China risks for Big Tech go far beyond Nvidia
Summary
Within the largest companies in the sector, the players least affected by China risk are Alphabet and Meta Platforms.News that both Nvidia and Advanced Micro Devices are taking charges in the current quarter due to a new U.S. rule limiting chip sales is casting attention on a broader problem: Many more tech companies, in chip manufacturing and beyond, are at risk as Beijing and Washington square off.
All non-Chinese chip manufacturers face risk in China because the government is seeking to break the country’s dependence on technology from outside. Until last year, this remained a distant goal, but the transition has begun with restrictions on Chinese local and central government purchases of new PCs and servers. The risks from that shift, and from the trade war in general, range from chips to software and even production of devices such as iPhones.
There are 18 central processing unit chips approved for Chinese governments, and none of them are from Intel or AMD, the two dominant players worldwide. Many of the CPU chips have intellectual property from Arm, a U.K. company, but over the longer term, it faces the same risk in China as other non-Chinese chip companies.
Microsoft’s Windows operating system and Oracle’s database software are the leading edge of the problems for U.S. software companies. Along with U.S. CPU chips, new PCs and servers purchased by the Chinese government won’t run Windows, but rather a choice of six homegrown options. When Chinese authorities unveiled restrictions on government purchases of PC and servers last year, they also listed 11 domestic options for databases.
These are long-term issues because shifting the installed base of software, PCs, and servers for the whole country will take time. The transition, beginning with government procurement, would require transforming the Chinese supply chain.
But U.S. companies that make chips domestically, such as Texas Instruments and Intel, already see their Chinese sales under threat. While the Chinese government did issue exceptions to its 125% retaliatory tariff on U.S. goods, it didn’t include relief for U.S.-produced chips. Because the Chinese government considers Taiwan part of China, chips made there for U.S. companies such as Apple, Nvidia, Qualcomm, and AMD won’t face the tariff.
In fiscal 2024, Intel got 29% of its sales from China. The figure was 19% for Texas Instruments.
For now, smartphones and PCs imported into the U.S. don’t face any of the most recent tariffs, but the Trump administration has signaled that it is going to place a separate set of tariffs on those products in a month or two.
Among big tech companies, Apple faces the most China risk because both its production and demand for its devices stand to be affected. Though it now has lower-volume assembly in India and Vietnam, Apple puts together a large majority of its devices in China. It will have a tough time changing that quickly.
While Chinese manufacturing provides relatively cheap labor, it also offers Apple the scale needed to produce vast numbers of devices. China is also central to the entire East Asian tech supply chain.
The only other country that can match China in scale is India, where Apple has begun to move some iPhone production. Estimates for India’s production of iPhones range from 15% to 20% of the total, though Apple still pays taxes on components it brings into the country.
On the demand side, Chinese sales, including Taiwan, represented 17% of Apple’s revenue in fiscal 2024. While the trade war puts that at greater risk, the shine may already be coming off the Apple brand in China. Sales there were down 8% in fiscal 2024.
Again, because of its vast scale, India is also Apple’s answer to the risks to demand it faces in China. Apple began a full-court press in 2020 with the online Indian Apple Store, followed by retail stores in 2023. CEO Tim Cook frequently calls out Indian sales in earnings calls.
But Apple is a behemoth, and any changes to supply and demand will take time.
Amazon.com, meanwhile, in a different category because it is mainly a retailer. It faces much higher tariffs on imports than before, led by a tariff of at least 145% on most Chinese goods. Goldman Sachs analyst Eric Sheridan estimates that Chinese goods account for 20% to 40% of Amazon’s first-party merchandise costs. Those expenses are poised to rise significantly in a trade war.
Sheridan didn’t make a comparable forecast for Amazon’s robust third-party business, which accounted for 37% of its retail sales in 2024. That injects uncertainty into the outlook. Amazon knows what is happening in the supply chain for its own inventory, but it may not have the same level of detail for its third-party vendors.
Amazon didn’t immediately respond to a request for comment.
Within big tech, the least affected by China risk are Alphabet and Meta Platforms. Services like Google Search and Facebook don’t operate in China, but the two companies do get some revenue from Chinese companies advertising to customers outside the country.
A trade ware could eat into the 11% of 2024 revenue that Meta got from China. Alphabet doesn’t break out Chinese sales, but 16% of 2024 revenue was from the Asia-Pacific region.
Write to Adam Levine at adam.levine@barrons.com
