Micron Technology Inc. (MU) is slipping further on Thursday morning as the arrest in Canada of Huawei Technologies Co. CFO Meng Wanzhou has exacerbated anxiety over a trade war with China.
Considering that Micron generates 57% of its revenue from mainland China, the semiconductor maker could be a significant victim of increased Sino-American tension that many observers worry the arrest could provoke. At the very least, the arrest has pulled the "trade truce" rug out from underneath investors.
Shares of the chipmaker were down around 3% in trading before the opening bell Thursday following news of the high-profile arrest. Micron already had fallen nearly 8% on Tuesday during the market downdraft.
The Canadian news outlet The Globe and Mail first reported that Meng, who is not only the CFO of Chinese technology giant Huawei but also the daughter of its founder, was arrested Saturday in Vancouver at the behest of U.S. authorities.
The rationale for the arrest is reported to be related to the sale of telecom equipment to Iran in violation of U.S. sanctions against that country. The violation could lead to extradition of Meng for trial in the U.S.
Both Huawei and Chinese officials have responded angrily, demanding the release of Meng immediately.
"At the request of the U.S. side, the Canadian side arrest a Chinese citizen not violating any American or Canadian law," China Embassy in Canada said in a statement. "The Chinese side firmly opposes and strongly protests over such kind of actions which seriously harmed the human rights of the victim."
Possibly complicating the issue is a report from the South China Morning Post that indicates Meng knowingly had skirted international sanctions for the sake of business.
"Of course, beyond the yellow and red lines, there may still be another scenario, and that is where the external rules are clear-cut and there's no contention, but the company is totally unable to comply with in actual operations. In such cases, after a reasonable decision-making process, one may accept the risk of temporary non-compliance," the report quotes her as saying.
The report also quotes her father as being unconcerned about flouting U.S. sanctions specifically.
"The U.S. has very strict compliance policies, but American companies are used to it," the South China Morning Post quotes Huawei founder and President Ren Zhengfei as saying. "Nobody dares to flout the law, it has become a habit, and they can still achieve high speeds. Our company has not yet formed this habit, that is why communication costs are too high."
Such statements, if confirmed, bode poorly for the progress of any release requests from Chinese officials and indicate extradition of Meng is likely.
Semiconductor companies have significant supply chain and customer connections to Chinese markets; consequently, the sector is feeling pain amid the arrest of the CFO of the world's largest telecommunications equipment maker and second-largest smartphone producer in the world.
Providing some relief to Micron investors specifically is the recent announcement by CEO Sanjay Mehotra that the company already had accelerated its tariff mitigation strategy in anticipation of possibly worsening trade ties.
"We had said that we see mitigation for tariffs happening over the course of two to three quarters and we had shared with you that in FQ1 we see an impact of 50 basis points to 100 basis points on our gross margin as a result of the tariff," Mehotra said at an investor conference on Nov. 28. "[Now] we expect that by end of December 90% of the tariff mitigation work would have been completed."
Such actions will help deal with supply chain problems and issues related to import and export.
However, the market is expressing its anxiety that about $20 billion in revenue sourced from Chinese markets could be at risk.
Micron stock already has plummeted 40% in just the last six months due in part to persistent trade concerns that are only gaining momentum.