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The fallout for the tech sector from the US-China trade war – September 2019

Most technology hardware and electronics suppliers rely on a multitude of components that are sourced from China and the impact of the ongoing trade war between the two super-powers means that electronics, mobile phones, PCs will undoubtedly have to increase in price, otherwise, the impact will be lower profits and job losses.

The real concern with the United States raising tariffs on US$200 billion worth of Chinese imports to 25 per cent means that China has retaliated by increasing duties on US$60 billion of US goods and this technology cold war is escalating day by day with no end in sight. The real impact of raising barriers to trade will be disruptive to supply chains, global trade and the economic well-being of nations.

Morgan Stanley analysts have warned that with no resolution to the trade talks expected and a lasting breakdown with higher tariffs on all US-China trade would push the global economy towards recession. They are worried that technology companies like Cisco, Apple and others will be heavily impacted by this trade war, as they try and find ways of cushioning themselves from the increased tariffs.

Big Tech Firms React

Some technology companies like Cisco have started the process of adjusting their complex supply chains to eliminate or at least limit Chinese produced products and component parts. Hoover-maker Techtronic Industries has moved its production to Vietnam and Google’s hardware maker Flex has been seeking new production partners in Malaysia.

Given that they are produced in China, I wonder how many Americans will be happy about the cost of a new Apple iPhone rising sharply, according to Morgan Stanley’s Katy Huberty, the iPhone XS would increase by US$160. According to the US Census Bureau, China’s exports of iPhones to the US was $31 billion in 2018, making up 6.5% of China’s total exports to the US last year, which was $478.4 billion.

Apple Inc shares have fallen sharply, hurt by a warning from financial-services company HSBC that higher tariffs on Chinese goods would force the tech company to raise prices, with "dire consequences" on demand for its products. If trade tensions between the US and China continue to escalate, Apple’s profit could drop by as much as 30%, Goldman Sachs has estimated.

Apple is not the only corporate giant in the West that has been directly affected by the trade war: Boeing, Caterpillar and Nvidia have also been negatively impacted according to the investment research firm, Zack’s. But how are the Chinese technology giants faring in the face of trading bans and increased tariffs?

The Ripple Effect of the Huawei Ban

Google has now limited the software services it provides to Huawei after a White House order restricted the Chinese company’s access to US technology. US chipmakers Intel, Broadcom and Qualcomm have been told not to supply any components to Huawei until further notice. And the Taiwanese electronics manufacturer Foxconn has reportedly now halted some production lines for Huawei phones due to the reduction in orders for new Huawei smartphones.

For Huawei, the big impact will be felt internationally, and its biggest effect will be in places like Europe, where it has emerged as a big smartphone seller. Laptops made by them have disappeared from Microsoft’s online and retail stores in Australia and globally. This move follows US President Donald Trump’s executive order that prevents US companies from purchasing and supplying equipment to foreign companies that are deemed a national security risk.

The ripple effect of the trade ban is being felt not only by Huawei, but by all the technology companies that supply it, including many US technology giants like Intel.

The Impact on China

The aggressive stance by the US is moving China towards a position where Chinese people can use only Chinese phones and gadgets powered by homegrown chips and software. All of this is happening with a speed that has shocked many in China as many Chinese companies buy US technology products.

US chips and software power Chinese servers and mainframes. China has been a big revenue driver for Apple, Oracle, Intel and other big names in tech. Much of this was by necessity since China couldn’t make all this stuff itself, but it allowed US companies to influence China’s digital future.

Many small Chinese technology component manufacturers have been caught in the crossfire. Companies like these often depend on orders from big firms such as Huawei to sustain their business and losing a big customer so suddenly threatens their survival. This, however, creates opportunities for other high-tech Asia Pacific nations to win these contracts, but the question is, will these nations have to decide if they are Team USA or Team China?

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