As the saber-rattling between the U.S. and China over the bilateral trade deficit heated up this week, it became increasingly clear that U.S. components suppliers — and one in particular — may have the most to lose in a trade war between the world’s two largest economies.
The U.S. has threatened to impose tariffs as early as next month on hundreds of Chinese tech products, many of which use chips designed and marketed by U.S. chip firms. As if that wasn’t enough, a ban enacted this week on exports to Chinese electronics giant ZTE Corp. will further cut into sales for U.S. chip firms, particularly Qualcomm, which sells an estimated $500 million worth of smartphone chips to ZTE each year.
Meanwhile, China’s regulatory Ministry of Finance, also known as Mofcom, continues to hold hostage the $44 billion acquisition of NXP to which Qualcomm has pinned its hopes for continued growth and expansion. On Thursday (April 19), Qualcomm and NXP withdrew and refiled notice of the acquisition with Mofcom at the agency’s request. The refiling after a spokesman for Mofcom said that Qualcomm’s plan to remedy Mofcom’s antitrust concerns about the acquisition was insufficient to earn the agency’s stamp of approval.
A spokesperson for Qualcomm said that the company had no comment on the ZTE action, which was imposed by the U.S. Commerce Dept. in response to ZTE violating the terms of a deal reached last year when ZTE was caught shipping telecom equipment to Iran and North Korea, said the Commerce Dept.
Qualcomm won’t disclose how much it does in business with ZTE. But by some estimates, Qualcomm chips are used in half of ZTE’s smartphones to the tune of some $500 million per year in sales for the San Diego-based fabless chip giant.
According to Handel Jones, CEO of consulting firm International Business Strategies, there are no remaining market share issues with regard to Qualcomm’s pending acquisition of NXP. “We are in a trade war and China is highly skilled at winning battles, which result in the gaining of competitive advantages,” Jones told EE Times in an email exchange.
“Qualcomm-NXP is a part of a bigger picture than the semiconductor industry, and the best solution is for the U.S. and China to cooperate on advancing adoption of new technologies,” added Jones. “Without this cooperation, a number of U.S. companies will face increasing challenges in participating in the China market.”
Qualcomm began shedding jobs this week as part of a largely unrelated plan to shed $1 billion in costs annually. The cost savings plan was promised to Qualcomm shareholders in January in response to Broadcom’s hostile takeover attempt of Qualcomm, which was later quashed by Trump on national security grounds. While Qualcomm has declined to say how many jobs it will cut, the layoffs include 1,500 jobs in California.
As for the tariffs, the Trump administration earlier this month unveiled a list of about 1,300 largely tech products that would be subject to 25% tariffs in protest of Chinese policies around technology and intellectual property deemed unfair. The list includes scores of products used in the electronics manufacturing supply chain but is largely devoid of finished consumer electronics goods that many feared it could contain.
Before taking effect, the list will next undergo a public comment and review period, including a May 15 hearing scheduled by the U.S. Trade Representative. It is expected that there will be pushback from both industry and politicians asking for items to be removed from the list.
The Trump administration has argued that the tariffs are necessary to protect U.S. companies and jobs from industrial practices by China deemed to be unfair. While the U.S. semiconductor industry has complained for years about China’s practices, particularly in regards to intellectual property protection and foreign ownership of businesses in China, chipmakers remain very wary of tariffs or the cascading effects of a trade war between the two nations.
Indeed, Qualcomm and other components suppliers might end up suffering collateral damage. In fiscal 2017, 65% of Qualcomm’s revenues were from customers and licensees based in China, according to a Qualcomm spokesperson.
China is the No. 1 export market for U.S. chips. China reportedly offered last month to buy even more chips from U.S. companies to try to offset the bilateral trade deficit between the two countries, which last year reached $375 billion. Trump has said that he wants to cut the deficit by $100 billion.
ZTE, by the way, may be forced to exit the smartphone business altogether, according to Bill McClean, president of IC Insights. In addition to being cut off from access to U.S. components, the ban means that ZTE likely will no longer be able to use Google’s Android operating system.
“If fully enacted, it is difficult to see how ZTE could remain in the smartphone business,” McClean told EE Times in an email exchange. “I would guess that all of its phones use at least one U.S.-sourced IC. It would take a lot of time to attempt to redesign its smartphones to work around this ban.”
— Dylan McGrath is the editor-in-chief of EE Times.