Qualcomm, Cisco Hurt By U.S. ZTE Trade Restrictions

QUALCOMM, Inc. QCOM and Cisco Systems, Inc. CSCO are in for some negative headwinds, according to a recent JPMorgan research note.

Due to forthcoming exportation trade restrictions by the United States against China's ZTE CORP ‘H'CNY1 ZTCOF (SHE: 000063) (HKG: 0763), a handful of New York-traded telecom companies will likely feel the negative impacts.

JPMorgan's Rod Hall explained, "The U.S. Commerce Department slapped ZTE with new trade restrictions, hindering the company's ability to buy components and software from U.S. suppliers."

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The Restrictions

The new restrictions, to be published Tuesday, spawned from what the Commerce Department explained as actions by ZTE "contrary to the national security and foreign policy interests of the United States."

Hall elaborated, "Specifically, ZTE broke U.S. rules by selling U.S.-made, high-tech goods to Iran. ZTE also planned to use a series of shell companies ‘to illicitly re-export controlled items to Iran in violation of U.S. export control laws.' The trade restrictions will essentially prohibit U.S. companies form selling a wide array of restricted goods – including PCs, software and telco equipment – to ZTE."

China's Response And Implications Stateside

According to Hall and corroborated by Bloomberg and the Wall Street Journal, "China is ‘strongly dissatisfied' with the export restrictions."

These restrictions are likely to influence Qualcomm and Cisco in particular, explained Hall.

"We calculate that direct impact to Qualcomm assuming as much as half of ZTE's 40 million annual smartphone unites and above average chip ASPs to be below 1% of EPS. However, increased trade tension between the US and China could negatively affect trends that we believe have been moving in the right direction for both QCOM and CSCO in the country. Note that CSCO, in particular, saw a large jump in growth in China over their FQ1 just reported."