Here's How China Can Crush US Tech Firms If Trade War Escalates

President Trump rattled stocks on Wednesday after the Commerce Department rolled out its list of Chinese products, representing $200 billion in imports, that could soon face 10% tariffs Tuesday night - the latest sign that the escalating trade war between the US and its largest economic rival is still heating up. And, echoing recent comments from Morgan Stanley, on Wednesday morning, Bloomberg pointed out that China could soon opt to "trip up" US tech firms operating in the region, something that MS analysts say could have serious repercussions for US equities which have yet to be adequately priced in by the market, and which earned the tech sector a downgrade to underweight.

Apple

Since China imports far fewer goods from the US than the US imports from China, the country has threatened to embrace other tactics as part of its retaliation, like imposing new taxes or adding regulation on US companies, slowing deal approvals, or encouraging citizens to boycott American products, the WSJ reported today.

Some companies that export goods to China have already reported unexplained holdups at customs or in other areas. And as Bloomberg reported Wednesday, US tech companies - which have led US the US equity market all year as the bulk of the S&P 500's gains have been on the back of a handful of megacap tech stocks - are particularly vulnerable to the Communist Party's wrath. Which is one reason why Morgan Stanley recently recommended that its clients stay long volatility into the summer. As Michael Zezas, Chief US Public Policy & Municipal Strategist at Morgan Stanley wrote earlier this month: "In equities, our team thinks that US tech is vulnerable as a sector where pricing has been insensitive to trade risks so far."  

As a reminder, it is tech stocks that have been the pillar upon which the market's 2018 gains were erected, with just the 5 biggest stocks responsible for nearly all the S&P's upside in 2018.

Tech

Out of all US tech companies, Apple is perhaps most vulnerable to China's retaliation. While President Trump has reportedly promised Apple CEO Tim Cook that iPhones will be spared from the Trump administration's tariffs it's likely only a matter of time before Xi Jinping becomes frustrated with Tim Cook's ineffectual attempts to act as the tech community's "chief diplomat" and decides to crack down on the world's largest company. 

Apple is the master of global electronics supply chains. While the company is based in the U.S., China has arguably become its most important market. The vast majority of Apple products manufactured across China, and the company generated about 20 percent of its revenue there during its most-recent fiscal year.

Since launching bigger-screened iPhones in China and striking expansive wireless carrier partnerships with China Mobile and others, Apple has thrived there. The company has increasingly configured some of its hardware and software for the region - at a level beyond any customization for other markets. It also released a gold iPhone to appeal to Chinese consumers, added mobile-payment support for some of the country’s transit systems, and developed messaging features that mimic popular functions of local services like WeChat.

The company has also followed local laws, agreeing to relocate data storage for its iCloud services to state-affiliated servers in China. Tim Cook, Apple’s chief executive officer, also visits China regularly for public and private events.

But while the crackdown on Apple remains one eventuality, the Chinese government has a more direct route: hitting M&A deals, like scuttling Qualcomm's planned takeover of NXP. The US chipmaker has little more than a week left to close the deal before its agreement with NXP expires.

That chip deal is one of the most prominent hostages of the brewing trade war between the U.S. and China. Qualcomm promised investors that the transaction would be closed by the end of 2017. NXP has given Qualcomm until July 25 to close the deal or their agreement will expire.

Qualcomm already won clearance through the investigation phase of China’s approval process, people familiar with the matter told Bloomberg earlier this year. The final announcement, though, may be held up amid the high-level standoff over broader trade issues and the fate of Chinese telecom equipment company ZTE Corp.

The complexity of politically infused, cross-border acquisition approvals is relatively minor compared to the global electronics supply chain, which binds China and the U.S. and creates domestic tensions for both countries. An Intel Corp. processor made in Oregon or Arizona will often head to Chengdu where it’s packaged for final installation into a computer. That computer can then be assembled for a U.S. company such as HP Inc. by a Chinese subcontractor and shipped to the U.S. for sale. It’s unclear which parts of this process would be affected by U.S.-China tariffs.

