uploads///A

Micron’s Earnings to Take a Hit from Tariffs and Huawei Ban

By

Updated

Micron’s exposure to China

Micron Technology (MU) is already in a cyclical downturn with prices of DRAM (dynamic random access memory) and NAND (negative AND) falling due to oversupply. In its two-year growth cycle from mid-2016 to mid-2018, Micron prepared for a down cycle by reducing its production cost and debt and building its cash reserves. However, the company didn’t prepare for the economic downturn caused by the US-China trade war.

Article continues below advertisement

During the memory market upcycle, Micron increased its exposure to China from 43% in fiscal 2016 to 57% in fiscal 2018. However, this increased exposure to China made Micron more vulnerable to the trade war. The company shifted its supply chain to avoid tariffs on Chinese imports. However, the decline in smartphone demand from China and the slowdown in the Chinese economy because of the trade war impacted Micron’s revenue in the second quarter of fiscal 2019.

Micron and Huawei

To add to Micron’s troubles, the United States banned firms from shipping technology to Huawei, the world’s second largest smartphone maker. Micron earned 13% of its revenue from Huawei in fiscal 2018.

As the Huawei ban comes into effect in Micron’s fourth quarter of fiscal 2019, it remains to be seen how much of that 13% revenue is cut from the guidance as this quarter is a seasonally strong quarter for smartphone makers. This is just the direct impact of the Huawei ban, which will slash the revenue earned from the Chinese firm.

During the fiscal 2019 second-quarter earnings call, Broadcom’s CEO, Hock Tan, explained that Huawei is a major buyer across the technology supply chain and a technology ban on such a key player will cause ripple effects. The supply chain will contract as original equipment makers would become cautious about placing new orders over fears that they might not be able to absorb inventory amid demand uncertainty. This broad-based slowdown in the demand environment is expected to impact most Micron customers.

Another risk from the trade war is that tariffs will make Micron’s chips expensive, encouraging Chinese firms to switch to non-US memory chipmakers. All these indirect impacts of the Huwaei ban will force Micron to reduce its guidance.

Advertisement

More From Market Realist