“The whole semiconductor industry could collapse.”
China is important to US companies. Qualcomm gets 57% of its revenues in China, Micron 43%, Apple 23%, Jabil 21%, Boeing 13%, Wynn Resorts 60%, according to Bloomberg’s math.
In the last earnings report, GM specifically pointed at its “strong performance in China,” the largest auto market in the world. In the first three quarters this year, GM sold 2.7 million vehicles in China, 38% of GM’s global sales, and up 9% year-over-year. GM’s global vehicle sales rose a mere 0.4%. Without the boom in China, GM’s total vehicle sales would have declined.
And much of the supply chain of US companies is at least partially dependent on China. US companies have long ago jumped on the China bandwagon. With growth languishing in the US, Europe, and Japan, China was the place to be – both, as a booming market for American brands and as a manufacturing base.
This is part of a complex two-way, awfully lopsided $627-billion trade relationship, with the US running a $337 billion trade deficit with China – for the great benefit of US companies and with, let’s say, mixed impact on the US economy. But it cuts both ways: one country’s exports are the other country’s supply chain.
President Elect Trump has now inserted himself into this relationship by questioning in bursts of 140 characters or so the previously unquestionable “One China” policy, whereby the US toes the line and acknowledges that Taiwan is not an independent country but part of China. This is a hot-button issue in China.
So when Trump “accepted” a phone call from Taiwan’s leader – the first direct communication between leaders of the US and Taiwan since 1979, and apparently planned by the Trump folks in advance to demonstrate a hard line on China – and when he in the ensuing media hoopla tweeted that the “One China” policy could be used as a bargaining chip, the Chinese leadership sat up straight. And it has begun to bargain in its own manner.
On Saturday, Wang Jianlin, chairman of Dalian Wanda Group – which acquired among other US jewels, AMC Theatres and Legendary Entertainment, and announced last month that it would acquire Dick Clark Productions – told a conference in Beijing that the jobs of his 20,000 employees in the US would be at risk if a trade war between the US and China broke out.
On Tuesday, an editorial in the Global Times, published by the state-run People’s Daily group, warned, as reported by Bloomberg: “To deal with Trump’s threats, China has a full toolbox.”
On Wednesday, the official China Daily, an English-language paper, cited Zhang Handong, director of the National Development and Reform Commission’s price supervision bureau. China would soon hit a US automaker – he didn’t say which – with an antitrust fine for “monopolistic behavior,” as the paper put it. Investigators found that the company had told distributors to fix prices starting in 2014. For good measure, as if to emphasize the subtext, he added that “no one should read anything improper into the timing of penalty decisions or businesses that are targeted.”
US companies are worried. They have a lot at stake. China has long used administrative procedures and the selective enforcement of anti-monopoly laws, government regulations, and procurement tenders to hamper operations of foreign companies in China for the benefit of local competitors.
“People feel off-balance right now; when there is a sour relationship between the US and China, everyone is affected,” Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai, told Bloomberg. “State-owned enterprises in China have considerable purchasing power, and they’ll be influenced by the government tone, or get specific directives, to avoid American businesses. People will try to read Beijing’s mood and that’ll shape economic activity.”
“Technology companies are quite nervous,” said Eric Huang, a board member of Monte Jade Science and Technology Association and CEO of COINX Ventures, both in Silicon Valley. Tech companies are particularly vulnerable due to their extensive supply chains in China and Taiwan. Bloomberg:
Taiwan plays a critical role in the global tech supply chain. Apple Inc.’s main manufacturing partner is Foxconn Technology Group while Intel Corp. provides chips to many Taiwanese device-makers and the country’s contract semiconductor firms Taiwan Semiconductor Manufacturing Co. and United Microelectronics Corp. supply many U.S. companies.
While contract manufacturers such as Foxconn and Pegatron Corp. are Taiwanese, most of the assembling is done at enormous plants in mainland China.
Tensions between China and Taiwan, or worse, a Chinese economic embargo of Taiwan, would shred the global supply chains of technology products. All the semiconductor foundries are in Taiwan, explained Ben Lee, co-founder of Glogou in Silicon Valley, whose software helps US businesses market their products in Asia. “The whole semiconductor industry could collapse,” he said.
Trump’s China rhetoric may just be a negotiating tactic, but it already is working its magic.
“Donald Trump doesn’t follow any the rules,” Ta-lin Hsu, founder and chairman of PE firm H&Q Asia Pacific in Palo Alto, told Bloomberg. “It’s causing a huge sense of uncertainty. People are trying to guess what will happen next. No one has a clue.”
Investment plans are on ice given the uncertain outlook and should a US-China trade war break out, companies with small margins caught in the cross-hairs may go bankrupt, according to Hsu.
The hopes are that Trump, as a business man, will be practical and bring a bottom-line focus to the US-China relationship. But Tao Weimin, VP of apparel company V-Grass Fashion in Nanjing, warned that the approach by Trump’s transition team could backfire. “Beijing might feel like it cannot back down or be seen to be weak,” he told Bloomberg. “So there is a possibility of escalation.”
This might come as another nasty surprise for the happily ballooning US stock market valuations that see nothing but a gravity-free paradise in the Trump era.
And so the Hot Money returns and bets big on Oil Nirvana. Read… Treasuries Melt Down, Junk Bonds Boom, Yield Spreads Collapse
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