And here is why semis are especially vulnerable: chipmakers and other tech companies derive a larger percentage of their sales from China than any other US industry.

Tech

 

According to Deutsche Bank calculations, US-based companies have a trade surplus of $20 billion with China if US corporate revenues are factored in. Given this vulnerability, and with the US showing no signs of backing down, the question of whether Xi and the Communist Party will go after US tech giants that they once sought to court is no longer a question of "if", but a question of "when."

And if a true tech selloff gets rolling - one that even corporations couldn't stop by stepping in and buying back their stocks...

Buyback

... it's impossible to say where it will stop.

Comments

mkkby Stuck on Zero Wed, 07/11/2018 - 23:18 Permalink

Fake bullshit arguments.  Nobody is talking about doing without each other's products.  It's about leveling the playing field.  No tariffs or equal tariffs.  No slow downs or equal.  No forced tech transfers or other games.

China got a sweet deal, but they got too greedy so the game is over.  You better not push too far because hungry, unemployed slaves have a history of hanging dear leader. 

The pain will hit in 6 months to a year when the higher prices drive down exports.  Meanwhile Trump's popularity is only growing because the middle class is realizing they finally have a champion.  Maga happening before our very eyes.

In reply to by Stuck on Zero

jialins mkkby Thu, 07/12/2018 - 04:40 Permalink

Go read about WTO clauses and its causes, or Nobel laureates’ comments on the matter, before you post comments like that. There is a reason every single developing country has barriers and some form of protectionism regulation. In fact, you should check Brazil, india and all the others and arrive at your own conclusion. So dumb

In reply to by mkkby

keep the basta… Meyer Bauer Thu, 07/12/2018 - 00:06 Permalink

Yes but why? Russia was wealth stripped by 85% in the 1990's, then sanctioned. Paid off last of USSR debt last year. Spent 60 BN last year on military total, stocked up on gold. Developed replacement for the sanctioned imports. swift etc. All organic farming.

 USA should be able to do something. Produce more for itself and different to export. Something other than armaments weapons and such. Something new. ZHedgers keep saying USA innovates, well just get on with it. Use the innovation brilliance you all keep writing about.

In reply to by Meyer Bauer

. . . _ _ _ . . . Bumpo Wed, 07/11/2018 - 21:49 Permalink

"And the US can stop buying ... crap."
The business model will have to change... drastically.
Why is it that the USA produces the best merchandise for export while importing most of the crappiest stuff in the world?

I grew up in an orchard which produced some of the biggest and best apples I have ever seen. Truth is, I have never seen this kind of quality in the local markets, or anywhere else, for that matter.
Australia does the same with movies. Most Aussies have never seen their best work.

Shouldn't the very best be kept for our consumption while the worst goes to exports? It could, at least, be 50/50.
But that might be considered racist, or something.

Everything in the world is bass-ackwards; why should this differ?

In reply to by Bumpo

. . . _ _ _ . . . Consuelo Wed, 07/11/2018 - 22:21 Permalink

Well, you changed the subject... but I'll play. (Yes, you did.)

Yes. Very crappy.
Very very crappy.
Try building a system yourself. You'll see.
"Like software, the best programs never end up as industry standards." -Peter Watts - Starfish
Same with the hardware.

Are you actually saying, publicly, that you think the hardware that runs our global everything is the best, most efficient, and cheapest it could be? Deluded.

PS. I'm not American.

In reply to by Consuelo

. . . _ _ _ . . . philipat Thu, 07/12/2018 - 00:03 Permalink

Manufacturing specs for plastic dollar-store crap??
Remember, he changed the subject.

"..."cheap crap" is manufactured UNDER CONTRACT in China by US Corporations."
That assumes that the Chinese respect the standards that the US imposes. They don't.

