China vs. USA – Retaliatory strike?

A self-defeating retaliation.

• If China blocks Nokia and Ericsson exports, it will simply accelerate the migration of manufacturing from China that will cost Chinese jobs and incentivise other companies and industries to also leave China.
• China is considering placing export restrictions on Nokia and Ericsson such that the base stations that they manufacture in China will not be able to be sent to other countries for deployment (see here).
• These export controls are being considered in the eventuality that the EU follows the USA, Australia and the UK in banning Huawei from supplying equipment for the new 5G networks.
• I think it extremely unlikely that a measure like this will ever be taken as it will harm China more than anyone else.
• This is because it will cause Nokia and Ericsson to move manufacturing from China with immediate effect, costing China thousands of manufacturing jobs and the tax receipts that go along with them.
• What is far more likely is that Ericsson is stripped of its contracts to supply infrastructure in China which made up around 9% of net sales in Q2 2020.
• Given that the USA made up 35% of net sales in the same period it is clear which country will get priority should Ericsson be forced to choose sides.
• Nokia is also likely to receive the same treatment, but its exposure is smaller (6% Q1 2020) and its share in China is also declining.
• A further problem with an action of this nature is the signal that it would send to anyone who makes anything in China.
• China has become the factory of the world but if there is a risk of not being able to exports one’s products, it is quite feasible to relocate one’s facility elsewhere in Asia.
• Many industries are already considering this given the increasing tension between China and multiple other countries this would only exacerbate this trend.
• China’s economy has boomed on the back of its manufacturing and exports which would be badly hurt if there was a mass exodus.
• Hence, China has to tread carefully meaning that a ban on supplying Chinese telecom operators is by far the most likely retaliatory action.
• This would achieve the impact desired without risking it’s export economy or manufacturing jobs.
• This is what the EU should expect should it decide to harden its stance against China.
• Ericsson would suffer the most, but its exposure is not large enough to trigger a very serious problem.
• I still think that Nokia is in the best position to see the most benefit should Huawei be blocked outside of China and its share price remains a distant shadow of its former self.
• This is where I would look for exposure to the Huawei theme.