As President Donald Trump ramped up the trade war with China with tariffs imposed on Chinese products, investors were betting on which companies are the most exposed. Some turned their sights toward semiconductor producers, such as Qualcomm Inc. (QCOM), a mobile chip maker that does much of its business in China.

Qualcomm's products are vital infrastructure components of 5G technology, the future of the data economy, communications networks, data security, and technologies like driverless cars and artificial intelligence. Any action against China in an escalating trade war could have lasting effects on companies that rely on China's advanced technology industry for a large part of their business.

Key Takeaways:

  • Semiconductor stocks fell in May 2020 after the Trump administration blocked chip shipments to Huawei.
  • Qualcomm fell over 5% in the same period.
  • The drop reflects the effect that the trade war with China has on stocks heavily reliant on the Chinese market.

Understanding the Effect of the Trade War with China

In May 2020, the Trump administration blocked semiconductor shipments from U.S. chipmakers to Huawei Technologies Co., Ltd., a leading Chinese telecommunications and consumer electronics company. This move was part of the U.S. trade war with China, but the result was that computer hardware and semiconductor stocks fell in the United States.

According to CNBC, Qualcomm stock fell over 5% while Intel stock fell by 1.4% in one day. Huawei relies on these imported parts and software for its smartphones and telecom infrastructure. To make matters worse, Qualcomm was also in a patent licensing dispute with Huawei. 

Before the Trump administration took this punitive action against China, in March 2018, the administration blocked Broadcom from acquiring Qualcomm, as Broadcom was based in Singapore.

Huawei relies on U.S. firms for networking equipment and data center components. Any ban affects all Huawei products, including high-end smartphones, mobile infrastructure, data centers, and cloud services. The ban would also affect Huawei’s global customers, especially European carriers.

Retaliation from China could target chip giants like Qualcomm, Broadcom, and Apple, who depend on chip makers for iPhone manufacturing. The last time Qualcomm got caught up in the United States-China trade war, it withdrew from the acquisition of NXP Semiconductors (NXPI).

Qualcomm's Interest in China

The majority of Qualcomm's revenues come from China. According to Statista, in fiscal year 2020, Qualcomm earned $14,001 million from the Chinese market compared to $1,129 in the U.S. market.

While the Trump administration did little to build confidence in Qualcomm's strong market presence in the China market, the new Joe Biden administration may not help the tensions with China to a noticeably greater extent. Chinese telecom giant Huawei responded to U.S. blacklisting last year by focusing more on its home market where it is gaining market share.

Qualcomm is diversifying and, according to Investor Business Daily, the company has partnered with China's Tencent (TCEHY) on mobile gaming devices.

The global chip industry took a downturn in 2018 and then fell 12% in 2019. There were signs of an industry upturn early in 2020 followed by a sell-off due to the Coronavirus epidemic. However, despite the pandemic, the semiconductor industry is expected to grow again. The Semiconductor Industry Association quoted World Semiconductor Trade Statistics, which projected that chip sales would rise 5.1% to $433 billion in 2020 and increase to 8.4% in 2021 with the distribution of 5G wireless networks.

Qualcomm and the Future

For Qualcomm, there is a huge opportunity with 5G smartphones and 5G laptops although China-U.S. tensions and the coronavirus shock to the global economy represent strong headwinds. However, with the new Biden administration, a trade war with China that would be significantly detrimental to the U.S. semiconductor industry is unlikely.