The wealth management group warns that hardware and semiconductor firms will be under pressure from the US government's actions against the controversial Chinese company.

Hardware and semiconductor companies in China – and potentially elsewhere – face particular pressure from US actions to restrict technology transfer linked to Huawei, according to UBS’ wealth management arm.

The Donald Trump administration has slapped controls on the Chinese technology firm, amid accusations that it is so embedded in the Chinese state apparatus that its equipment is a security threat. The firm has been put on the US Department of Commerce's "Entity List", which means that US companies must now get licenses to transfer technology to Huawei. This effectively makes it impossible to sell new components or chips to the company, the effects of which could be significant for the businesses involved as well as for investors, UBS said in a note. 

“Given the ongoing trade uncertainties and technology transfer restrictions related to Huawei, we see near-term pressure for hardware and semiconductor companies. So we continue to prefer the service and the software industries within tech for their better risk-reward. Also, internet firms in digital advertising and e-commerce are well positioned to navigate any near-term trade-related volatility, due to company-specific catalysts and superior growth prospects,” Sundeep Gantori, equity analyst, UBS Global Wealth Management chief investment office, said in a note.

Wealth managers have so far taken what appears to be a cautious stance about escalating tariffs between the US and China. The Huawei issue is ostensibly about security worries. In a number of countries, including the UK, fears about whether the firm’s tech could give China a way of spying on countries have become politically toxic. China denies any malign intent.

The US government has 150 days to draw up a plan for enforcement, the UBS note said. The bank said that in 2016, Huawei's Chinese peer, ZTE, was placed on a similar "Entity list" on 8 March 2016, but the restrictions were suspended on 24 March 2016 after ZTE agreed to cooperate with the US authorities. 

If restrictions remain, they will have a long-standing effect on the global tech supply chain, UBS said.

“Huawei has, over a period of time, diversified its supplier base to include in-sourcing through its chip subsidiary HiSilicon. But the company still relies on US suppliers for certain critical components like radio frequency, optical and network processors. While media reports last week claimed that Huawei has enough inventory for the time being, if the ban is in effect for more than 3–6 months, the company would be in deep trouble and may have to halt some of its operations,” it said.

“For the global technology supply chain, the risks would be somewhat manageable for consumer businesses (e.g. smartphones and connected devices), as it's relatively easy for consumers to switch brands."

The matter is more complicated for the carrier (and somewhat for the enterprise) subsector, in particular, where Huawei has entrenched market share. Huawei is a not only a leader in terms of cost but also has better technology, especially in innovative areas like 5G and the Internet of Things. It will therefore be very difficult for Huawei's competitors to totally regain market share in this segment and, given the company's broader contribution to industry innovation, the restrictions would likely slow down overall progress of such technologies,” UBS continued. 

The bank predicts that if China does not retaliate by targeting other US tech firms, the restrictions will curb industry earnings by low single digits for US tech, mid-single digits for Asia firms and mid-to-high single digits for Taiwan firms in percentage terms.

“Most of these vendors are based in China, Taiwan and the US and, although the restrictions are on Huawei and not their businesses, the entire supply chain would be significantly affected if the measures limit Huawei's ability to do business,” UBS said.

Another uncertainty for technology firms is the US government’s proposed 25 per cent tariff on the remaining $300 billion of Chinese goods. 

“Unlike the previous tariffs, this one would disproportionately impact tech companies, as it would cover most consumer tech products like smartphones, PCs and tablets, as well as enterprise products. We believe this final tariff would slash global tech sector earnings by a mid-single-digit percentage, with the earnings of the two most sensitive industries, hardware and semiconductor, falling by more than 10 per cent,” the bank added.