Apple Inc. (AAPL)
“We are avoiding sectors that have large exporting elements, for example, the entire iPhone supply chain,” Zhou said.
Zhou said she is now focused on Chinese industry leaders – Tencent and Alibaba, for example – that buy and sell products and services almost exclusively within China, and are therefore shielded from the tariffs’ impact.
Apple’s out-sized dependence on China should be obvious to anyone that could read an annual report. The Tim Cook-led tech company relies on hundreds of suppliers in China to produce its iPhone, iPad, Apple Watch, and other tech gadgets. The Apple production model has for years been centered on making products for as cheap as possible mostly in China, and then profiting from big markups on U.S. consumers.
Baidu, Alibaba, Tencent
China Tech Can’t Spend Its Way Out of This Mess (May 20, 2019)
China’s biggest tech companies are not only battling a sustained economic slowdown, they’re getting to the natural end of a decades-long expansion – fueled by the theory that if revenue grows, profit will automatically follow.
Tencent, meanwhile, has chosen pragmatism over the blind chase for revenue. In the March quarter, management cut its sales and marketing spending by 24%, the most in four years. That helped boost operating income, despite across-the-board weakness in revenue, which grew 16.3%, the slowest pace on record. After removing the subcategory called other gains, which includes those from investments, the company reported its highest operating margin in a year. As a result, Tencent was the only company of the three to post a rise in operating profit, climbing 11% to a new record.
The pain for Huawei will clearly be greater than for U.S. suppliers. “Our assessment is Huawei, just like all large tech companies, remains highly dependent on a global supply chain, and possibly will experience a notable disruption without a continuous supply from the US. For suppliers, losses of Huawei may be mitigated by the gain of Huawei’s rivals, but short-term setbacks are hard to avoid,” Bernstein analysts wrote. Analysts believe Huawei has been stockpiling chips, and that could help it for awhile.
“This would also quickly put at risk both the company itself and the networks of Huawei customers around the world, as the firm would be unable to upgrade software and conduct routine maintenance and hardware replacement. It would hit virtually all of Huawei’s products, including high-end smart phones, mobile infrastructure, data centers and cloud services, and have immediate global implications for any company utilizing Huawei’s products or services. European carriers, in particular, are likely to be affected quickly,” the Eurasia Group analysts noted.
Huawei’s $105 billion business at stake after U.S. broadside (May 16, 2019)
Earlier this week, Huawei was added to the U.S. Bureau of Industry and Security’s so-called Entity List. That means American firms will need to get a license from the government to sell or transfer technology to Huawei.
Huawei has over 30 U.S. companies that it deems “core suppliers,” selling it components to go in everything from its smartphones to its telecom networking equipment.
It appeared that Huawei has been preparing for this situation for some time. The world’s largest telecom equipment maker told some suppliers six months ago that it wanted to build up a year’s worth of crucial components to prepare for any U.S.-China trade war-related issues, according to a report from the Nikkei Asian Review on Friday.
While lack of access to the Google Play Store for users in China is not an issue – Google services such as these are banned in the mainland – it would become a big issue in Western markets if blocked.
Huawei shipped a total of 206 million smartphones in 2018, 105 million of them to mainland China, IDC data shows, which means roughly half of Huawei’s smartphone business could be affected by the potential loss of Google services in future.