One of the first Implications of Global Trade War is the US Huawei Ban. Here we explain How this will impact to Global Markets
Huawei is one of the largest technology company in the world. The company, which was created in China, has grown from a small operation to one that generates annual revenues of more than $30 billion. It is the second-biggest smartphone company in the world after Samsung. Last year alone, the company sold more than 200 million devices around the world. In addition to devices, the company manufactures telecommunication devices that are used by mobile couriers globally. As such, it has disrupted the industry long dominated by Western companies like Ericsson and Nokia.
The rise of Huawei is a testament to the Chinese growth. This has come at a time when the United States is starting to worry about global dominance by the Chinese economy. As a result, the company has been caught in the middle of the ongoing trade conflict between the United States and China.
In the past few months, the Trump administration has called for its allies to ban the company from the 5G transition (our suggestion about 5G companies). The country argues that the company’s technology cannot be trusted because China can hold the countries hostage. China is also famous for its anti-privacy system of governance. As such, the government can easily collect and spy on these countries. For years, Huawei has rejected that it is controlled by the Chinese government.
Huawei's Ban: The apotheosis (for now) of global trade war
Last week, a week after Donald Trump announced new tariffs on Chinese goods, he went a step further and announced that the country would ban its countries from doing business with Huawei. This was the strongest announcement to the company. Essentially, American companies will no longer be able to sell to the company.
This will have major impact for the company. This is because a large part of the company’s production relies heavily on American parts. For example, all Huawei devices work with the Android operating system. Over the weekend, Google announced that it will not offer Android to the company. However, since Android is an open-source system, the company will continue to use it but, it will not have the proprietary services offered by Google.
In addition, the company’s devices are run by chips from companies like Quallcomm and Broadcom (and some of them just join Google in the ban). While Huawei develops its chips, they are not as powerful as those offered by the American companies. Its computers run with Windows, which means that the company could be left with no operating system.
There are a few implications on this that investors should know about:
- There are chances that many Chinese will start abandoning legacy American products like iPhone and iPads. In fact, recent data from China shows that the Apple sales are slowing down. This will affect other companies like Microsoft and Nike.
- There is a likelihood that some American products could be banned in the country. This is a major issue because most American companies are leaning to China for growth. After the talks broke down, these companies could experience barriers to their growth.
- The collateral damage will likely be on the American farmers. This is because China could easily ban American produce like corn and soybeans from the country. This could affect their prices, which are already depressed.
Some big questions about Huawei Ban from US
Can Huawei survive without crucial parts?
First, the truth is that Huawei relies heavily on US parts for its smartphone and computer products. All its smartphones are powered with Android, which means that the company will have to develop its own operating system and convince app developers to create apps for it. Because of its scale, many developers could do this. The company also relies on American suppliers for its chips. The leading of these suppliers are Qualcomm and Intel, which provide better products. However, Huawei has developed its own Kirin chips, which will be used to power its devices. Therefore, the company could see some growth in future.
How China will respond?
The second question is on how China will respond. The truth is that China has more tools to attack the US. For example, while iPhones and other Apple products are designed in California, they are manufactured in China. The company is also betting on the Chinese market for growth. Therefore, with Huawei being in the Entity List, China could retaliate by banning Apple from the country. It can do this by closing Apple plants. While many Chinese people will lose their jobs, the country will be glad to see the decline of an American icon.
China can also do this by targeting other companies like Procter & Gamble, Caterpillar, and Boeing. It can also make life for these companies more difficult. In addition, it can continue the act of stealing or forcing technology transfers. The country can easily play this because it has more leverage than the United States. Trump has said that these companies are fleeing China, but this is not the case. Doing so will be expensive. Instead, they will likely compensate the tariffs with high prices.
The reason for this is simple. While China has a large trade surplus with the US, most of the goods are usually sold by American firms. These firms pay taxes to the US. On the other hand, very few Chinese companies do any business in the US. Most of its large companies are majorly domestic in nature and don’t do any business with the US. For example, companies like Baidu don’t have any operations outside of China. Alibaba does very little business in the US.
What traders should be careful about
As a trader, you need to know the large American companies that do a lot of business in China. These companies are the most vulnerable if the trade war move to a corporate warfare. Second, you need to understand the American companies that rely on parts from China. This is because China can do things to hinder their businesses.