Winners and Losers of the Huawei Import-Export Ban May 20

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Oil Prices Climb on Monday →

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Winners and Losers of the Huawei Import-Export Ban

The US has moved to restrict Huawei’s access to US markets either as a supplier or a buyer of technology. This poses risks to many companies in the US Telecom and Semiconductor industries, and could potentially disrupt the rollout of 5G around the world. It also opens up opportunities for a handful of European and US equipment vendors.

Citing national security concerns, President Trump has banned Huawei Technologies Co. (SHE) from selling its technology and equipment in the United States until further review. Additionally, Huawei and 70 affiliates have been added to the US Commerce Department’s so-called “Entity List”, which is a blacklist of sorts that would prevent the Chinese telecom giant from buying parts and components from US companies without first obtaining US government approval. In making these moves, the Trump administration has declared what one analyst has deemed a technological “act of war” that will spark an era of tech decoupling that’s unprecedented in recent history.

3 Reasons for the Huawei Blacklist

The US has long expressed concerns about Huawei and its ties to the Chinese government. There are several reasons why the Trump administration has decided to move more firmly against Huawei at this time.

First, there are concerns that Huawei’s equipment, particularly 5G-related equipment, could be outfitted with hard-to-detect sensors that would enable the Chinese government to spy on Americans’ phone calls, text messages and emails – putting US information infrastructure at risk. The ubiquitous role of 5G in the future heightens those concerns. With 5G, many more devices, people, and products will be linked than ever before in human history. Ericsson AB estimates that 5G will cover over 40% of the world’s population by 2024, with billions of chips, sensors, cameras, and electronics pinging information back and forth between interconnected devices. This greatly increases the potential damage from hacking and manipulation by hostile actors.

A second worry is that Huawei’s growing influence over wireless carriers will not only divert billions of dollars from US rivals, it will enable China to beat the US in deploying 5G technology around the world. Huawei is currently the frontrunner in building next-generation high-speed 5G networks, and the Trump administration has been lobbying, with mixed results, other countries not to use Huawei 5G equipment.

A third reason could be Huawei’s status back home as a national champion that enjoys plenty of government contracts and near-unlimited lines of credit. With its 2018 revenues topping the $100 billion mark, Huawei is by far China’s biggest tech company on a revenue basis, with sales 50% greater than JD.com, the next runner up. However, Huawei’s reliance on the US for many advanced components, including both semiconductors and software, is a weakness that can be exploited. Because American companies dominate semiconductors, Huawei would find it “difficult if not impossible” to maintain production in many of its offerings, from 5G base stations to mobile phones.

For example, Huawei’s base station, smartphone, server and maritime cable businesses cannot run without Qualcomm baseband and processor chips. Alternatives exist, but from American peers such as Intel, Micron and Broadcom. A 2016 report by the Center for Information and Industry Development (CCID), a Beijing-based think tank, noted that Xilinx was a lifeline for Chinese telecom and chip manufacturers, providing more than half of the FPGA chips used by Huawei and ZTE. Anticipating a possible disruption in its supply chain following ZTE’s near-extinction last year, Huawei has been building up inventory of some components it needs, so it has a bit of runway for now.

By restricting Huawei’s access to a US market that is critical to the company’s operations, President Trump may be able to increase his leverage against President Xi Jinping in the current trade war.

Negative for Small US Telecoms

In the United States, small and rural wireless carriers have the most to lose from a Huawei ban. Not only is Huawei the world’s biggest supplier of telecommunication and networking gear, the company’s equipment is favored for its technological edge and competitive pricing. Indeed, Huawei’s technology can be up to a year ahead of its Western peers because it significantly outspends those rivals on R&D. While most large US carriers stopped using Huawei equipment, smaller operators around the US rely on Huawei equipment due to its lower cost. Going forward, they would have to purchase pricier equipment from Nokia (NOK), Ericsson (ERIC) and Cisco (CSCO).

