Impact of the Trump Presidency on the Global Telecom Industry
LightCounting Releases a New Research Note
Although the Trump Presidency is less than two weeks old, it already seems clear that its impact on the telecoms industry will be significant. Four areas in particular that could have an impact are trade, regulation, mergers and acquisitions, and tax relief.
President Trump has already removed the U.S. from participation in the Trans-Pacific Partnership agreement (TPP), which has not yet been finalized, and has pledged to re-negotiate NAFTA with Mexico and Canada. The latter could potentially affect U.S. companies with plants in Mexico, though exactly how and to what degree is still very uncertain.
The biggest country of concern regarding U.S. trade policy is China, however. President Trump’s desire for a “better deal” and “fair trade” with China was made known numerous times on the campaign trail. If the worst happens, and a trade war breaks out with high tariffs imposed on both sides, it would have a dampening effect on import/export sales of optical networking gear and optical components between the U.S. and China. Chinese equipment makers Huawei and ZTE might seek Chinese, Japanese, or European alternatives to U.S. based vendors like Acacia, Finisar, Lumentum, Macom, Neophotonics. and Oclaro. U.S. equipment makers like Arista, Cisco, Ciena, Coriant, Juniper, Nokia, and others might end up switching some of their component purchases to U.S. or other suppliers from existing Chinese component suppliers, if the tariffs were high enough.
Trying to predict what will actually happen at such an early stage of the transition is difficult. However, LightCounting has no reason to believe that communications is high on anyone’s list of industries suffering from unfair trade with China (though the reality may be otherwise). We believe any trade sanctions that are imposed between the two countries will be limited in scope, and most likely focused on specific high-profile industries like steel and consumer appliances.
Suppliers of optical components and modules moved their production to China soon after the telecom crash of 2001. By now, all labor intensive manufacturing steps, such as assembly and testing, is done in China and other developing countries in Asia. Laser and detector chip production remains in the US and Japan, since it is less labor intensive and considered to be the key technology advantage. Our industry is truly global and very interconnected. Trade barriers would present many challenges for established vendors with a large global footprint. It may favor start-ups and development of new technologies, which can replace Asia-based labor-intensive manufacturing with more US-based automation.
Bringing jobs back to the US is the key promise made by President Trump during the election campaign. However, it is hard to imagine that anyone can reverse the course of globalization. Slowing down the tide of globalization in the US, softening this transition for millions of Americans left on the sidelines and boosting morale with a few high profile examples is probably the best that Trump can deliver. These efforts come 15 years to late for our industry and probably many others.
One of the decisions that the Trump administration will have to make in mid February is whether to extend a temporary relief of export sanctions on ZTE. These were last extended in November 2016 and will expire on February 27th, 2017. Trump’s messages of being tough on China suggest that it may not be extended and ZTE will be unable to purchase products from US companies. This will be disruptive for ZTE and equally disruptive for many of their US-base suppliers, including Acacia and Oclaro. ZTE will have to find other suppliers outside of the US. Huawei may do the same in fear of potential sanctions, making a much larger negative impact on many US-based component and module vendors. This will not be good for creating jobs in the US. Sales of optical transceivers to China accounted for about $2 billion in 2016, boosting the revenue of many US suppliers. By this logic, ZTE should get a permanent relief from the export sanctions.
For its part in all of this, China enjoyed a public relations coup at the 2017 World Economic Forum in Davos Switzerland by billing itself as the new guardian of free trade and worldwide co-prosperity.
Creating jobs and helping US businesses should be a higher priority for the Trump administration than being tough on China. Export sanctions related to sales of equipment to Iran imposed by the Obama administration does not seem to be a good choice for setting an example of being tough on China. Explaining it to the public will require more than 140 characters. This should be a “no go”.
Bottom line: U.S. trade sanctions on Chinese goods in the form of import tariffs are a possibility. If that were to happen, retaliation by China is almost certain. U.S. companies with a high percentage of sales to Chinese customers should take this threat seriously, and lobby their representatives in Congress and the administration to protect their interests, and at the same time, try to diversify their customer base. Chinese companies doing a large percentage of their business with U.S. customers should also take similar steps. Companies in either one of these countries that are reliant on components made in the other should likewise take notice, and consider trying to find a second source located elsewhere.
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