Cree says tariffs will hurt profits; Cisco is ‘in deep discussions in Washington’

U.S. government tariffs are complicating Cree’s attempts to return to profitability, company executives say.

On an Aug. 14 conference call, CEO Gregg Lowe and Chief Financial Officer Mike McDevitt told investment analysts they’re assuming the taxes U.S. President Donald Trump’s administration imposed on imports from China on July 6 will lower Cree’s earnings per share in the first quarter of 2019 by 2 cents.

That translates into a $2 million hit to the bottom line of an electronics company that expects to lose $9 million to $14 million in the quarter by the time it ends in late September.

McDevitt said Cree officials “are evaluating ways to mitigate the impact of” the July tariffs and a second set that take effect on Aug. 23. He did not talk further about what that might mean in practice, explain what exactly Cree’s buying from China or discuss any potential fallout other than the predicted earnings hit.

Cree officials declined to elaborate after the conference call.

But being the largest U.S. manufacturer of light-emitting diodes has “certainly helped us as we work through the impact of the tariffs,” Lowe told investment analysts during the call.

He added that he doesn’t know of any effect the duties are having on a second key product line, the silicon-carbide-based components Cree’s Wolfspeed subsidiary is making for the auto industry to use in electric vehicles.

Federal officials designed the July 6 tariffs to hit about $34 million in Chinese-supplied goods. Of potential relevance to Cree, their target list covers things like semiconductors and LEDs, plus the tools and materials to make them.

The Aug. 23 tariffs will cover an additional $16 billion of goods. In both cases, the government’s charging a 25 percent import duty.

Cisco watching closely

The question of potential tariff impacts also surfaced Thursday when another prominent tech employer in the Triangle, Cisco Systems, reported its year-end results for fiscal 2018.

Unlike the Cree report, Cisco officials didn’t predict any specific financial fallout from tariffs. And they also had a profit to report, $110 million for the fiscal year and $3.8 billion for the fourth quarter.

But analysts were nonetheless curious how Cisco is dealing with the tariffs.

Its CEO, Chuck Robbins, answered that the company is “watching [them] closely” and is “in deep discussions in Washington with the administration on trying to get to a favorable outcome.”

He did not elaborate, beyond saying Cisco officials hope “to see that land in a good place.”

The China tariffs are part of the so-called trade war the Trump administration is waging not just against the Asian power, but against countries in Europe and North America that are military allies of the U.S.

Industry groups expect financial fallout in the tech sector.

But a professor at UNC-Chapel Hill’s Kenan-Flagler Business School sees the impact as a matter of timing. The short- and medium-term effects are less worrying than the long-term ones if the trade war continues, said Arvind Malhotra.

In the tech sector, “I doubt that there’s a direct, immediate headwind that can be attributed to tariffs,” Malhoutra said.

But “there are clear signs there are headwinds in more strategic ways,” he continued, explaining that the Chinese can respond by ordering their domestic companies to change their buying habits, by blocking mergers and by retaliating on the intellectual-property front.

There is an incentive for China to compromise because there’s a “more symbiotic relationship” between it and the U.S. in the tech sector, he added.

“They need our tech sector for many other purposes, to learn from them, and our tech sector is a good employer for them,” Malhoutra said. “It’s not like soybeans.”

Malhoutra said that because of such considerations, he thinks there’s “more probability of an agreement being reached than for it escalate into a full-blown” trade war.

The cost to Qualcomm

But China’s already deployed at least one of the retaliatory measures he listed, its ability to influence mergers and acquisitions. In July another tech company with Triangle ties, Qualcomm, abandoned plans to buy Dutch chipmaker NXP Semiconductors because the Chinese government wouldn’t join other regulators around the world in approving the deal.

The decision is costing Qualcomm $2 billion.

Cree’s warning about the effect of tariffs on its earnings is far from the first problem the federal government has caused for its business.

In 2017 the Committee on Foreign Investment in the United States blocked the proposed sale of its Wolfspeed subsidiary to a German company, on national security grounds.

The decision prompted Cree to instead buy out the relevant portions of the German company’s business early this year and rework its business strategy, making Wolfspeed the focus of its future growth plans.