Trump May Ban Chinese Telecom Equipment: Winners and Losers

According to a recent report by POLITICO, President Donald Trump is likely to sign an executive order banning Chinese telecom equipment from being used for U.S. wireless networks. The executive order is anticipated to be signed next week, ahead of Mobile World Congress, scheduled for Feb 25-28 at Barcelona, Spain.

Trump administration’s plan to issue the directive is part of its core principles to protect the United States from external cyber threats, especially from China. Imposition of user restrictions stems from U.S. administration’s concern for national security and will primarily target Chinese telecom equipment behemoths Huawei Technologies and ZTE.

National Security Concerns Dominate Telecom Space

Trump administration is deeply concerned about China’s drive to unseat the United States as the primary developer and supplier in the fields of high-tech artificial intelligence, semiconductors, quantum computing and various other digital technology driven sectors.

In fact, in 2018, the U.S. government made AT&T Inc. T drop Huawei smartphones from its offerings. Meanwhile Qualcomm Inc. QCOM was barred from selling its chipsets to either Huawei or ZTE owing to apprehensions of Chinese spying on Americans utilizing these high-tech products. This move is testament to the fiercely aggressive stance that the U.S. government is adopting in order to protect innovative next-generation products of U.S. tech giants.

Recent Move by the US Against Chinese Tech Giants

On Jan 28, the U.S. Department of Justice filed criminal charges against Chinese telecom behemoth Huawei Technology’s CFO Meng Wanzhou and the daughter of the company’s founder and president Ren Zhengfei. The Justice Department is seeking their extradition from Canada, following their arrest on Dec 1. Huawei was charged for violating U.S. sanctions on Iran and a 2014 civil trade secrets lawsuit filed by T-Mobile US Inc. TMUS for stealing trade secrets.

On Jan 24, U.S. Commerce Secretary Wilbur Ross told CNBC that the United States is still "miles and miles" away from a deal with China. On Jan 22, White House economic advisor Larry Kudlow confirmed that the U.S. government has rejected a trade planning meeting with China on the ground of disagreements over intellectual property rights.

A major concern for the Trump administration is that China is stealing intellectual property from U.S. companies by unfair means. This is the central point of trade conflict between the two largest trading countries of the world. On Dec 17, federal prosecutors of the Department of Justice leveled charges on two Chinese hackers on account of hacking valuable technologies of the U.S. high-tech firms.

In December 2018, several key politico-economic allies of the United States such as Japan, the UK, Canada, Australia and New Zealand also banned Huawei Technology from selling its products in those countries.

Winners and Losers

President Trump has given enough indication that his administration will take special interest in the functioning of the telecom industry. The safeguarding of the highly valuable patents of the American tech heavy companies from the Chinese dragon is of foremost importance to the American eagle.

If President Trump finally bans Chinese equipment from US wireless networks, U.S. and European tech behemoths will be the primary beneficiaries. Major telecom equipment makers such as LM Ericsson ERIC, Nokia Corp. NOK, Cisco Systems Inc. CSCO and Comtech Telecommunications Corp. CMTL will gain. Comtech carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

On the other hand, large telecom operators and tech giants like AT&T, Verizon Communications Inc. VZ, T-Mobile US, Sprint Corp. S and Apple Inc. AAPL will stand to lose the most. These firms depend on low-cost Chinese high-tech equipment for their profitability.

The chart below shows price performance of major telecom equipment makers in the last three months.

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