We take a look at the 3 industries worst affected by the ongoing trade war between the U.S. and China, and the companies who can expect a lot of change.
Sept. 12, 2019
Over the past year, US President Donald Trump and Chinese President Xi Jinping have been applying tariffs back and forth, starting with Trump’s duties on solar panels and washing machines in January 2018. Since then, the tariffs have ramped up significantly. In August, Trump ordered US companies to “immediately start looking for an alternative to China” after Jinping threatened to impose duties on $75 billion worth of US goods.
These industries face the biggest threats:
The Technology Industry:
These taxes have the most significant impact on industries that deal directly with the other country. One of the industries impacted the most by the trade war is the technology industry. Chipmakers such as Nvidia (NASDAQ: NVDA), Micron Technology (NASDAQ: MU) and Intel (NASDAQ: INTC) are particularly vulnerable to the trade war tensions as they have high exposure in China. Chinese revenue makes up 24%, 57%, and 27% of their total revenue respectively.
Trump’s ban on US companies selling equipment to Huawei is another move which could have disastrous consequences for both countries. Semiconductor manufacturer Broadcom (NASDAQ: AVGO) sold $900m worth of chips to Huawei alone in 2018, with 49% of its total revenue coming from China. Huawei expects revenue to fall by $10 billion due to this ban from the US. Although the ban has recently been delayed, Huawei are prepared to work for the foreseeable future under these kinds of restrictions, reducing its dependence on US products.
The Automobile Industry:
The automobile industry is likely to suffer from the introduction of tariffs from China. In 2018, China raised the tax on US automobiles from 15% to 40%. Although Chinese consumers usually buy locally manufactured cars, one US company that could suffer greatly from these tariffs is Tesla (NASDAQ: TSLA). Tesla, who currently manufactures its automobiles in the US, has begun building its Gigafactory in Shanghai. This new facility intends to manufacturer roughly 10,000 Model 3’s every week for the local Chinese market and aims to open in late 2019. Although the levies has been brought back down to 15% as a gesture of good will, further tension between the US and China could lead to significant financial trouble for Tesla as it expands further into China.
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The Agricultural Industry:
Another industry heavily affected by these charges is the agricultural industry. China is currently the fourth largest agricultural export market for the US, with $9.3 billion worth of agricultural products being exported to China in 2018. Amongst cotton, hide, pork and coarse grains, one of the largest Chinese imports are US soybeans. In 2018, $3.1 billion worth of soybeans were purchased from the US. That same year, Chinese officials placed a 25% toll on the product.
These tariffs have had a bad impact on farmers, with agricultural exports down 61% from 2014. This has led to an increase in farm bankruptcies and has had a knock-on effect on companies such as Deere & Co. (NYSE: DE) and Caterpillar (NYSE: CAT), who manufacturer equipment used by farmers. In August, Deere & Co. cut its full-year earnings forecasts for a second time in the past four months, saying that uncertainty in the sector has affected its results. Deere & Co’s net sales for the three months to July 28th fell 3.8% from the same time last year, with net income also declining from $910 million to $899 million.
How to overcome these issues:
In an attempt to work around these restrictions, companies such as Huawei have been limiting its reliance on US technology. In August, Huawei unveiled its own phone, computer and smart device operating system, with the goal of competing with the Android OS. Huawei also recently announced Ascend 901, a new artificial intelligence chipset, to compete with Nvidia’s GPU (graphics processing unit) and Google’s (NASDAQ: GOOG) TPU (tensor processing unit).
US companies, on the other hand, have begun moving operations out of China. Apple (NASDAQ: AAPL) has announced that it would move some of its manufacturing facilities from China to India. Californian solar technology company Enphase (NASDAQ: ENPH) announced it would produce some of its products in Mexico to avoid these tariffs.
This is not the first time companies have looked outside of China for manufacturing. Since 2013, the minimum wage in Shanghai has risen roughly 53%. Over the course of this time companies such as Nintendo (TYO: 7974), Sharp (TYO: 6753) and Kyocera (TYO: 6971) have moved production to Vietnam, whose exports grew 64% over the past three years. India, Malaysia, Thailand, Taiwan and Mexico have also seen an increase in their exports to the US, with Mexico passing China to become the US’s largest trading partner.
Although the trade war is still in full swing, on September 4th, 2019, the US and China agreed to resume trade negotiations. The two countries agreed to talk in Washington this October in a bid to relax the growing tension. The Dow Jones Industrial Average rose 1.2% following this announcement.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Alphabet, Apple and Nvidia. Read our full disclosure policy here.