that those chips could still be banned. 

Yet Intel can afford to lose those orders since its PSG business generated just 2.5% of its revenue last quarter. Intel doesn't disclose the PSG segment's exact revenue from China, but we know that the chipmaker generated 28% of its total revenue in China last year. As such, Intel's FPGA sales to Huawei likely account for less than 1% of its total revenue.

Hesitation on both sides

These new license approvals should allay some concerns about Intel and AMD's future in China, but they also indicate the Trump administration isn't ready to completely cut Huawei off from American chips. That hesitation mirrors the Chinese government's reluctance to blacklist U.S. tech companies.

Both sides seem hesitant because their technologies and businesses are still too tightly intertwined. Moreover, cutting off Huawei from American chips would force Chinese chipmakers to accelerate the development of their own domestic chips -- which could harm American chipmakers over the long run.