Apple, GM, Boeing Are China's Top Hostages In A Trump Trade War

Photo of Apple, GM, Boeing Are China's Top Hostages In A Trump Trade War

The new Trump administration has already lined up the first shots in a clash of trade titans.

Calling China "the most protectionist country" among major U.S. trading partners, Wilbur Ross, Donald Trump's choice to run the Commerce Department, on Wednesday signaled new tariffs for Chinese steel and aluminum industries dumping their products in the U.S. at artificially low prices.

That gave U.S. steel stocks a one-day boost. But if the protectionist rhetoric and actions continue to ratchet higher, U.S. companies with a big China presence, such as Apple (AAPL), General Motors (GM) and Boeing (BA), could get caught in the crossfire.

China, via the state-run Global Times, has already warned that it could target Apple, Boeing and Starbucks (SBUX) if Trump followed through on his campaign rhetoric by slapping a 45% tariff on U.S. imports from China.

China accounts for about 4.8% of S&P 500 revenue, according to FactSet. But many big U.S. companies rely on China for at least 10% of revenue — some more than 50%. They could take a disproportionate hit if the conflict intensifies. Some other companies with broad exposure to China include Intel (INTC), Qualcomm (QCOM), Nike (NKE) and Las Vegas Sands (LVS), according to an IBD review of company filings.

Deteriorating trade relations with China wouldn't only risk near-term revenue but also future growth plans. Starbucks, for example, now has about 2,400 stores in China but envisions having 5,000 by 2021. China needs 6,840 airplanes valued at $1 trillion through 2035, Boeing says.

Markets still see a full-fledged trade war as unlikely and Trump's harshest threats as part of his negotiating strategy.

The Eurasia Group, which analyzes political risk for investors, wrote that it expects the Trump administration to "aggressively accelerate the pace of anti-dumping, anti-subsidy and other unilateral actions against specific Chinese imports, but they will not adopt across-the-board tariffs in order to maintain room for a negotiated solution."

In the near term, that wouldn't necessarily be a major departure. President Obama imposed a 35% tariff on Chinese tires in 2009, citing a surge in imports, and anti-dumping duties on imports of Chinese solar panels and cold-rolled flat steel.

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Yet Eurasia Group analysts Evan Medeiros and Michael Hirson write that China is likely to "retaliate immediately and proportionally" with the goal of inflicting "substantial but not overwhelming pain on U.S. firms" to persuade Trump not to take broader, more destabilizing steps. Among the likely targets are "iconic American consumer goods" and companies in agriculture, aviation, financial services, tourism and technology.

They note that China has myriad ways to create trouble for American companies, from regulatory actions, to delaying or denying approval for licenses, to blocking an M&A deal.

American companies already feel that Beijing is making their lives more difficult. A survey by American Chamber of Commerce in China out this week found that 81% of members felt less welcome than before vs. 77% a year ago, while 24% said the investment environment was improving and 31% said it was getting worse.

If Trump used his trade leverage to push China to ensure a more level playing field for American companies in China, that could help their growth prospects. Yet he appears more interested in using his leverage to convince Apple to shift much of its production to the U.S., even if that substantially raises the cost of an iPhone.


No company has more at stake in China than Apple, which accounted for $46.4 billion in sales in its latest fiscal year, or 22% of total revenue. And China is where most of its iPhones are pieced together.

Global Equities Research analyst Trip Chowdhry is a rare analyst who thinks Trump will prevail upon Apple to significantly ramp up iPhone production in the U.S. for the domestic market. "Companies who are America First — Made in the USA by the USA workers — will outperform the rest," Chowdhry wrote.

Yet Chowdhry, recognizing that domestic production would hike costs and likely lower margins, concludes: "Days of share buybacks and dividends are over."

UBS analyst Steve Milunovich considered a far different trade outcome in which Trump signs onto the House GOP's plan to cut the corporate tax rate to 20% and apply a 20% tax on the value of imports. Under this scenario, tax reform would be a net negative for Apple, with an outright earnings decline coming from a tax on the value of iPhones it imports to sell in the U.S. and lower foreign earnings due to an associated rise in the dollar.

Yet for all the hand-wringing, Apple shares are up about 8% since the November election.

General Motors

GM's joint ventures with China totaled $45 billion, or 30% of total revenue, in the latest fiscal year. In December, China hit GM with a $29 million fine for price-fixing, leading to speculation that the fine carried a political message for the incoming president.

Yet Eurasia Group figures that GM and Ford (F) may be less vulnerable to retaliation from China because their Chinese joint-venture partners would also suffer.


More than half the wireless chipmaker's $23.6 billion in revenue came from China in the latest year, though that reflects China's lead in mobile phone production, not just its large base of end customers. The San Diego-based company has been on a roll lately — especially in China — making inroads with Chinese phone makers after it agreed to pay Beijing $975 million in 2015 to settle an antitrust probe of its licensing practices.

If China wants to send a message to Trump, it could stall Qualcomm's acquisition of NXP Semiconductors (NXPI), a Dutch maker of chips for the automotive market as well as mobile devices. NXP CEO Rick Clemmer told Barron's that China could delay the deal if trade frictions rise, but he sees almost no chance it will be blocked.


Sales of Boeing aircraft to China, which amounted to $12.6 billion in the latest fiscal year, support 150,000 jobs for American workers, the company boasted in December to underscore the risk of a deepening trade rift.

Few companies represent a bigger or simpler target than Boeing. Morningstar and Eurasia Group analysts have warned that China could shift its business to Airbus, rewarding Europe as it penalizes the U.S.


Wynn Resorts (WYNN) and Las Vegas Sands both get close to 60% of their revenue from their China properties in the autonomous Macau coastal region of China. Both have just opened new casino resorts in the world's biggest gambling market, increasing their exposure. Trump, a onetime casino mogul himself, has a long association with their bosses. Steve Wynn is a finance chair of Trump's inaugural committee, while Sands CEO Sheldon Adelson is a GOP megadonor.


Trump's infrastructure spending agenda and his pledge to use Caterpillar (CAT) and Deere (DE) equipment to build a wall on the southern border helped boost shares of the long-suffering construction vehicle maker. But Caterpillar, which gets about 8% of its revenue directly from China, is wary about the implications of a trade war.

Caterpillar's outgoing CEO Doug Oberhelman expressed concern about "being held out of a lot of the markets" like China as retaliation for Trump's saber-rattling.

Macquarie Research analyst Sameer Rathod downgraded the shares after their run-up last month, noting that Trump "being aggressive on anti-dumping duties would be detrimental to global growth and trade and is likely going to be a negative for aggregate commodity demand."


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