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Trump to Relax Sanctions Imposed on ZTE: Who Will Gain?

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President Trump has asked the U.S. Commerce Department to reconsider its order prohibiting all U.S. tech equipment manufacturers from selling products to the Chinese telecom behemoth ZTE Corp. Last month, the U.S. Commerce Department issued the order citing that ZTE violated the terms of a 2017 settlement. Notably, the settlement resolved ZTE’s evasion of U.S. sanctions by selling to Iran.

The Trump administration had barred U.S. companies from selling products to Chinese counterparts due to apprehensions of Chinese spying on Americans utilizing these high-tech products. This move is evidence of the fiercely aggressive stance that the U.S. government is taking to protect innovative next-generation products of the U.S. tech giants.

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 of state-of-the-art products in the fields of high-tech artificial intelligence, semiconductors, quantum computing and various other digital technology driven sectors. Notably, the Chinese government patronizes most of these big manufacturers. These companies have become serious threat to the U.S. economic and military supremacy. 

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 Chinese companies is of foremost importance to the U.S. administration.

ZTE Targeted Earlier

The U.S. government has prohibited indigenous mobile chipset developers and optical fiber component makers from selling products to ZTE. Per a Reuters report dated May 2, President Trump is contemplating issuing an executive order to restrict select Chinese telecommunications giants primarily ZTE and Huawei Technologies from selling products in the United States.

Notably, ZTE depends on billions of dollars in component imports from U.S. tech giants for its survival. Non-availability of U.S. mobile equipment dealt a severe blow to its businesses.  The company had already ceased major business operations resulting in massive loss of jobs in China.

Moreover, per research firm IDC, ZTE is the fourth-largest seller of mobile phones in the United States with a 9.5% share of units shipped to the country. Consequently, banning ZTE from selling its products in the United States will be a death knell for the company.

Who Gains if ZTE Ban is Revoked?

If the U.S. government finally withdraws sanctions imposed on ZTE then major gainer will be mobile chipset developer Qualcomm Inc. (QCOM - Free Report) . The company generates nearly 28% of its revenues from China especially from ZTE and Huawei. Additionally, world’s largest chipset developer Intel Corp. (INTC - Free Report) will also benefit. Following the news yesterday, the stock price of Qualcomm and Intel rose 2.7% and 0.4%, respectively.

Secondly, fiber optic component developers will also gain from removal of selling restrictions on ZTE. Major optical fiber component developers such as Acacia Communications Inc. (ACIA - Free Report) , Oclaro Inc. (OCLR - Free Report) , Finisar Corp. (FNSR - Free Report) and Lumentum Holdings Inc. (LITE - Free Report) gained 8.7%, 2.9%, 1% and 2.2%, respectively.

Acacia Communications has a Zacks Rank #5 (Strong Sell). All other stocks mentioned above, carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chart Below shows price performance of six stocks mentioned above in last three months.

 

Bottom Line

The United States and China are trying to defuse the trade war tensions by coming to a compromise with the tariffs. This week, high-level U.S. and Chinese delegations will sit for a meeting to reduce trade tension between the two countries. This will be the second such meeting in this month. Relaxation of sanctions on ZTE will also open business opportunities for several U.S. tech titans.

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