All Silicon Valley can talk about right now is more integration – more cloud, more connection and more cooperation. Conversely, all the international community can talk about is why they need to become less interdependent – and tech-investors are watching it all with a weather eye on the China-US sky.
Despite all the benefits that going global has bestowed upon business, the recent rise in tensions between China and the United States has meant new challenges to the way tech companies engage in commerce. While America’s President Donald Trump and China’s Paramount Leader Xi Jinping play chicken with each other’s economies – all the talk of tighter restrictions and tariffs have made the markets volatile.
Supply chains are the unsung heroes that make the modern world go around and it isn’t until something seriously disrupts the process that people realize how much it impacts the economics behind business. Electronic devices are the most complex things that people produce and components are often built by highly-specialized manufacturers in different parts of the world – often crossing oceans multiple times as more technology is added to the hardware.
China has cornered the market on electronics assembly and, according to Henry Yeung from the National University of Singapore, commands half the world’s workforce capacity for building them. Companies like Intel Corp. (NASDAQ: INTC), for example, announced that they are reviewing their global supply chain process to reduce their reliance on China’s role in their production.
Tariffs are making it hard to manufacture and move products, Intel says, and they will make changes if they have too. The company’s stocks were one of the hardest hit after President Trump’s May 5 tweet about raising tariffs on goods coming out of China – ping 10 percent in the first six trading days following the initial spate of trade talk. Consequently, Intel has had to reduce their revenue forecast for the year due to what they have called “China headwinds.”
Likewise, Apple Inc. (NASDAQ: AAPL) recently announced that Taiwan-based Foxconn Technology Group – their major partner in manufacturing – is prepared to bid Beijing a fond farewell if things don’t turn around. They have enough supply to keep phones coming to an eager North American market.
“Twenty-five percent of our production capacity is outside of China and we can help Apple respond to its needs in the US market,” said Young Liu, a representative of Foxconn, in an investor briefing on June 11. He went on to say that arrangements were being made for India to step in as a partner. “We have enough capacity to meet Apple’s demand.”
Apple’s stocks upticked 1 percent that same day, to $194.99 at close in New York. The company made it clear they are not moving operations out of China as of yet but do want to reassure investors that they are preparing for every eventuality.
Sources:
https://seekingalpha.com/article/4269707-china-may-use-boeing-asymmetrical-trade-warfare
https://www.economist.com/business/2019/06/06/the-technology-industry-is-rife-with-bottlenecks
https://seekingalpha.com/article/4270511-vwo-diversify-portfolio-emerging-markets
https://www.investopedia.com/why-rising-inventories-due-to-china-threaten-the-u-s-stock-market-4687543
https://www.nytimes.com/2016/08/04/books/review-how-everything-became-war-and-the-military-became-everything.html
https://www.heritage.org/trade/report/the-benefits-free-trade-guide-policymakers
https://www.bloomberg.com/news/articles/2019-06-16/trade-war-has-intel-reviewing-global-supply-chain-ceo-says
https://www.bloomberg.com/news/articles/2019-06-11/hon-hai-has-enough-ex-china-capacity-to-make-u-s-bound-products
https://www.cnbc.com/2019/05/13/these-are-the-biggest-dow-losers-since-the-trade-war-escalated.html
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
