Huawei is reportedly running out of its own high-end chips for smartphones due to U.S. sanctions — and the company may have limited options to secure future supply.

The inability to obtain cutting-edge chips will threaten Huawei’s newly-acquired status as number one smartphone maker in the world. It could also wipe out billions of dollars of sales for the Chinese technology giant.

Huawei may survive 2020, but the next two years could be very difficult, one analyst told CNBC. 

In May, the U.S. introduced a rule which requires foreign manufacturers using American chipmaking equipment to get a license before they’re able to sell semiconductors to Huawei. 

The Chinese firm designs its own chips via a subsidiary called HiSilicon. But those semiconductors, which go by the Kirin brand name, are actually manufactured by Taiwanese contract chipmaker Taiwan Semiconductor Manufacturing Company. Washington’s rule has effectively cut Huawei off from TSMC.

To comply with the rule, any chips currently in production must be shipped to Huawei by Sept. 15. 

“This is a very big loss for us,” Richard Yu, CEO of Huawei’s consumer business, said Friday at an industry conference in China, according to the Associated Press. 

“This year may be the last generation of Huawei Kirin high-end chips,” he added, saying the company has “no chips and no supply.”

Huawei did not respond to a request for comment when contacted by CNBC. 

Huawei is among just a handful of companies, which includes Samsung and Apple, that design their own chips for their smartphones. It’s one of the major reasons the Chinese technology giant has been able to differentiate from its rivals and grow. 

“Huawei’s smartphone division is running out of options for sourcing chipsets. The outlook is bleak, but salvageable,” Neil Mawston, executive director of wireless device strategies at Strategy Analytics, told CNBC by email.

He said there are 15 chipset suppliers in the world Huawei could work with but only five were “credible” options. They are:

1. Continue with the Kirin line of processors and eventually move to manufacture with SMIC, China’s biggest contract chipmaker, instead of TSMC.
2. Outsource to Unisoc in China
3. Outsource to Taiwan’s MediaTek
4. Outsource to South Korean chip and phone maker, Samsung
5. Get the Qualcomm ban lifted by the U.S. government (Qualcomm is not allowed to supply to Huawei because the Chinese firm sits on a U.S. blacklist known as the “Entity List.”) 

Mawston notes, however, that “all five options face major challenges.” 

SMIC uses U.S. equipment to make chips which would mean it would not be able to supply to Huawei. It is also significantly behind TSMC in terms of technology.

Huawei’s Kirin chips are built using a so-called 7-nanometer process, one of the most advanced chipmaking techniques. And chipmakers are now looking toward 5-nanometer process, the most cutting-edge technology. It’s unclear when SMIC may introduce a 7nm production process at scale.

Meanwhile, China’s Unisoc, which designs its own chipsets, produces low-end semiconductors that won’t fit Huawei’s needs. “It will take years for Unisoc to ramp up scale and quality,” Mawston said. 

Samsung makes its own chipsets, called Exynos, and it may not be willing to share that with Huawei, it’s fiercest competitor in smartphones. Mawston noted that South Korea usually sides with the U.S. on political issues.

U.S. chipmaker Qualcomm is lobbying the U.S. government to reverse a ban that stops it from selling to Huawei, the Wall Street Journal reported over the weekend. 

“But with a tight U.S. election coming up in November, it is hard to see the tough U.S. stance being softened any time this year,” Mawston said.

That leaves Taiwan’s MediaTek which makes low-to-mid-range chips for mobile devices. Mawston sees this company as one of the most viable options for Huawei in the short term. But some risks remain, including the fact it uses TSMC for some production and “may yet come under the U.S. spotlight.” 

MediaTek was not immediately available for comment when contacted by CNBC. 

The outcome of the U.S. election in November could well be a key factor in whether Huawei’s smartphone division survives or not. If Democratic presidential candidate and former Vice President Joe Biden wins, policy toward technology and China could change.

“The Biden camp may be formulating its own policies around geopolitics of technology, including on chips. And to win support from U.S. businesses, like Qualcomm, it may propose revoking Huawei’s chip ban. Or, the Trump camp may want to win support from U.S. businesses and may ease up restrictions,” Abishur Prakash, who specializes in geopolitics at the Center for Innovating the Future (CIF), a Toronto, Canada-based consulting firm. 

“This may also be a strategy of Huawei, to wait it out until November and see what happens,” Prakash added.

Another potential post-election solution could be Qualcomm being allowed to supply ready-made chipsets to Huawei, but the Chinese firm may be forbidden from designing its own chips like it currently does, according to Strategy Analytics’ Mawston.

Qualcomm and MediaTek both produce chipsets that can be bought “off the shelf,” which means multiple smartphone makers may buy the same semiconductors from them. Huawei’s current solution is customized as they design their own Kirin chips. 

If Huawei was forced to go with a generic vendor, that would hurt its smartphone business, according to Nicole Peng, a mobile analyst at Canalys. 

“If they (Huawei) are using a standard solution, it will be hard to differentiate from Oppo, Vivo and Xiaomi. It’s expected they will lose their competitive advantage especially on the high-end side to the Chinese players,” Peng told CNBC.

“So the expectation is that it will be difficult to maintain the kind of leadership status (it currently has).”

Huawei could also consider selling HiSilicon, its chip design unit, according to Neil Shah, research director at Counterpoint Research. 

That would involve potentially merging with another supplier like MediaTek, as well as transferring knowledge and intellectual property to build exclusive chipsets for Huawei’s devices that would be optimized to work with its own operating system called HarmonyOS. 

“This basically decouples HiSilicon from Huawei but still helps Huawei get advanced and exclusive chipsets for itself,” Shah told CNBC. 

Huawei’s consumer division, which includes smartphones and other products like laptops, raked in 467.3 billion yuan or $ 66.93 billion in 2019. The business accounts for over 50% of Huawei’s total sales. 

Any move now looks like it would put billions of dollars of sales at risk.

“If Huawei continues to go forward with selling smartphones, we think it has enough chipsets in stock and from MediaTek orders to see out 2020, but will probably find it increasingly difficult to source adequate chipsets and apps (like Google) in 2021 or 2022, sales are likely to fall outside China, and the smartphone division will shrink to a smaller size,” Mawston said.

“Huawei’s smartphone unit is probably fine for the rest of 2020 — but 2021 and 2022 are a whole ‘nother ball game.”