How the trade war is damaging the US tech industry

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For US tech companies, it all began promisingly enough. It is nearly two years since the White House vowed to investigate longstanding complaints about China’s methods for tapping into American knowhow, including trading market access for tech transfer and the outright theft of intellectual property.

But what started as a narrowly targeted trade complaint has morphed into what looks like a turning point for America’s global tech leaders, contributing to severe market whiplash this month.

Apple, for instance, shed about $90bn of stock market value in the three trading sessions after President Donald Trump in a tweet threatened a new round of tariffs. This week, it regained $50bn at the open on Tuesday when those tariffs were delayed — but by the end of Wednesday had given back $40bn on worries that the trade war was contributing to a wider economic slowdown.

A resolution of the trade war may yet calm ructions like this. But many tech executives have concluded that their world is changing for good — and not in ways that they hoped or wanted.

The fight with China has had three broad effects, according to Chuck Robbins, the chief executive officer of networking equipment maker Cisco Systems, and the White House has no offsetting positives yet to show for this pain. Surprisingly, perhaps, companies such as Cisco have managed to resist most of the headwinds so far — but that may be changing.

One effect concerns sales to customers in China. US policy was meant to open the market more to American tech companies, but if anything it has had the opposite effect.

Tech is being ‘disentangled’ into China- and US-centric supply chains

Cisco’s sales to Chinese telecoms groups had already been sliding for years, but big state-owned enterprises have now shut the door in the company’s face. “We’re being uninvited to bid, we’re not even being allowed to participate any more,” Mr Robbins complained this week.

For US chip companies, the threat of lost sales has been exacerbated by the ban on selling to Huawei. Broadcom, for instance, sold $900m worth of chips to the telecoms equipment company in 2018. The loss of those sales, as well as wider uncertainty from the trade war, recently caused it to scrap predictions of a revenue rebound later this year, adding to the doubts that have gathered around an expected cyclical recovery for the chip industry. The pain may eventually be justified by new trade concessions from China, but there is nothing yet to justify optimism.

A second hit has come from the penal tariffs on imports into the US. The White House this week delayed duties on iPhones and laptops, among other consumer goods, to prevent a dent to this year’s holiday-season sales. But that delay is in itself an admission of the damage the duties will cause to companies such as Apple if they are imposed later. Meanwhile, for suppliers of data centre technology such as Cisco, a recent increase in imports tariffs to 25 per cent has already started to bite.

Even if the dispute is resolved soon, tech companies have seen the writing on the wall, bringing a longer-term reordering of the industry. The tech world is being “disentangled” into separate US-centric and China-centric supply chains, says Pat Gelsinger, chief executive of data centre software company VMware. This is not just about finding different ways to serve the US and China markets, he adds. Rather, it reflects rival networks of global economic influence: selling technology to customers in places such as Europe, Latin America or Africa will ultimately be affected by whether they have been drawn into the orbit of US or Chinese tech suppliers.

Tech companies that want to serve a broad array of international markets will have to rethink their organisations and structures to allow them to serve both these global supply networks, adding to the costs of complexity of operating globally, the VMware chief says.

Even this, however, might be wishful thinking. The Trump administration campaign to isolate Huawei has yet to be backed up with any hard public evidence of the company’s wrongdoing, leading many to conclude it is being conducted for commercial reasons. That could in future invite retaliation against US companies.

The third negative impact listed by Cisco’s Mr Robbins, meanwhile, is economic. So far, the global economy has withstood most of the effects of the trade war. That could be changing.

A veteran salesman who has lived through cycles like this before, Mr Robbins says a pause in big deals signed by his company in July has left him with a “gut feel” that business confidence is turning, leading his company to issue a downbeat financial forecast. 

The Trump administration’s trade war may yet produce results, but the tech industry has little to cheer so far from a campaign that was once said to be waged in their interests.

richard.waters@ft.com