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Huawei Ban Causes Large Tech Sector Sell-off As Global Concerns Mount

May 20, 2019
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Today technology companies, and in particular chipmakers, fell broadly as concerns mounted over the U.S. black list of Chinese telecom giant Huawei.

In a stunning move, the Trump Administration blacklisted Huawei last Wednesday, citing espionage concerns and ultimately national security. Google followed suit by by announcing that it would halt the use of its services and OS updates for Huawei, effective immediately. The move will cripple Huawei's devices outside of China as services like Google Maps will no longer function.

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U.S. tech stocks plummet on news of Google ban

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Huawei consumes a lot of components, which is understandable as they are now the world's number 2 smartphone maker. The Trump ban denies the ability for any U.S. company to sell to Huawei, which will not only greatly affect the Chinese manufacturing giant but will have a large impact on the sales of their U.S. based suppliers as well. That's what sparked investor fears today - almost all the major tech companies saw their stock prices plummet - those with major sales in China were impacted the most.

Thus far Intel (NASDAQ:INTC), Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM), Xilinx (NASDAQ:XLNX), and Infineon (OTCMKTS:IFNNY) have announced to employees that they would no longer be supplying components to the Chinese telecom giant. It's not surprising that investors want to jump ship when a company suddenly announces an entire revenue stream is done for; and that's what we saw happen today. Intel dropped 3 percent while Apple (NASDAQ:AAPL) suffered roughly the same; Broadcom and Qualcomm were hit even harder - the two plummeted by 6 percent each. These companies sell tens or even hundreds of millions of dollars worth of parts to not only Huawei - but China as a whole. The fear is that China will surely retaliate against U.S. companies, and that's what fueled the sell-off. More on that, down below.

What will happen to Huawei?

Huawei statement after Android ban

We might be seeing history repeat itself here. Last April, the U.S. announced a ban on the Chinese company ZTE, citing trade agreement breaches after it was found that ZTE was selling to Iran and other blacklisted countries. The ban put ZTE in an extremely uncomfortable position as it was said it could put the company completely out of business. In fact, ZTE suspended operations once the ban was put into effect. Ultimately, ZTE settled for a large fine and a 10-year probationary period. What's relevant here is Trump used the ban on ZTE to bring Beijing to the negotiating table and it seemingly worked last time.

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Yet there are some major differences between ZTE and Huawei. First, Huawei is simply much larger for one, it can probably survive a U.S. ban, or at least weather a ban for some years. The Chinese company doesn't really do a lot of sales in the States, and it's completely safe in its home market of China, and away from the reach of the U.S. in other markets like Europe. Second, Huawei hasn't really been caught doing anything contrary to U.S. policy or international agreements. While ZTE and Chinese leadership knew they were in trouble with ZTE selling to Iran, in this instance, unless evidence surfaces, the ban is based on fears only - it seems arbitrary and fueled by financial/political reasons. Lastly, Huawei is a major infrastructure provider. Countries that have been timid about using Huawei for 5G deployment have been forced to get over their concerns as there isn't really a cost-effective alternative out there just yet. ZTE didn't have near that amount of leverage in terms of key technologies.

We don't know anything definitively about Huawei's plans of preparing for this eventuality, but we have been hearing rumors that the Chinese firm has been anticipating this for some time. Reports have surfaced that it's ramped-up purchases of chips as early as the middle of last year (around the time ZTE was dealing with a U.S. ban). Huawei already has an in-house developed Kirin SoC, but for many other of its smartphone components, it buys directly from U.S. companies. On the software side of things, Huawei is even further exposed since outside of China it relies on Google's services for many of the core functions customers expect out of a modern day handset.

Is the ban really a point of leverage for US - China trade negotiations?

president trump tim cook

What we know for a fact is that the U.S. banned the sale of components to Huawei based on a national security threat from possible Chinese state-sponsored espionage done through Huawei's devices and equipment. However, no evidence of that claim has surfaced - yet, anyway.

We can only speculate what the ban might really mean. We learned that Huawei will receive a temporary license to purchase U.S. components through August of this year. Any real effect on the company will be delayed at least until then. If Huawei was really banned for national security, it seems odd that the firm would instantly be able to get a license to continue business as usual. A temporary license until August could buy Trump and his negotiators to position themselves amid trade talks with Beijing.

The other side to all of this is that China can't be happy with this flurry of events. Some U.S. companies are ultra-dependent on China and its combination of low-cost labor and raw materials. There isn't a better example than Cupertino, CA-based Apple Inc. The firm builds the vast majority of its devices in China and the costs to switch to another country like India or Taiwan would be absolutely massive. Tim Cook probably won't lose much sleep if his firm is denied the ability to continue on with its roughly $40B per year of business in China, but what will cause the CEO of Apple to have nightmares is the thought of doubling or even tripling manufacturing costs. Apple has already seen its sales in China decimated (not ironically mainly due to Huawei's surge in popularity) in recent quarters, but if Apple's global supply chain is threatened, there is a major cause for concern.

Apple has already been questioned after recent product price increases and given last year's global slump in premium smartphone demand, there is a fair amount of consensus that prices can't go higher, at least for now. Apple would be forced to take a huge hit to its margins, and China is well aware of that. However, China may not want to sour relations with Apple, since its Apple that is lobbying hard in the U.S. to keep the trade barriers down. So it's hard to say at this point what China will do, but the Communist-led country has basically matched the U.S. at every stage of tariffs with a rapid response, there's no reason to believe it won't consider doing the same here.

Of course, should Huawei get a permanent license, this will all amount to just potential with no real action ever taking place - just anticipation, fear, and relief, with financial markets, correspondingly diving and soaring. What can be said with absolute certainty is that those who profit from market volatility are surely having the time of their lives and laughing all the way to the bank.

 

 

 

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