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Share price plunges indicate who has the upper hand in US/China trade war

Tense relations between United States and China. Concept of conflict and stress

If ZTE has acted in violation of US trading regulations there is no question it should be punished, but investor reaction to the ZTE ban perhaps shows US companies depend more on China than vice-versa.

Yesterday the US Department of Commerce’s Bureau of Industry and Security (BIS) has imposed a denial of export privileges order against ZTE, meaning US companies cannot do business with ZTE for seven years. The result of this order will be felt by ZTE, which has been working itself into a useful position in the US for devices, but it could spell disaster for some US firms.

At the time of writing, the impact was quite notable for these firms:

  • Acacia Communications down 35.97%
  • Oclaro down 15.18%
  • Inphi down 5.96%
  • Lumentum Holdings down 9.06%
  • Finisar down 4.05%
  • NeoPhotonics down 3.98%
  • Qualcomm down 1.72%

All of the above firms are somewhat reliant on being a ZTE supplier, and as you can see from the numbers above, the impact is quite varied. Qualcomm counts ZTE as a customer, but the same could be said for pretty much every other mainstream smartphone manufacturer. Acacia Communications, which manufactures components for fibre optic networks, has a considerable amount of exposure, with 30% of its business attributable to ZTE over the course of 2017.

This is perhaps one of the most worrying aspects of President Trump’s trade war with the Chinese; we suspect US companies need the Chinese economy and its companies more for growth than the other way around. This is just one example, however if (or perhaps when) Chinese authorities react to US, restricting their ability to do business in the country, what impact will that have on the spreadsheets? We don’t think it will be a very positive one.

US technology companies are the powerhouses of the global economy. In pretty much every sub-sector, a US company will be at the top, or pretty close, of the rankings. The rapid growth and digitalisation of the US economy was the one of foundation blocks of this incredible rise in power, however the US is now a mature market. For future profits, these powerhouses have to look to the international markets, and when you look internationally, it usually means China.

Years ago we used to talk about the BRICs (Brazil, Russia, India and China) nations as the ones fuelling global economy, but owing to the rapid acceleration of China, and more recently India, the scope of ambition has been refined. China has a monumental population which is just awakening to the digital economy, while businesses are undergoing the digital transformation process experienced in the Western economies years ago. Some might point to the Chinese companies which are incredibly advanced, the likes of Alibaba or Huawei, but considering the sheer size of the country, there is still a huge amount of profit to be made.

ZTE is only one company, but the dip in share price above shows how dependent some companies have become on Chinese customers and the nation’s economy on the whole. If, or when, the Chinese government retaliates to Trumps tariffs on a much wider scale, making it harder for US companies to do business, we dread to think of the consequences spread throughout the US technology industry.


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