US-China dispute damage may be much worse than investors imagine
If the US government is trying to destroy Huawei and slow the development of 5G networks in China, then the US-China relationship is likely headed to a dark place
Global equity investors are likely to be underestimating what may be immense damage across a variety of industries triggered by the US-China trade dispute, particularly involving the latest Huawei escalation, Wall Street analysts say.
The Trump administration putting Huawei, and dozens of its affiliates, on an export blacklist means “the US government has halted China’s 5G push”, and is transforming the trade war “into a digital one”, Sean Darby, Jefferies’ chief global equity strategist, wrote in a note. The move may have ramifications well beyond the tech sector as well, analysts at MKM wrote.
“The progression from tariffs to direct actions against single Chinese companies and their interlinked supply chains has a wide-ranging impact on profitability that investors will find difficult to quantify,” Darby warned.
The Huawei ban “holds back the development of 5G [the largest global capex project] and the growth of internet-of-things,” he said. It also “completely disrupts the global tech supply chain. The macro and micro implications are immense.”
Darby noted that 5G provides a “huge advantage” for “everything from the use of autonomous vehicles to AI eco-systems,” while “enormous amounts of money” are also required to install fibre-optic and operating systems.
China has been a 5G technology leader, but Chinese companies have an Achilles heel — their reliance on US semiconductors and components with no alternatives, he said. Those include baseband chipsets for handsets, from Qualcomm and Intel; semiconductors for base stations, from Xilinx; RF/power amplifier chipsets, from Skyworks Solutions, Qorvo, Avago and Macom, and optical components, from Lumentum Holdings Inc. and Finisar Corp.
The Huawei blacklist “is a very important development and we suspect it has fallen through the cracks,” Cowen senior policy analyst Chris Krueger wrote in a note. He said that “a framework has now been put in place that could be extremely broad, disruptive, and restrictive.”
He sees the commerce department’s licence process as “likely to take some time,” and suspects “nearly all requests will be denied.” He added that talks in Beijing with US trade representative Robert Lighthizer and treasury secretary Steven Mnuchin are still unscheduled.
“It is very hard to see any off ramps before the June 28 Trump-Xi meeting in Japan at the G-20,” Krueger said. “A few more weeks like we had this week and that meeting may not even materialise.”
“The most important question is what is the US Government trying to accomplish,” MKM analyst Michael Genovese wrote in a note. “If the answer is to destroy Huawei and slow the development of 5G networks in China, then the US-China relationship is likely headed to a dark place with major geopolitical ramifications beyond the tech sector.”
But Genovese tends to believe the move may be a “negotiating tactic.” MKM assigns a 50% probability that Huawei is permanently banned from purchasing key US technology, and hopes there’s a 50% probability the order is walked back. Genovese downgraded NeoPhotonics on Huawei uncertainty, helping send shares plunging 21% to the lowest in four years.
Earlier, China’s state media signaled a lack of interest in resuming trade talks, while the government said stimulus will be stepped up to buttress the domestic economy. That helped send US stocks broadly lower. Qorvo fell 4% in early Friday trading; Lumentum dropped 4.3%, and Qualcomm slipped 3.4%, while Intel fell 1.5%, and the exchange-traded fund that tracks the Philadelphia Semiconductor Index fell 1.7%.
On Friday morning, Acacia Communications said it plans to fully comply with the commerce department’s Huawei order. As sales to Huawei have been less than 1.5% of total revenue, it sees a “de minimis impact” from losing those sales in the second quarter. But Acacia cautioned that “developments or regulatory actions against Huawei may have a broader impact on overall conditions” in its markets.
With assistance from Ryan Vlastelica