uploads///Graphics _Trade War

Semi Stocks Fall as US Bans Eight Chinese Tech Firms


Oct. 8 2019, Published 5:41 p.m. ET

Today, the United States added 28 Chinese organizations to its Entity List just two weeks before its high-level bilateral trade talks with China. The US stated that these firms violated the human rights of Uighurs and other Muslim minorities in China.

The ban sent the S&P 500 Index down 1.27% today. Semiconductor stocks took the biggest hit. Eight of the 28 blacklisted companies include two video surveillance firms and five AI (artificial intelligence) startups.

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The latest US ban covers the world’s two largest video surveillance firms—Hikvision and Dahua Technology. The two firms together accounted for over 40% of the global video surveillance equipment revenue in 2018. The two companies own 56% of China’s video surveillance equipment market. This data is from IHS Markit and was reported by the Global Times on July 16.

Semi stocks fall on the new US ban 

Citing surveillance video research company IPVM founder John Honovich, the South China Morning Post stated that Hikvision and Dahua use Intel, NVIDIA (NVDA), Western Digital, and Seagate chips. The two-way ban would prevent US companies from supplying chips to Hikvision and Dahua Technology. The ban would also prevent these Chinese firms from selling their technology in the US.

A significant amount of semiconductor content like memory, sensors, analog, connectivity chips, and microcontrollers go inside a surveillance camera. These cameras’ back-end work is supported by data centers. This means surveillance firms also need CPUs (central processing units), GPUs (graphics processing units), memory, and networking chips for their servers. It’s no surprise that the VanEck Vectors Semiconductor ETF (SMH) fell 2.2% on the news of the ban.

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  • Memory stocks Micron (MU), Western Digital (WDC), and Seagate (STX) fell 2.6%, 3.8%, and 3.5%, respectively.
  • Analog stocks Texas Instruments (TXN) and Analog Devices (ADI) fell 3.0% and 2.6%, respectively.
  • Microcontroller stocks Intel, NVIDIA (NVDA), Advanced Micro Devices (AMD), and Xilinx fell 1.3%, 3.2%, 2.2%, and 3.0%, respectively.
  • Connectivity chip supplier stocks Broadcom (AVGO), Qualcomm (QCOM), and Skyworks (SWKS) fell 1.3%, 3.5%, and 1.9%, respectively.

What does it mean to be on the Entity List?

In the trade war, the United States first used tariffs. Now, it’s using trade restrictions through the Entity List to force China to stop unfair trade practices. Companies on the list can no longer buy goods and services deemed critical to national security from US companies. Moreover, they cannot sell goods and services to the United States.

In May, the United States added the world’s largest telecommunication equipment maker, Huawei, to the Entity List. In June, it added five Chinese supercomputing companies to the list, including China’s largest high-performance computing firm, Sugon.

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US firms can apply for licenses to ship certain goods that may or may not be critical to national security. However, the US Department of Commerce may deny most or all of these applications. In its recent earnings report, Micron stated that it applied for licenses but has not yet heard from the government.

As Huawei depends on US chip firms for components, CEO Ren Zhengfei reduced the company’s revenue guidance for 2019 and 2020 by $30 billion. Huawei and other Chinese firms reduced their dependence on US firms, as they became unreliable suppliers due to the trade war. We expect the eight Chinese tech companies recently added to the Entity List to suffer the same fate as Huawei and Sugon.

How could the latest US ban impact US and Chinese firms?

The 28 new Chinese firms added to the Entity List include the Xinjiang’s Government Public Security Bureau, 19 subordinate government agencies, and eight tech firms. The eight tech firms are:

  • video surveillance firms Hikvision and Dahua Technology
  • Alibaba-backed AI startups Megvii and SenseTime
  • AI firm Yitu Technologies
  • voice recognition software firm iFlytek
  • data forensics company Xiamen Meiya Pico Information
  • nanotech firm Yixin Science and Technology Company

The impact of the US ban on each of the above firms depends on exposure to the United States. On July 9, the South China Morning Post stated that Meiya Pico earns less than 1% of its revenue from overseas. However, an August 28 Reuters report noted that Hikvision earns about 30% of its revenue from overseas.

After the Huawei ban, many Chinese firms reduced their reliance on American suppliers. Meiya Pico largely uses domestic suppliers, whereas Hikvision depends heavily on US-based suppliers.

The US-based firms found a way around the entity list. They identified products not included in the ban and started shipping them. According to today’s Wall Street Journal report, the ban does not prevent US firms from selling goods manufactured outside the United States to blacklisted firms.

Despite this, US firms expect to feel the impact of the ban on their revenue from IoT (Internet-of-Things) and data center markets. The intensity of the direct impact should depend on their exposure to China. We expect chipmakers to see reduced orders from IoT customers, as the ban would negatively impact the global demand for surveillance cameras.


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