US chipmakers take their turn on the trade war trampoline: Ready to bounce?

A perspective from E*TRADE Securities 05/23/19

They’ve been called the crude oil of the 21st century, and this week investors got a taste of just how influential they’ve become: Welcome to the world of semiconductors—seldom understood but critical to the digital world we inhabit.

Semiconductors are used to make microchips, which, in turn, power the world’s digital devices. One technology firm in particular—Huawei—accounts for more than $20 billion in semiconductor purchases each year, making it a dominant consumer of the industry’s wares.1

If that firm’s name rings a bell, it’s because the Chinese tech giant is roiling the financial markets in a manner few could have predicted.

What’s the deal with this outfit?

Huawei operates in more than 170 countries and last year generated $107 billion in revenue, placing it among the global titans of technology.2 But once again, the company is caught squarely in the crossfire of the US-China trade war. Over the years, the US has accused Huawei of any number of transgressions, including copying software code, infringing on US patents, conducting government espionage, and, most recently, violating US sanctions on Iran.

White House decrees; stocks tumble

The controversy around Huawei was largely contained to foreign policy circles until last week, when the White House issued an executive order, carried out through the Commerce Department, banning American companies from purchasing telecom equipment deemed a security risk. The decree specifically limits US sales to Huawei.3

That’s a big deal because American firms are critical to the global semiconductor supply chain, and the Chinese market for chips is huge. Two of the largest American chipmakers, Qualcomm and Micron Technology, generate more than half of their annual revenue from exports to China, which comprises about one-third of the global market for semiconductors.1

Global industries with highest revenue exposure to China

Source: Financial Times


It’s no wonder, then, that the tech sector—and chipmakers, in particular—took a beating when US firms began complying with White House demands. Qualcomm shares tumbled nearly 6% by the closing bell on Monday, while the PHLX Semiconductor Index lost 4%.

Google drove home the Commerce Department’s order in very real terms by restricting Huawei’s access to its Android operating system, which is central to Huawei’s bid to become the world’s largest smartphone provider.4

The importance of semiconductors

Although it was painful to reckon with, the fallout among chipmakers underscored the influence of the semiconductor industry—a nearly $500-billion global market responsible for powering the smartphones, computers, ATMs, televisions, and home appliances we depend on daily. Even technology firms with little exposure to Huawei were caught in the undertow, helping drag the tech-heavy NASDAQ Composite down 127 points on news of the blacklisting.

Semiconductor sales

Source: Statista


It was also a reminder of just how susceptible financial markets are to shifts in the geopolitical winds. It’s one thing to read about the US-China trade war from afar; it’s quite another to see your portfolio take a direct hit from the shrapnel.  

Bottom line

For investors, the takeaways aren’t exactly mind-benders, but they do warrant a mention.

•  No surprise: Technology can be volatile. It goes without saying, but we’ll belabor the point, nonetheless. Technology stocks are known for having growth potential, but they also carry risk. As US-China trade negotiations are replaced with barbs and bombast, technology firms with markets in China could come under pressure. In the current environment, shares of US chipmakers may be particularly choppy.

•  Geopolitics matter. Trade policy cuts both ways. On Monday, tech stocks sold off on the Commerce Department’s earlier directives. A day later, semiconductor shares rallied after the government eased restrictions on US firms doing business with Huawei in order to minimize supply chain disruptions.

•  Consider international opportunities. Chinese technology firms like Huawei need to buy their chips somewhere, which could bode well for non-US chip firms—and investors with the foresight to spot these opportunities.

Had your fill of this trade war? The next opportunity for the two sides to reach an agreement could be at the G20 summit next month in Osaka. Until then, buckle up. And let the chips fall where they may.

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1.    CNBC, “Chipmaker stocks plunge on report that companies are dropping business with big customer Huawei,” May 20, 2019, https://www.cnbc.com/2019/05/20/chipmaker-stocks-plunge-on-report-they-are-dropping-business-with-huawei.html

2.    “Huawei Shakes Off U.S. Offensive to Post Strong Results,” The Wall Street Journal, May 23, 2019, https://www.wsj.com/articles/huawei-shakes-off-heightened-global-scrutiny-to-post-strong-results-11553826912

3.    U.S. Department of Commerce, “Department of Commerce Announces the Addition of Huawei Technologies Co. Ltd. to the Entity List,” May 15, 2019, https://www.commerce.gov/news/press-releases/2019/05/department-commerce-announces-addition-huawei-technologies-co-ltd

4.    CNBC, “Google cuts ties with Huawei. That may be a ‘kill switch’ for the Chinese firm’s global smartphone ambition,” May 20, 2019, https://www.cnbc.com/2019/05/20/google-stops-some-business-with-huawei-could-hit-its-global-smartphone-ambitions.html

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