Globalization has been a huge boon for American companies that rely on strength across all regions to boost their bottom lines. However, U.S. companies, especially the large caps that make up the S&P 500, aren’t so American anymore. About half of all sales for the S&P 500 come from outside the United States. While Europe leads as the region contributing most of those revenues, Asia Pacific is a close runner-up.
Nearly 10% of all S&P 500 sales come from Asia Pacific, with the largest contributor being China, responsible for about a quarter of that. From 2003 through 2011, China’s GDP was between 9% and 14%, before dropping to 7.7% in 2012. China’s economy has gradually softened since then — a concern for many U.S. multinationals that rely on Chinese growth and have not been able to offset moderating Chinese GDP anywhere else. China’s surprise move to weaken its currency in the summer of 2015 caused more issues, as many U.S. companies with significant exposure to the world’s second largest economy sold off in response.
Some sectors are more dependent on China, tech specifically. Of the top 20 S&P 500 companies that get the greatest percentage of revenue from China, 17 hail from the tech sector, mostly semiconductors. Skyworks (SWKS), Qualcomm (QCOM), Nvidia (NVDA), Qorvo (QRVO), Broadcom (AVGO), Micron (MU) and Texas Instruments (TXN) all rank in the top 10; each gets 30% or more of their sales from China and are, except QCOM and TXN, off to a great (double-digit) start this year (see “China-tech connection”). Consumer discretionary names such as Wynn (WYNN) and Yum Brands (YUM) also made the list last year, but that will change now that Yum has spun off its China division.
The stronger dollar also has been troublesome to these multinationals, and though cooling, the dollar should remain strong. A stronger dollar makes prices of these company’s goods and services more expensive to customers overseas, and also means sales decline when repatriated from a country with weaker currency. Analysts expect the dollar to remain strong in 2017 in anticipation of three additional rate hikes from the Fed.
The latest threats to companies with manufacturing and product arms in China are the proposed import tariffs by the Trump administration. The newly inaugurated president is recommending a 45% tax on all Chinese goods, which could drive the cost of those goods up by 10% for U.S. consumers.
The public company that would be most affected by this border tax is Apple (AAPL). The goal of such a tariff would to be to force Apple production back to the States. However, that assumes that Apple would move manufacturing back home instead of another country with cheaper costs than China. There is also the issue of few alternative suppliers in key product categories that China sells to the United States. This unequivocally impacts electronics, of which China sources around 75% of the mobile phones and more than 90% of all tablets and laptops that make it here.
Metal producers might not mind such a border tax as cheap Chinese steel has created issues for names such as U.S. Steel (X) and Alcoa (AA). There makers ruled to have engaged in the practice of dumping (selling below cost to gain market share), which Chinese officials have denied.
As our second largest trade partner, China is key for the success of U.S. companies. Some of our largest corporations get a third of all yearly revenues through business in China, and many rely on the country to manufacture parts that are not available anywhere else. The possibility of tariffs could begin to change that trade relationship and be paralyzing to U.S. multinationals.