The Trump Administration’s War on Huawei Could Hurt These 3 Stocks

TSMC and two other tech giants could become collateral damage in the tech war.

Chinese tech giant Huawei, one of the world's leading manufacturers of telecom equipment, networking hardware, and smartphones, has been repeatedly slammed by the Trump administration's trade war against China.

Last year, the U.S. Department of Commerce placed Huawei on an "Entity List," a group of firms that American companies cannot offer their technologies to without a special license. Earlier this year, it expanded that licensing requirement to all non-U.S. chipmakers that use American chipmaking equipment, intellectual property, and design software.

The U.S. wanted to cut off Huawei's access to American technologies for three reasons: It wanted to throttle Huawei's progress in the 5G market, remain ahead of China in the semiconductor market, and limit Huawei's overseas reach due to national security concerns.

Huawei claims it doesn't have a special relationship with the Chinese government, but it also didn't deny media reports that claimed it received as much as $75 billion in state subsidies. Therefore, the battle against Huawei could drag on for years as the trade war evolves into a tech war.

In the meantime, these clashes could cause collateral damage for three other tech giants: TSMC (NYSE:TSM), Micron (NASDAQ:MU), and Qualcomm (NASDAQ:QCOM).

1. TSMC

TSMC, the world's top contract chipmaker, generated 14% of its revenue from Huawei and 20% of its total revenue from China last year. The Taiwanese company is one of three chip foundries, alongside Samsung (OTC: SSNLF) and Intel (NASDAQ:INTC), that produce the world's smallest and most powerful chips. Orders for new chips are usually split between TSMC and Samsung, since Intel mainly manufactures in-house chips.

TSMC dodged the Commerce Department's first blacklist since it isn't an American company. However, the subsequent expansion to include non-American chipmakers forced TSMC to halt its orders from Huawei in mid-May.

TSMC also agreed to build a new $12 billion plant in Arizona, set to open in 2024, which aligns it with the U.S. instead of China in the escalating tech war. However, this alliance could backfire if the Chinese government retaliates against TSMC's Chinese plants, which produce older chips, or ramps up its investments in TSMC's Chinese rival SMIC. It could also lose its other Chinese orders to Samsung.

Regardless of what happens, the tech war is a major headwind for TSMC, and it could be forced to choose between its U.S. and Chinese clients in the near future.

2. Micron

Idaho-based Micron is the third-largest DRAM manufacturer and fourth-largest NAND manufacturer in the world. Samsung leads both memory chip markets by wide margins.

Image source: Getty Images.

Last year, Micron generated 12% of its revenue from Huawei and 15% of its revenue from mainland China. Micron halted shipments to Huawei after the Entity List was introduced, which forced Huawei to order more memory chips from Samsung and its South Korean peer SK Hynix instead.

Korea Economic Daily recently claimed that Huawei requested a "stable" memory chip supply from Samsung and SK Hynix to offset its loss of Micron's chips. Both companies denied the reports, but didn't comment on any future deals.

Meanwhile, Chinese chipmakers have started to produce their own DRAM and NAND chips. These chips aren't on par with Micron, Samsung, or SK Hynix's chips yet, but they could significantly improve over the next few years and boot foreign memory chipmakers out of the market. Chinese chipmakers could also flood the market with cheaper memory chips, which would torpedo the cyclical rebound in memory prices.

For now, Micron can offset its loss of Huawei's revenue with rising market prices. But over the long run, the tech war could cut it off from the Chinese market and force it to compete with Chinese chipmakers.

3. Qualcomm

California-based Qualcomm is the world's top mobile chipmaker. It generates most of its revenue from its mobile SoCs (system on chips) but earns most of its profits from its portfolio of wireless licenses, which claim a cut of each phone sold worldwide.

Qualcomm was already struggling in China before the trade war started. Back in 2015, Chinese regulators fined the chipmaker $975 million over anti-competitive practices and high licensing fees. Qualcomm was forced to renegotiate its licensing terms with each Chinese OEM.

In 2018, Huawei followed Apple's lead and stopped paying Qualcomm licensing fees, with both companies claiming the fees were too high. Qualcomm reached an interim settlement with Huawei for fixed payments last year, but those fees are significantly lower than its traditional percentage-based cuts.

Qualcomm still hasn't signed a new long-term agreement with Huawei. Meanwhile, Huawei's HISilicon chipmaking unit, which relies on TSMC for manufacturing, is producing its own mobile SoCs for select phones -- which could eventually eliminate its dependence on Qualcomm's Snapdragon SoCs.

Qualcomm generated nearly half its revenue from mainland China and Hong Kong last year. The U.S. Entity List could eventually cut Qualcomm off from that market, and China is reportedly developing its own Entity List -- which targets Qualcomm, Apple, and other companies -- to permanently close the door. That escalation could force Qualcomm to make some calls regarding the Chinese market.