Nevertheless...
"Obviously US Corporations believe that US consumers either want, or can only afford, "cheap crap"?"
How does that change anything I said?
But there's another option. Maybe US corporations believe that US consumers won't know the difference.

Again, it doesn't change the fact that the modern USA is built on crap... from China.

Don't just look at performance, look at lifespan, too.

A Mongolian defense minister (whose gov. signs some trade agreement) with a budget of $10M has access to much better tech than any private US citizen worth hundreds of millions does... except maybe Bezos and a few other select billionaires.

Do you actually believe that the MIC will sell its best, or even second-best, to the private sector?
We are decades behind the best tech, and we always will be.

In reply to by philipat

CashMcCall Bumpo Wed, 07/11/2018 - 22:55 Permalink

Another Trumptard genius. Have you considered buying a concert piano lately? China makes the world's best concert pianos at Pearl River. In the last 20 years, they now make all of the best Concert piano Brands in the world...

Tards are stupid as crap. Perhaps the real crap is between your ears. 

 

In reply to by Bumpo

MonsterSchmuck CashMcCall Wed, 07/11/2018 - 23:51 Permalink

The Chinese build what they were given to and told to build by those who exported European and American businesses there to take advantage of lower costs, which means lower wages, no benefits, polluting, and no consequences for it. Kind of like prison labor. Chinese are good at that and building flawless pianos to avoid getting a thrashing.

Financial Pigs shouldn’t gloat.

Now suck on Trump you bastards. 

In reply to by CashMcCall

mug Bumpo Thu, 07/12/2018 - 02:19 Permalink

Good luck finding somewhere. Korea and Japan too expensive. Visit Vietnam, Laos and Cambodia and see all the things "kindly built/rebuilt by China". So China will ensure they won't help at a scale that would offset any flow of american imports. All of Africa is kindly supported by China.

You won't be able to get the same shit cheaper anywhere else. Best to move tech industry back to the usa and say fuck it to the rest of the cheap crap made in 3rd world countries

In reply to by Bumpo

Scipio Africanuz Bumpo Thu, 07/12/2018 - 05:59 Permalink

Stop talking nonsense! In which world do you live? You folks wanted a trade war, the President, being a promise keeper, gave you one! You don't know pain or deprivation, you think it's all fun and games? Let me disabuse your thinking thus:

A full blown trade war, will kill the USA as a functional economy for at least, two generations, every side will suffer no doubt, and that's not the point I'm making.

The point? Americans don't know what suffering, real suffering, is about! You spout rubbish about crap that China makes? Fine, where are American high speed trains? Open your eyes! This current epoch of civilisation started in China!

That the Caucasian West is currently top dog, is not due to any racial, intellectual, or spiritual superiority, but the ability to do on a massive scale, what others feared to do, and that is, remorseless organized violence!

Spiritually, the West is beholden to the "rag heads", intellectually, to the same "rag heads", martially, at least in the current incarnation, the West is beholden to the "slant eyes". I could go on and tell you uncomfortable facts but what would that achieve? Listening to you, nothing!

Have some respect, grow up, and stop blaming innocents for your predicament, China did nothing to you, you did it to yourself, by not paying attention, by enjoying the theft of the resources of others, by believing fallacies of exceptionalism, and considering everyone else, as inferior.

The USA, is a baby compared to the civilizations you disparage, and before you go spout some rubbish, about how it was the West that made all the wonderful technologies existent now, listen up, the technologies you're so proud of, are NOTHING, compared to what came before!

Nuclear weapons are nothing new, nor is wireless technology, human flight, submarines, or what have you, they're crude reinventions of ancient technologies, so grow up, wise up, have some humility, and reach out a hand of brotherhood, rather than talking ignorant smack!...

In reply to by Bumpo

Sanity Bear Wed, 07/11/2018 - 21:31 Permalink

US big tech are a bunch of Orwellian fascist types who need to be reined in anyway.

China can fuck the big tech sector all it likes, by my reckoning. They'd be doing the world a favor.