Negative for Global 5G Rollout

Huawei now owns the greatest number of standard essential 5G patents in the world, some of which cover the fundamental building blocks to the technology. This means Huawei is entitled to royalties if companies want to license its 5G technology to build out their own 5G networks. As such, telecom operators that had been counting on Huawei to supply them with 5G equipment will likely experience delays in their 5G rollout.

Negative for US Chip Makers

The Commerce Department’s decision to put Huawei on its “Entity List” means US companies will have to obtain a license if they want to sell technology to Huawei. Even non-US suppliers might have to seek US government permission to sell to Huawei if their goods contain US-sourced components. According to US export control authorities, applications for such licenses are “usually subject to a policy of denial”. For luckier applicants, an approval can take weeks or months. Edison Lee, a telecom analyst at investment bank Jefferies, said in a report that he doesn’t expect the US to grant any such licenses.

This could spell trouble for the suppliers affected. Huawei does business with some of tech’s biggest names such as Intel (INTC) for cellular-tower components and Oracle (ORCL) for software. Microchips are sourced from a wide range of companies, including but not limited to, Qualcomm (QCOM), Broadcom (AVGO), Xilinx (XLNX), Texas Instruments (TXN), Skyworks Solutions (SWKS), Qorvo (QRVO), and ON Semiconductor (ON). It also buys from many smaller technology suppliers spread across the country. Among these are Lumentum Holdings (LITE), a producer of optical components for telecom equipment. Last year, Huawei spent $11 billion – a third of its budget – to purchase US components, and counts some 33 US firms among its top 92 suppliers. The iShares PHLX Semiconductor ETF (SOXX) provides exposure to some of the impacted US suppliers.

Positive for European and US Equipment Vendors

As chief rivals to Huawei, Finland-based Nokia (NOK) and Sweden-based Ericsson (ERIK) could see their sales pop in the United States. The same holds true for some American equipment vendors such as Cisco (CSCO) and Juniper Networks (JNPR).

Conclusion

Some observers argue that the White House is unlikely to bring the full force of a blacklist to bear. As noted above, many American tech firms rely on Huawei for business and could suffer significant losses. China’s government has said it will take “all necessary measures” to defend its companies, and could retaliate against Huawei’s US rivals, which includes pretty much everyone from Cisco (CSCO) to Apple (AAPL) to Dell Technologies (DELL). Moreover, as this video illustrates, it is “almost impossible to extract Huawei from telecom networks” at this point.

Huawei has long denied that its equipment is at the disposal of the Chinese government for spying, however the company’s origin story, as well as assorted evidence of corporate espionage, and the founder’s own connection to China’s Communist Party have kept speculation swirling.


Semiconductors vs Telcoms vs 5G vs S&P 500

Source material for today’s market insight…

Huawei Ban

US chipmakers hit after Trump blacklists Huawei

Shares in some of Huawei’s biggest American suppliers fell on Thursday after the Trump administration ratcheted up attacks on the Chinese tech group. The White House and US Department of Commerce took steps on Wednesday night that would in effect ban Huawei from selling technology into the American market, and could also prevent it from buying semiconductors from suppliers including Qualcomm in the US that are crucial for its production.

US chipmaker Qualcomm, which earns around 5 per cent of its revenues from Huawei, saw its share price drop 4 per cent to close at $82.81 in New York on Thursday despite a broadly positive market. Shares in Broadcom, another supplier, fell 2.3 per cent to $297.29.

The Information Technology Industry Council, which represents Huawei suppliers Qualcomm, Intel and Microsoft, raised concerns about the US executive order and urged the administration to “work with industry” to minimise the fallout.

The US Department of Commerce said it would put Huawei on its so-called Entity List, meaning that the American companies will have to obtain a licence from the US government to sell technology to Huawei. At the same time, US president Donald Trump signed an executive order declaring the US telecoms sector faced a “national emergency” — giving the commerce department the power to “prohibit transactions posing an unacceptable risk” to national security.

Huawei Ban

Trump’s Huawei Threat Is the Nuclear Option to Halt China’s Rise

The Trump administration is pulling out the big guns in its push to slow China’s rise, with potentially devastating consequences for the rest of the world.

The White House on Wednesday initiated a two-pronged assault on China: barring companies deemed a national security threat from selling to the U.S., and threatening to blacklist Huawei Technologies Co. from buying essential components. If it follows through, the move could cripple China’s largest technology company, depress the business of American chip giants from Qualcomm Inc. to Micron Technology Inc., and potentially disrupt the rollout of critical 5G wireless networks around the world.

The threat is likely to elevate fears in Beijing that President Donald Trump’s broader goal is to contain China, leading to a protracted cold war between the world’s biggest economies. In addition to a trade fight that has rattled global markets for months, the U.S. has pressured both allies and foes to avoid using Huawei for 5G networks that will form the backbone of the modern economy.

“This decision is in no one’s interest,” Huawei said in an emailed response. “It will do significant economic harm to the American companies with which Huawei does business, affect tens of thousands of American jobs, and disrupt the current collaboration and mutual trust that exist on the global supply chain.”

Read the full article from TheStreet +

Huawei Ban

Chip Stock Investors Shouldn’t Panic About the Latest Huawei News

While the Nasdaq was up nearly 1% Thursday, the Philadelphia Semiconductor Index was down 1.4% after the Commerce Department announced it plans to put Huawei and 70 affiliates on an “entity list” that prevents it from buying components from U.S. suppliers without U.S. government approval.

Mobile chip suppliers Skyworks (SWKS) and Qorvo (QRVO) , both of which are estimated by Mizuho Securities to get over 10% of their sales from Huawei, were each down over 6%. Qualcomm (QCOM) , which both supplies Huawei and is in a patent-licensing dispute with the company, was down 4%. Other big decliners include Xilinx (XLNX) , Lumentum (LITE) and Inphi (IPHI) .

Meanwhile. some major telecom equipment suppliers are outperforming after the Trump Administration issued an executive order banning the use of “information and communications technologies or services” from any foreign entity deemed to be a national security risk. While not mentioned by name, the move was widely seen as targeting Chinese telecom equipment suppliers such as Huawei and ZTE. Nokia was up 4%, Ericsson was up about 2% and Cisco Systems (CSCO) , which delivered a solid April quarter earnings report on Wednesday afternoon, was up around 7%.

The selloffs seen on Thursday among chip and component vendors with Huawei/ZTE exposure look like an overreaction, at least until credible signs emerge that Washington is thinking about fully banning parts sales to Huawei and/or ZTE rather than simply requiring government reviews.

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Economics & Trade →

Trade War

What could happen if China uses its ‘nuclear option’ in the trade war

Finance →

Banks

Japan’s Banks Are About to Get Even Feebler

Space-Sharing

Food Delivery Boom Means Sandwiches Don’t Come From Restaurants Now

US Housing

Slowdown in U.S. Housing Market Is Helping Landlords Raise Rents

Services →

Advertising

YouTube’s new ‘Bumper Machine’ automates 6-second ad production

F&B

Food Delivery Stocks Are the Latest Casualties of the Amazon Effect

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3DP THEME ALERT

Bombardier installs Stratasys 3D Printing machine

Technology →

Huawei Ban

US chipmakers hit after Trump blacklists Huawei

Huawei Ban

Trump’s Huawei Threat Is the Nuclear Option to Halt China’s Rise

Huawei Ban

Chip Stock Investors Shouldn’t Panic About the Latest Huawei News

Telecoms

Amazon makes it easier for mobile carriers to offer its services

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Jet-Powered Flying Taxi Unveiled Following First Flight

Aviation

Boeing says it’s fixed software for 737 MAX after two fatal crashes grounded planes worldwide

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The Holy Grail Of Lithium Batteries

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U.S. to Lift Steel, Aluminum Duties on Canada and Mexico

Oil THEME ALERT

Stalemate In Libya Could Cause Next Major Oil Supply Outage

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CRISPR THEME ALERT

CRISPR Reveals New Cancer Drug Targets through ID of Critical Gene Fusion Regions

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Media

Hungarians See Record-Low Freedom for Their Media

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JOE MAC’S VIEWPOINT

Joe Mac’s Market Viewpoint: Time for Gold →

JOE MAC’S VIEWPOINT

April 25, 2019
The Facts Changed (For Now) →
Between a slowdown in inflation, a sharp decline in treasury yields, and a short-lived bear market, investors have undoubtedly felt a huge swing in momentum; and they’re not alone, as the Federal Reserve now seems set in neutral until further notice. While some have had their own theories for why the FOMC voters, chiefly Chairman Jerome Powell, has such a radical and resolute change of heart, the answer may be just as simple as raw data.

Other Viewpoint Reports

March 29, 2019

February 28, 2019

Joe Mac’s Market Viewpoint: After the Inflation Intermission →

January 31, 2019

Joe Mac’s Market Viewpoint: Patience, Patience →

December 6, 2018

Joe Mac’s Market Viewpoint: The Next Handle →

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ACTIVE THEMATIC IDEAS

Long-Dated U.S. Treasuries

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Week Ahead

This week minutes from the Fed, RBA and ECB policy meetings will be keenly watched, alongside US durable goods orders, housing data and flash Markit PMIs; UK inflation and retail trade; Eurozone flash consumer confidence and Markit PMIs; Germany business morale; and Japan Q1 GDP growth, trade balance, inflation, machinery orders and Nikkei Manufacturing PMI. Investors will also react to European parliamentary elections, as well as Indian general election results.

US Consumer Sentiment Hits 15-Year High

The University of Michigan’s consumer sentiment for the US rose to 102.4 in May 2019 from 97.2 in the previous month, easily beating market consensus of 97.5, a preliminary estimate showed. That was the highest reading since January 2004, as consumers viewed prospects for the overall economy much more favorably. The survey was conducted before the trade negotiations with China collapsed.

Eurozone April Inflation Rate Confirmed at 5-Month High

The annual inflation rate in the Euro Area rose to 1.7 percent in April 2019 from 1.4 percent in the previous month and in line with the preliminary estimate and market expectations, final data showed. It is the highest inflation rate in five months, mainly driven by cost of services.

Sterling Hits 4-Month Low

The British pound fell to $1.276 Friday morning, its weakest level since January 15th, after Brexit talks between Labour and the Conservatives collapsed. Prime Minister Theresa May has agreed to set a timetable at the start of June for her departure if MPs reject her Brexit plans for a fourth time. Against the euro the pound hit its lowest since mid-February, at €1.143.

Oil Prices Climb on Monday

The price of crude oil hit $63.81 a barrel in early trading on Monday, its highest level since May 1st, after OPEC members indicated production cuts will continue. Saudi Energy Minister Khalid al-Falih said on Sunday there was consensus to drive down crude inventories “gently” and United Arab Emirates Energy Minister Suhail al-Mazrouei said that producers were capable of filling any market gap and that relaxing supply cuts was not the right decision. The price of crude oil rose 1.4% to $63.7 a barrel around 8:30 AM London time and Brent went up 1.3% to $73.3.

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MARKET INSIGHT UPDATES: SUMMARIES

Economics & Trade

Trade War

What could happen if China uses its ‘nuclear option’ in the trade

Chinese scholars are reportedly looking into the so-called nuclear option in the trade war — Beijing dumping US Treasurys. While UBS strategists think it’s unlikely China would sell the entirety of its holdings, they looked into what could happen just in case. To do so, they looked at the effect the Fed’s tapering had on yields.

“Through quantitative easing programs, the Fed expanded its balance sheet by about $3.5trn,” the strategists wrote. “We estimated that this compressed US term premium by about 110bp. Through its balance sheet unwind of $600bn, we estimated that 10-year term premium had risen by about 20-30bp.” Therefore, they concluded that China unloading all $1.1 trillion of its Treasurys, or about 7% of the entire market, would cause the 10-year yield to climb by 30 to 40 basis points.

But not everyone agrees that yields would go higher. In Bloomberg’s daily markets email, Joe Weisenthal, the executive editor for daily news, suggested Treasury yields could actually fall. “Yields would fall because people would assume that this ‘nuclear option’ represented a gigantic break in the U.S.-Sino relationship. All that would hurt the global economy, causing the Fed to be even slower with expected rate hikes. In the immediate term, there would likely be a flight to Treasuries, amid a big risk-off move in markets. The Treasury market often behaves counterintuitively,” he added.

Finance

Banks

Japan’s Banks Are About to Get Even Feebler

Japan’s banks are the weak link in its economic framework. Prime Minister Shinzo Abe’s insistence on following through with a tax increase could make them weaker still.

On Thursday, credit-ratings company Moody’s downgraded its outlook for Japanese banks from stable to negative. The Bank of Japan , which is holding its benchmark interest rate in narrowly negative territory, was the main cause of the downgrade. Japanese interest rates are low because economic growth is relatively weak. That is a problem that the 2-percentage-point sales-tax increase scheduled for October will only exacerbate.

Low interest rates have driven down loan spreads in Japan, squeezing banks’ income from lending. Interest rates on new loans issued by regional banks are now well below the level the sector requires to break even, according to Shannon McConaghy, a portfolio manager at hedge fund Horseman Capital who has shorted Japan’s regional banks.

The weak position of regional banks isn’t a new theme for stock investors. Since the election of Mr. Abe at the end of 2012 ushered in more expansionist economic policy, Japanese stocks as a whole have risen by around 50%. Japan’s regional banks are down 10% over the same period. If the government goes ahead with its tax increase, however, the sector’s problems will only get worse—and there is nothing the BOJ can do about it.

Read the full article from The Wall Street Journal +

Construction & Real Estate

Space-Sharing

Food Delivery Boom Means Sandwiches Don’t Come From Restaurants Now

Kitchen United Inc., a startup backed by the company formerly known as Google Ventures, plans to have as many as 15 locations across the country by the end of the year, including in Atlanta and Columbus, Ohio. They are ghost kitchens, or delivery-centric cooking spaces without the added hassle of in-person dining that a traditional restaurant brings.

Chief Executive Officer Jim Collins says Kitchen United plans to grow to 300 to 400 spaces in four years, and has enlisted chains like gourmet hot dog seller Dog Haus as tenants. In Chicago, where 11 different restaurant brands operate, the site is buzzing with conveyor belts zipping bags of deli sandwiches across the kitchen and down the side of the building to waiting DoorDash Inc. and Uber Eats drivers. There is no eat-in service. Last year, the company secured $10 million in a funding round led by GV.

Still, some ghost kitchen companies have abruptly closed as third-party delivery services squeeze margins with fees that can be as much as 30% of sales. “We’ve seen a lot of them start up, and build a bunch of buzz and then flare out,” says Sterling Douglass, CEO of Chowly Inc., a restaurant software provider. “It’s one of those markets that I think is in its infancy, so there are still a lot of people who are trying to figure that out.”

Read the full article from National Real Estate Investor +

US Housing

Slowdown in U.S. Housing Market Is Helping Landlords Raise Rents

Data from Zillow released Thursday shows that home-price appreciation continued to slow in April from a year earlier, driven in part by softening West Coast metros like San Jose and Seattle. The company also reported the first nationwide monthly price dip in more than seven years — albeit just 0.1%. At the same time, rent growth accelerated, climbing by 2.6% on an annual basis, after a lull in 2018.

Americans pulled back from home purchases last year after mortgage rates spiked, exposing the underlying affordability problem in the property market. Many people piled into rentals, where landlords were offering concessions after a period of overbuilding higher-end units. That increased demand helped drive up what people were willing to pay for an apartment.

Rents and home values tend to move together over the long-term, said Skylar Olsen, Zillow’s director of economic research. “But, in this case, what we’re seeing is a little different.”

More broadly, the challenge for the U.S. housing market is scarcity. As millennials — one of the largest U.S. generations — reach prime homebuying age, they’re finding that the supply of entry-level houses hasn’t nearly kept pace with their numbers. That could force them to rent for longer as they save up to buy the homes that are available, Olsen said.

Services

Advertising

YouTube’s new ‘Bumper Machine’ automates 6-second ad production

YouTube is testing a software tool called “Bumper Machine” that aims to optimize video ads for mobile audiences, TechCrunch first reported. The video-editing tool uses machine learning to pick out key moments from a longer spot and condense them into six-second bumper ads, a format that the video-sharing site introduced three years ago.

Food delivery app GrubHub shortened two 13-second ads with Bumper Machine by identifying more exact marketing messages the company wanted to show. A GrubHub spokesperson told MediaPost that the short-form videos gave it more flexibility in its ad placements as part of ongoing campaigns.

The Bumper Machine looks at video spots and identifies elements such as human characters, motion, sharpness of the focus and quality of the framing. It can help marketers to identify the message and how best to convey that in six seconds, Vishal Sharma, VP of product management at YouTube, told MediaPost.

Read the full article from Mobile Marketer +

F&B

Food Delivery Stocks Are the Latest Casualties of the Amazon Effect

Having already pummeled the likes of grocers and insurers, the Amazon effect is now hitting Europe’s listed online food delivery companies. Just Eat Plc shares slumped nearly 11% on Friday, the biggest casualty of news that Amazon.com Inc. is leading a $575 million funding round in Deliveroo. Takeaway.com NV and Delivery Hero SE also slid on concern the move may lead to new competitive pressures.

“From the point of view of a business owner, we can’t think of much more terrifying news than hearing Amazon is entering your backyard,” Ameet Patel at Northern Trust Capital Markets said in emailed comments.

European investors have learned to beware of Amazon’s incursions. A report last August that the tech giant was holding talks with insurance companies battered shares in GoCompare.com Group Plc and Moneysupermarket.com Group Plc. When the U.S. company announced its acquisition of Whole Foods Market Inc. in June 2017, grocery stocks across Europe plummeted.

Not everyone is taking fright. According to Liberum analyst Ian Whittaker, all Amazon’s move changes in the food delivery space is to underpin Deliveroo’s valuation for an initial public offering. Market leaders such as Just Eat are more likely to become takeover targets, he also said, citing Uber Technologies Inc. and U.S. food delivery groups looking to expand internationally.

Read the full article from Railway Technology +

Manufacturing & Logistics

3DP

Bombardier installs Stratasys 3D Printing machine

German rail maker Bombardier Transportation has installed a Stratasys F900 3D printer at its Hennigsdorf facility located in north-west Berlin.

The printer will enable Bombardier to speed up final part production of interior and exterior train parts such as air ducts, housings and cable holders. Additionally, the company will be able to cut inventory for spare parts while boosting production flexibility for parts and tools. Bombardier will use the 3D printing machine to produce customised rail tools to support the production process and accelerate the launch of new platforms.

The F900 3D Printer was selected due to its large build tray, high strength-to-weight ratio and flame-smoke-toxicity rating. Bombardier Transportation said that the 3D printed rail parts will be supplied to rail and tram companies operating in Germany, Switzerland and Austria to help them maintain, produce and replace train and tram parts rapidly and economically.

EMEA Stratasys president Andreas Langfeld said: “Our FDM-based additive manufacturing technology offers rail companies and maintenance service providers advanced, rail-certified materials, large build trays for bigger rail parts, and importantly, the highest level of print reliability and repeatability in the industry.

Technology

Huawei Ban

US chipmakers hit after Trump blacklists Huawei

Read the full article from Financial Times +

Huawei Ban

Trump’s Huawei Threat Is the Nuclear Option to Halt China’s Rise

The Trump administration is pulling out the big guns in its push to slow China’s rise, with potentially devastating consequences for the rest of the world.