The S&P 500 fell 0.7% on Monday, with the tech-heavy Nasdaq dropping 1.5%, as the fallout from US restrictions on Chinese telecoms equipment maker Huawei rippled through the market.
Here we answer some of the top client questions and offer some context on this latest development:
What does inclusion on the entity list mean?
US companies are now required to obtain licenses to transfer technology to Huawei, effectively restricting them from selling new components, chips or software to the Chinese company and its 70 affiliates without prior US government approval. In a previous case in 2016, Huawei’s smaller peer ZTE won suspension from the list within two months of its imposition, after agreeing to cooperate with US authorities.
But hasn’t the US government since eased these restrictions?
The order is effective immediately, with the White House able to make changes to its enforcement plan within 150 days. But the US government on Monday allowed some exemptions for the “continued operations of existing networks and to support existing mobile services” through 19 August. However, rather than a reprieve for the Chinese firm itself, the slight easing of rules is squarely aimed at Huawei’s past customers, such as rural broadband providers or owners of its Android phones. News reports suggest US companies are already moving to comply with the restrictions: Google has restricted Huawei's access to its Android mobile operating system and US chipmakers, including Qualcomm and Intel, plan to stop supplying Huawei.
Can Huawei just rely on non US partners?
Huawei has diversified its supplier base to include in-sourcing through its chip subsidiary HiSilicon. But the company still relies on US suppliers for certain critical components like radio frequency, optical and network processors, of which we estimate the US holds dominant market shares of between 90% and 100%.
How might China respond?
Up to this point, China has carefully calibrated its responses to previous rounds of US trade escalations. Following the latest breakdown, Beijing has adopted a more combative tone in public comments, and the targeting of a “national champion” may trigger a more hawkish response. Chinese President Xi Jinping’s visit to a Chinese rare-earth mining and production facility on Monday offered a clear view on its options for retaliation. China holds over 80% of the world’s rare-earth reserves, according to third-party research, which are required in a number of high tech industries, from white goods and electronics to medical equipment, wind turbines and advanced weaponry.
How could this spill over?
The global supply chain impact will depend on the length and severity of restrictions imposed on Huawei. Assuming the current restrictions stay in place, we would expect industry earnings to decline by low-single-digits percentage for US tech, mid-single digits for Asia tech and mid-to-high single digits for Taiwan tech. We see a neutral impact for Europe's tech industry. Stepping back, lengthy restrictions on Huawei could slow the global roll out of 5G networks. These developments increase the likelihood telecom providers take a wait-and-see approach on the dispute before making 5G purchase for their next generation networks.
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