The Impact of the arrest of Huawei CFO

Stocks Impacted:

MU, AVGO (Broadcom), WDC (Western Digital), QCOM (Qualcomm), Seagate (STX), Intel (INTC) - These are Huawei's biggest US suppliers. 1/4 of Huawei's suppliers are American companies.

AAPL and those whose profit could be heavily impacted by Beijing's retaliation

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This development comes as extremely shocking and upsetting for Chinese business community and brings huge amount of uncertainty to US-China relationship, and will most likely escalate the trade tension.

The accusation is that Meng’s company sold HP products to Iran, which violated US sanctions. It’s beyond the scope of discussion whether or not arresting a foreign individual according to US sanction is justifiable. But compared to the treatment ZTE got earlier, this arrest most definitely has ulterior motive than just sanction violation.

Huawei is a 'private' company of strategic significance to Beijing in terms of development of 5G and telecom infrastructure. So, kinda like ZTE. However, Huawei is bigger in size than ZTE, more diversified and much more important to China in a cultural way. It's been the pride of Chinese business community for decades. Their CFO, Meng Wanzhou, is not only the oldest child of Huawei's idolized founder Ren Zhengfei but also the grandchild of a retired prominent party member. Meng herself is wildly respected too. Upon the breaking of the news, Beijing will undoubtedly face immense domestic pressure to get her back. Also, she is supposed to take over Huawei CEO role from her father on Dec 31st 2018. The timing of this arrest is just insulting.

The worst case: Meng gets extradited to the U.S. and used as an leverage with ultimate goal to get Huawei stop competing in 5G space with the US. The whole thing escalates into a big show down and will inflict pain on both sides.

It may be in Beijing’s best interest to bend the knee for now. But doing so would most definitely make Beijing appear 'weak' in front of domestic citizens, and that could spark further dissatisfaction, which is the last thing the party wants.

In my opinion and according to Chinese both in and outside of the states, Beijing can't afford to bend so quickly this time, despite Beijing wants and needs to make the trade tension go away. This act backs Beijing into a corner facing both international and domestic pressure. It appears to be personal, and humiliating to the Chinese. U.S. may ultimately win, but it won't come without some volatility in both markets.

I just wish the market can take the rest of the week off.

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TL;DR: US slapped Beijing’s face. this is very bad for MU and AAPL