Trade War Dampens U.S. Chipmakers, Not Huawei: Here's Why

Zacks Equity Research

The United States’ trade war with China intensified in May 2019 after the former blacklisted Huawei Technologies Co Ltd., restricting its trade with home-based companies over national security concerns. After initially agreeing to a partial embargo, on Aug 9, President Donald Trump announced that the U.S. government will not do business with Huawei and that he is not ready to make a trade deal with China anytime soon.
 
The trade restrictions on Huawei not only affect the company but also hamper revenues of several large and small-scale chip manufacturers. Since Huawei is a big consumer of these chip companies, giants like Intel Corp. INTC have already requested the White House for permission to carry out partial trade with Huawei.

Chips Stocks Dampened by Huawei
 
In 2018, the United States alone contributed 6.6% of Huawei revenues, which is more than $104 billion as per the company’s annual report. The company focuses on telecommunications networks, information technology, smart devices and cloud services. It depends on several big and medium-sized American companies for sourcing chips and technology.

In 2018, Huawei spent $11 billion on purchasing components from U.S. firms including QUALCOMM Incorporated QCOM, Intel and Micron Technology, Inc. MU, out of the $70 billion that it spent on total purchase.
 
Trumps’ announcement on Aug 9 dealt a strong blow to the chips stocks, though some of them rebounded before the market closed on clarifications from the White House. Advanced Micro Devices, Inc. AMD fell nearly 2% but made up 1% before the bell. Micron Technology, Intel and Skyworks Solutions, Inc. SWKS stocks closed 2%, 2.5% and 3% lower, respectively.
 
AMD, Micron, Skyworks and Qualcomm shares have gained 75.7%, 32.8%, 13.8%, 22.7% and 15.6%, respectively, on a year-to-date basis. Intel share have fallen 2.8% in the same time frame. Qualcomm stocks carry a Zacks Rank #5 (Strong Sell). Whereas, Intel, AMD, Micron and Skyworks stocks carry a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank stocks here.
 
What Next for Huawei?
 
Huawei has become the second-largest smartphone seller in the world, beating Apple, Inc. AAPL and aims to beat the Samsung Electronics Co. Inc. to reign in the number one position. On Jul 30, it reported 23.2% revenue growth for the first half of the year.
 
Contemplating trade restrictions, Huawei has already planned an $800 million investment to set up a new factory in Brazil. The company already has a factory in the Sao Paolo state that produces telecommunications equipment for mobile operators. The new facility will ramp up the company’s potential to replicate modem chips and processors.
 
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, has confirmed that will continue to supply to Huawei regardless of the U.S. ban. The company has also been stockpiling components since its chief financial officer Meng Wanzhou got arrested last year. It has also certified non-U.S. suppliers that will support the supply chain in the long run.
 
Meanwhile, Huawei has two new in-house chips designed by its chip arm, HiSilicon Technologies, named Kirin 985. The other one is the world's first chip made by using the cutting-edge extreme ultraviolet and produced by TSMC. Huawei will use TSMC’s new chip to debut its high-end smartphone, Mate 30 series. The company also launched 5G handsets of the Mate 20 series that can reduce the gap in revenues resulting from the ban on sales in the U.S. market.
 
Conclusion
 
The trade restrictions may not cloud Huawei’s revenues but hurt sales of U.S.-based chipmakers. Huawei is progressing fast on replacing its U.S.-based suppliers with Asian alternatives. Japan's Murata Manufacturing and Taiwan's RichWave, have already received increased orders.

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