Trade Tensions Between the U.S. and China: A Tech Perspective
Portfolio Manager Brad Slingerlend comments why escalating trade rhetoric should not materially impact growth and earnings prospects of the tech sector.
- We do not believe that limitations on Chinese investment in U.S. technology companies will materially impact the sector
- We consider the potential disruption to global supply chains caused by tariffs to be a greater risk. However, this interdependence should likely lead to a de-escalation of tensions
- Many of the most compelling themes in the tech sector today are not directly impacted by global trade, among them the cloud, the Internet of Things and artificial intelligence
Escalating trade rhetoric between the U.S. and China has put downward pressure on stocks over much of the past month. While several globally integrated sectors have been impacted, technology has more recently become a flash point as the Trump administration announced plans to curtail Chinese investment in “industrially significant” technology companies. In general, we don’t expect potential restrictions on Chinese investment in U.S. companies to have major ramifications on technology stocks. In fact, some of the most compelling themes in tech investing today – the transition to the cloud, the Internet of Things (IoT) and artificial intelligence (AI) – are only tangentially connected to global trade.
Rather than the flow of capital, we consider the potential disruption to global supply chains caused by tariffs a greater risk. Trade restrictions could disrupt the flow of goods in the globally integrated production process. Over the past decades, China has positioned its manufacturing base as a location for final assembly of a wide range of goods. While basic subcomponents are often sourced from China’s neighbors, more complex inputs, including semiconductors, originate in the U.S. Overall, a material portion of Chinese exports are comprised of componentry that was imported into the country. Given this interdependence, we expect that a mutually beneficial resolution to the current trade spat should ultimately be reached.
Longer term, persistently heightened trade tensions may influence the behavior of technology players. Supply chains are constructed to ensure the continued flow of goods through the manufacturing process. Companies – either in response to, or in anticipation of trade barriers – will adjust their logistics in order to meet their business needs. In that regard, less trade-friendly participants in the global economy may get left behind. Similarly, threats to the flow of semiconductors and other advance components to China’s factories may cause the country’s authorities to accelerate its “Made in China 2025” initiative. We are skeptical that China can so quickly master an industry as notoriously complex as semiconductors, but any inroads made into advanced manufacturing stands to come at the expense of established global players.
U.S. authorities are likely cognizant that China is an important market of finished U.S. technology goods, including Apple’s iPhone. A deteriorating commercial relationship between the two countries would create headwinds for American companies to maintain and grow market share in China. We believe that rising trade barriers seldom end well. We are also mindful of the remote risk that a more restrictive technology marketplace may place the U.S.’s globally dominant technology firms, such as Facebook, Amazon and Alphabet, on the defensive as Chinese Internet giants expand their international footprint and plan to go toe-to-toe with their American counterparts.
Global trade continues to create attractive opportunities for technology investors, as do China’s platforms catering to the country’s massive market. Still, some of the most compelling, long-duration themes in tech are largely independent of global trade. Salesforce.com, for example, has become a dominant player in Software as a Service, not because of its prowess in global trade, but its ability to drive value to its corporate clients. The same holds true for the value proposition offered by companies leading the way in novel IoT and AI applications.