Earlier this month, 37 already-strained Chinese organizations became even more difficult for U.S. companies to do business with. U.S. tech company Applied Materials (NASDAQ:AMAT), in fact, has suspended trade with these organizations until further notice. While Applied Materials stock hasn’t been hurt yet, the fallout from the decision may not yet be fully appreciated.
On April 10, the U.S. Commerce Department updated its so-called ‘red flag’ list of organizations that are “unverified” entities. Although unverified entities aren’t forbidden trade partners, they require additional licensing. They also require caution before buying from, or selling to, to avoid running afoul of strict trade rules.
“Even though it’s not an embargo, because of the hassle sometimes suppliers will treat it as an embargo,” said Kevin Wolf, former assistant secretary of commerce for export administration. “It has a practical effect that’s greater than the legal effect.”
To that end, it remains to be seen if the maneuver is part of a bigger tactic to bring China to the trade negotiation table, or a security concern that was going to take shape anyway. While the list includes organizations based in United Arab Emirates, Malaysia and Indonesia, China’s 37 additions were far more than any other nation.
Regardless of the intent, the updated list puts more pressure on China’s struggling economy, as well as U.S. suppliers and customers.
Fallout and Applied Materials Stock
While the fallout from the additions to the Commerce Department’s red flag list is still being weighed, whatever the broader implications it still is significant for Applied Materials. More than one-fourth of last quarter’s revenue came from China alone. While not all of its Chinese partners have been affected, its remaining partners may also rely on trade with names that now require new permissions from U.S. regulators.
San’an Optoelectronics, China’s biggest supplier of LED chips, was one of the noteworthy names currently off-limits to Applied Materials. Other customers include Xian Jiaotong University and the Chinese Academy of Sciences.
Applied Materials’ response appears decisive too. According to reports from Nikkei Asian Review, the company instructed its employees to “immediately stop all pending and future equipment delivery. It also asked its employees to withdraw from sites where red-flagged entities operate.
Trade War Faints and Applied Materials Stock
China’s regulatory governors responded to the additional names of unverified entities, with trade ministry spokesman Gao Feng calling the behavior “wrong,” and calling for the U.S. to undo its action.
The rhetoric between the two countries is nothing new, however.
As promised during his campaign, President Donald Trump has been tough on China’s trade policies with the United States. In June of last year, steep tariffs were placed on roughly $50 billion worth of goods imported from China into the United States, sparking a war of new tit-for-tat tariffs.
Though they were intended to bolster demand for U.S. goods corporations ranging from carmaker Ford Motor (NYSE:F) to food giant Tyson Foods (NYSE:TSN) to Coca-Cola (NYSE:KO) have all claimed to be victims of the political standoff.
By its specificity, the updated list of unverified companies is a step in a new direction though. It could be interpreted as an effort to quell unauthorized use of American-developed and U.S.-patented technologies.
Applied Materials, along with Micron Technology (NASDAQ:MU) and Taiwan’s Nanya jointly filed official complaints in late 2017, alleging China was the ultimate buyer of illegally-acquired semiconductor technologies.
The Bottom Line on Applied Materials Stock
The news thus far may only have boosted Applied Materials stock. AMAT shares are up 4%, swept higher with the broad market tide Other factors perhaps include the impression that its intellectual property is being better protected, or that it will remain highly competitive going forward even if it struggles with its new restrictions.
By and large though, the impact of the Department of Commerce’s new red flag list remains unclear. Applied Materials has not indicated to what extent, if any, it is seeking licenses to deal with the entities newly placed in the red-flag list.
If China acquiesces rather than doubles down on the trade front, Applied Materials should wind up more competitively positioned even if it has to find new suppliers and customers.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.