US tech firms wary of trade tensions with China
U.S. tech firms with heavy China exposure are wary of rising trade tensions between the world's two largest economies, fearing an adverse impact on their market capitalization and PRC operations. The Trump administration is reportedly preparing trade sanctions that could target imports of Chinese telecom and consumer electronics products. Broad restrictions could also be imposed on Chinese investment in the United States. Firms such as Apple, Qualcomm and IBM depend on the China market for a significant portion of their revenue.
American technology firms cannot say they haven't been warned. Since he hit the campaign trail in June 2015, US President Donald Trump has criticized China's trade policies. He has called for a reduction in the trade imbalance, which grows wider by the year. Tariffs, Trump believes, can help accomplish that goal. Thus far, Trump has only targeted steel and aluminium. But if the U.S. slaps tariffs on Chinese tech products, Beijing will feel obliged to retaliate. Similarly, if Washington restricts Chinese investments in the U.S., Beijing can do the same for American investments in China.
The foremost concern of U.S. policymakers in the trade dispute with China is intellectual property. Washington alleges that Chinese regulations force American firms to transfer proprietary technology to local partners in exchange for market access. The U.S. is also concerned about massive state support for Chinese technology firms, notably IC makers.
Still, some U.S. tech firms appear unworried about potential fallout with Beijing - Apple in particular. In March 2017, Apple announced it would build new R&D labs in Beijing and Suzhou, respectively. Just a few months earlier, Apple had said it would open a new R&D lab in Shenzhen. Apple also is investing US$1 billion in Chinese ride-hailing app Didi Chuxing. Overall, China accounts for $45 billion of Apple's $229 billion in annual revenue.
Analysts have long questioned Apple's dependence on China. In an August 2015 commentary, Bloomberg columnist Leonid Bershidsky said that Apple's dependence on China was risky, adding that the company "had wagered heavily without hedging its bets." In April 2017, tech industry magazine Wired described "a mismatch" between Apple's offerings and Chinese consumer preferences.
Some analysts say that Apple would be insulated from a Sino-U.S. trade war. Daniel Ives of GBH Insights told US World News & Report in March that Beijing would hesitate to target Apple's iPhone production facilities in China because they employ so many Chinese workers. "We believe there is a minimal risk to this relationship," he said.
That's an optimistic reading of the situation. In our view, it's worth considering Apple is first and foremost a foreign brand in China, and that fewer iPhones sales would benefit rising domestic smartphone makers, such as Huawei, Xiaomi, Oppo and Vivo. Meanwhile, a sustained plunge in China sales could send Apple's share price into a tailspin, wiping out billions of dollars in market capitalization. It would be naive to assume that Apple could shrug off a serious Sino-U.S. trade conflict.
For San Diego-based chipmaker Qualcomm, the risks of a Sino-US trade conflict are even greater. China accounts for 2/3 of Qualcomm's $22.3 billion annual revenue. Qualcomm is a major supplier to Chinese smartphone vendors and a key investor in Xiaomi. Qualcomm has "the most to lose in our opinion, and it's a worry for investors," GHS Insights' Ives told CNBC.
Recently, the Trump administration blocked Singapore-based Broadcom's attempted $117 billion takeover of Qualcomm, citing national-security concerns. Analysts say that Washington feared cost-conscious Broadcom would slash Qualcomm's 5G investments, weakening the U.S. position in that emerging wireless technology and allowing China's Huawei to take the lead.