U.S. tech giants are now hopelessly tangled in the China trade war. And there is no easy way out.
The Wall Street Journal reported Monday that executives from seven leading tech firms met with President Trump to discuss easing the Huawei blacklist. The ensuing statement suggested solidarity.
Getting the chief executives of Qualcomm (QCOM), Intel (INTC), Alphabet (GOOGL), Cisco (CSCO), Broadcom (AVGO), Micron Technology (MU) and Western Digital (WDC) into the same room doesn’t normally happen. The companies are fierce competitors with different agendas.
But they’re on the same side now. Something larger is at stake.
They’re fighting to save their business models.
U.S. tech companies are rightly worried about the designation of Huawei as a national security threat. It opens up all sorts of “solutions” that are detrimental to their interests and innovation.
As Huawei has grown, it has become a major customer for big U.S. tech companies. The Shenzhen giant consumes $11 billion worth of memory chips, semiconductors, peripherals and software licenses every year.
Now, this end market is in peril.
The trade dispute with China was always supposed to benefit U.S. tech companies.
Currently, the American companies trying to crack the Chinese market need to form joint partnerships with local firms. Normally this involves a forced intellectual property transfer to the new joint ventures.
Speaking directly to these issues, President Trump, in June 2018, imposed unilateral tariffs on $50 billion worth imported goods. The Chinese immediately retaliated with tariffs of $50 billion, targeting mostly American agricultural products.
Tensions have escalated since. The Trump administration has levied import taxes on $250 million worth of Chinese goods, while Beijing has retaliated with tariffs on $110 million worth of American imports.
The dispute culminated in May with rhetoric about U.S. national security and the blacklisting of Huawei, the largest telecom equipment maker in the world.
Investors should beware. This will end badly.
Sen. Rick Scott (R-Fla.) told CNBC Monday that doing business with Huawei is non-negotiable because the firm is a national security threat. He went on to say he didn’t believe a deal with China was ever possible.
And in in June, Reuters reported Sen. Marco Rubio, also of Florida, offered an amendment to the National Defense Authorization Act that would bar any company designated a national security threat from enforcing its patents in the U.S., effectively superseding international patent law.
Patent lawyers immediately denounced the idea as dumb and dangerous. But it has growing bipartisan support in the Senate.
What Rubio and other supporters of this idea miss is that courts in China routinely grant injunctions for patent infringement, barring the manufacture, sale and export of offending products. Many U.S. companies depend on supply chains wholly located in there. Imagine millions of iPhones, or Dell Computers, stuck in China because of minor patent infringement cases.
Tech companies worry this type of short-sighted, hardline thinking will lead to balkanization, future injunctions, less innovation and ultimately smaller profits for stakeholders.
Huawei has 56,492 patents and it’s not afraid to use them, according to a provocative Bloomberg story from June.
Now, keep in mind all this is supposed to be for the benefit of U.S. technology companies.
I’m reminded of President Reagan’s nine most terrifying words in the English language, “I’m from the government and I’m here to help”.
In recent days, President Trump has shown a willingness to ease the ban on Huawei for more agricultural product purchases from China. This does nothing to address forced technology transfer, but at this stage it would still be a win for U.S. tech companies.
Unfortunately, politicians on both sides of the aisle in Congress are beginning to weigh in more aggressively on banning U.S. companies from doing any business with Huawei.
Investors, to their peril, are ignoring the mounting political maneuvering.
During the past month, Wall Street investment analysts have been busy upgrading semiconductor stocks, suggesting the inventory buildup is behind us and better times are immediately ahead.
Key stocks like Micron, KLA Corp. (KLAC), Lam Research (LRCX), Xilinx (XLNX) have gone straight up during the last 30 days, rallying 44.3%, 25.2%, 18.5% and 17.8%, respectively.
The optimism is likely misplaced.
Use this strength to sell stocks like Micron and Qualcomm. Year-to-date, they are up 51.2% and 33.3%.
Those are gains that should be grabbed sooner rather than later. That’s because China still has many cards left to play in the ongoing trade dispute.
It’s doubtful that trade negotiators will accept anything less than the complete claw back of the Huawei blacklisting. And that is not forthcoming anytime soon.
Jon D. Markman
P.S. The trade war turned one year old in July. Meanwhile, 5G pioneers like Cisco and other “connected” companies are growing like gangbusters, many without the big exposure to the Chinese market. Get invested in them before they truly start to surge. Start here.