In our recent note sent several days ago we suggested that the China conflict would come back to haunt the US chip industry. From a stock perspective we suggested taking short term gains from a recent bounce back off the table. Both ideas turned out true, but way faster than we had thought! Not only have investors figured out that the trade truce was hollow but just to make sure, the US had Huawei’s CFO arrested in Canada.
Given that Meng Wanzhou, who was arrested, was not only the CFO but also the daughter of the founder of Huawei, China’s biggest tech success story, as well as a high ranking female, this is not just a slap in the face but rather Trump personally spitting in Xi’s face.
Guilt or innocence is not the issue as we think Huawei is very guilty. The ongoing joke from 15 years ago, which was no joke, was that Huawei routers when booted up would say Cisco on the display as all the code was stolen from Cisco. Huawei even admitted in court to stealing some of Cisco’s code, it was that blatant. We are also very sure that Huawei could care less if their products containing US semiconductors are sold to bad actors around the globe, much as ZTE did.
Yes, Huawei is very, very guilty but the timing of the arrest is the question not the guilt. Its very personal now between Trump & Xi.
If ZTE doubled China’s resolve to get big in the semiconductor business, Huawei just tripled it.
The next question is whether the administration did this on purpose to piss off China and play the role of “disruptor in chief” or it was just just a question of one hand not knowing what the other was doing. Maybe if its the latter the Chinese could brush it off to stupidity and not react as badly….but we’ll never know.
We would now put the odds of a “good” trade resolution at less than 50%. By good we mean tariffs going away and not giving up everything.
We would not be surprised if there were some further retaliation against the US tech industry. If we were the CEO/CFO of Micron, we probably wouldn’t want to be traveling anywhere near China for fear of being yanked off a plane for patent infringement, or some other charge.
Whereas the trade truce was likely good for KLAC/ORBK, China could now squash the deal as Huawei payback as it has clearly admitted that M&A approval is only political in nature. Responding in a non-tariff way would allow the Chinese to say they are respecting the truce just like the US.
Reconsidering QCOM/NXP was a joke as everyone understands it was dead and buried.
The arrest of Meng Wanzhou is like a US sniper taking out a North Korean general across the DMZ two days after the truce in 1953…..they might not be happy with us. We don’t think this is a case of a lone sniper not getting the ceasefire message, we think this was calculated on the US part.
Do we even make it to 90 days?
If this is the start of the ceasefire, how much worse can it get? China has now publicly played down what ever was not agreed to in South America. We think the Chinese position got very much more entrenched over the Huawei arrest, and will make compromise very, very difficult.
It all comes back to the semiconductor industry
As we have said for a long time, all roads in trade lead back to the chip industry. The core issue here are the US chips in Huawei products . China needs desperately to be independent of the US to get rid of this issue once and for all.
Chip equipment is at the very core of being independent. China desperately needs chip equipment to get their own chip production up. Jinhua / UMC / Micron was just the beginning of an ongoing struggle behind the public trade war.
The only true leverage the US has is to stop export of semiconductor equipment to any Chinese fab, foreign or domestic, which will choke off China’s oxygen supply. That may become the ultimate “nuclear option” if trade talks go south from here.
We would still avoid the stocks as we don’t like where things are headed (in a hurry). We think the downside beta remains higher than the upside beta in the trade issue and the tech industry could wind up with the short end of the stick if there were a bad agreement.
The administration seems more focused on soybeans and cars than chips and technology which is the real underlying issue. We would not be surprised for the administration to announce a “win” in trade on selling the Chinese more soybeans and cars only to cave on chips and technology which is less well understood.
Either way, its going to be rocky for a while with the stocks in a volatile pattern. We would rather watch from the sidelines.
Also Read: Could China Conflict Curtail Chip Comeback?Share this post via: