Semiconductor manufacturers have enjoyed rapid sales growth and soaring stock prices, but the good times are threatened by the mounting trade war between the U.S. and China. In particular, most chips imported to the U.S. from China are actually designed by U.S.-based companies that outsource production there, or use Chinese firms for final assembly and testing, as reported by The Wall Street Journal. Tariffs on imports from China, as well as restrictions on transfers of technology to China, are likely to hit these U.S.-based semiconductor companies hard: Intel Corp. (INTC), Qualcomm Inc. (QCOM), Texas Instruments Inc. (TXN), Applied Materials Inc. (AMAT) and Lam Research Corp. (LRCX).

Stock 1-Year Price Gain
Intel 50.0%
Qualcomm 4.3%
Texas Instruments 42.8%
Applied Materials 13.0%
Lam Research 18.6%
S&P 500 Index (SPX) 13.9%

Source: The Wall Street Journal, as of 10:45 AM EDT June 18.

The Tariff Threat

As noted above, major U.S.-based semiconductor companies such as Intel, Qualcomm and Texas Instruments are highly reliant on global supply chains in which China is a major player. Chips designed in the U.S. but manufactured in China, as well as chips made in the U.S. but sent to China for final testing and assembly, will be hit by a 25% tariff that the Trump administration has announced on semiconductor imports from China, per the Journal. Scheduled to take effect on July 6, this will be a tariff on U.S. chipmakers' own goods, the Semiconductor Industry Association argues.

By raising their costs, this will reduce the competitiveness of U.S.-based semiconductor firms. Meanwhile, China now has added impetus for spurring the growth of its own semiconductor industry into a major competitor to U.S. firms in design as well as fabrication. This, in turn, would diminish the future market potential for U.S.-based chipmakers in China, and eventually elsewhere in the world.

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Technology Transfer Concerns

Applied Materials and Lam Research are leading suppliers of the advanced capital equipment used in the fabrication of semiconductors. The Trump administration has already voiced objections over patent infringement and outright piracy of technology by Chinese firms, and it cited national security concerns in opposing a takeover bid by Broadcom Inc. (AVGO) for Qualcomm earlier this year, while Broadcom was domiciled in Singapore. The Journal indicates that the administration is expected to announce new controls on exports of sensitive technologies to China, which are likely to crimp exports by Applied Materials and Lam Research to that country.

This, in turn, would have two effects. For one, U.S. semiconductor companies that outsource production to China may be unable to have their newest, most advanced chip designs fabricated there, if more advanced fabricating equipment is necessary. Meanwhile, it also would slow China's own drive to become a more advanced player in chips, rather than just producing them according to foreign companies' designs. China had been holding up approval of Qualcomm's attempt to acquire NXP Semiconductors NV (NXPI), in what was viewed widely as yet another move in the mounting trade war, but this hurdle now has been removed, the South China Morning Post reports.