When the winds of change blow, some people build walls and others build windmills - Chinese proverb

How US companies are faring in the midst of the trade dispute

Uncertainties over Sino-American trade relations have led to wider market concern around the ability of US companies to grow revenues in China. We are now the majority of the way through the Q4 2018 earnings season in the US and while management rhetoric has been understandably cautious on forward expectations in China, few companies have seen a direct impact on results. On the whole, price increases to offset tariffs have been successfully passed onto customers and corporates have taken advantage of global supply chains to mitigate disruptions.

There is, of course, one well-publicised exception; at the end of January, Apple reported that sales from China fell -27%* in its final quarter of the 2018 calendar year relative to the same period in 2017. While management claimed that this resulted from a slowdown in the Chinese economy which has occurred to some degree, the fact that a local player, Huawei, managed to grow Chinese shipments in the same quarter by +23%** suggests that other factors were at play. In our view, the availability of national smartphone alternatives in China including Huawei, Xiaomi, Oppo and Vivo, has made the decision to shift from the American option all the more straightforward for consumers at a time when domestic adoption will have been encouraged.

But it’s not all doom and gloom. If we compare the fortunes of Apple in China with that of the US electronic connector manufacturer, Amphenol, a very different story can be told. Both companies are exposed to the smartphone market in China and while Apple sells the final device, Amphenol provides a broad range of electronic interconnect products and antennae found in mobile phones and tablets. These products are critical and very high quality which has led to broad-based demand from Chinese smartphone makers. In Amphenol’s case, there are few viable local alternatives which has meant its Mobile Devices division, the majority of which is China exposed, grew at +47% in the final quarter of the year.

If trade disputes persist, we believe this trend will endure. US companies selling into China will continue to demonstrate growth so long as their products are differentiated and there are limited local alternatives for Chinese buyers.

By Tommy Faber, CFA

US Equity Analyst

*Source: Apple Q1 FY19 earnings release  **Source: International Data Corp.

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