Iskiab Sanity Bear Wed, 07/11/2018 - 21:43 Permalink

Yea, the US should kill the high tech industry in the US to help the steel industry.  Maybe bring back the horse buggy and beaver hat industry that’s been lost in the US too.  Fuck dominating the future when you can try to bring back the past.

Trump will help his buddies in the coal industry above Americans as a whole.  I don’t get why people still don’t see it.

 

In reply to by Sanity Bear

JBL Iskiab Wed, 07/11/2018 - 21:51 Permalink

horses n buggies creates jobs...shlt shoveling jobs

 

current events are such a pity. over 70% of high school graduates enter into post secondary education of sum sort to supposedly learn skills. we're supposed to be the world leaders in nano tech, bio tech, modular housing & energy----yet these kids take liberal arts, psyc or underwater basket weaving! 

>.<

then being financially illiterate they wanna bring home jobs comprised of menial labor that can be automated by robotics

reality is gunna hit sum peeps like a ton o bricks i tells ya

In reply to by Iskiab

Iskiab Guderian Wed, 07/11/2018 - 22:53 Permalink

63,000 jobs working directly for apple, with an average salary of $120,000.  Indirectly through suppliers and whatnot, apple claims 2 million (but I doubt that number).

https://www.apple.com/job-creation/

Total steel industry is 83,000 in total in the USA.  

Either way, you don’t make strategy based on the present, you make strategy based on projections.  For example if you didn’t own Amazon when they were losing money you lost out.  Instead if you invested in who was making the most money at the time you’d be owning GM (who needed a bailout to survive) and Enron.

So you want to strategize the US to own all the mature markets and lose out on staying the world leader in tech?

In reply to by Guderian

Iskiab Mimir Thu, 07/12/2018 - 08:27 Permalink

There is a strategy.  The way to decipher who owns the president is by the who they choose as ambassadors.  In other countries ambassadors are civil servants, in the USA they’re plumb easy jobs given away as thank yous to friends who helped make you president.

Looking at the cozy jobs like France, England and Canada he got to be president with the help of the coal industry, Fox News and Johnson and Johnson.

Coal industry:  climate change denier, repealed the changes to get off coal for power, trying to increase steel production in the USA (who uses a lot of coal)

Fox news:  Keeps talking up fox, encourages that he gets all his info from fox and watches it all the time.

Johnson and Johnson:  ?

Trump has no plan, except to help his friends.

In reply to by Mimir

CashMcCall Iskiab Wed, 07/11/2018 - 23:00 Permalink

LOL you will love this... Trump's 200 billion tariffs against China include tariffs on coal, rare earth metals, frozen herring and of course Bovine Semen. China doesn't even export frozen herring. All under the grant of Authority from 1964 limited exclusively to national security. 

Trump has lost what was left of his cocaine blown mind. 

In reply to by Iskiab

hgfhfgjuyjjhgj Sanity Bear Wed, 07/11/2018 - 21:45 Permalink

 

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In reply to by Sanity Bear

mkkby Consuelo Wed, 07/11/2018 - 23:24 Permalink

I'd love it if tech companies went bankrupt tomorrow.  Fucking us over with their H1Bs and their outsourcing.  Products that are nothing but privacy theft.  Shitty games with pro forma accounting.

These people are the worst scum of society.  Just sociopaths with an IQ.  Put them in cages with the low IQ inner city sociopaths.

In reply to by Consuelo

koan Wed, 07/11/2018 - 21:42 Permalink

Actually "tech firms" having an issue and being unable to go on sounds perfect to me.
Is your heart really going to be broken if you can't have a smart phone or wireless dildo?

Money_for_Nothing Wed, 07/11/2018 - 21:55 Permalink

"Since China imports far fewer goods from the US than the US imports from China"
US government declares Micron chips can not be exported to China what happens?
US government says they will punish any country that re-exports Micron chips to China what happens?
There is a reason Micron stock is a solid buy. Single source for lots of high tech. Quality counts.