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A Huawei Technologies Mate20 Pro smartphone displays an image of the company’s Kirin 980 chip.

Krisztian Bocsi | Bloomberg | Getty Images

China is pushing ahead with the development of its own chip industry as major firms like Huawei face the threat of losing access to American technology.

Experts say the world’s second-largest economy could still be at least a decade off from catching up with U.S. technology. Still, if China successfully develops its own semiconductor industry, that could ultimately hurt American companies that have reaped big profits in the country.

Last month, Chinese tech giant Huawei was placed on a U.S. blacklist that required American firms to obtain government permission to sell to the company. The telecommunications equipment maker relies on some key components from U.S. firms and software from Google and Microsoft. Washington has granted a 90-day reprieve for now, but the threat remains a major problem for the company.

Other firms, including Chinese surveillance titan HikVision, are reportedly also being targeted. Huawei rival ZTE faced a similar situation last year, which significantly damaged the company.

While China has made no secret that it wants to develop its own semiconductor industry in the past couple of years, experts said that recent events have given new priority to that drive.

“The Huawei incident has indeed stimulated the development of China’s domestic chip industry,” Gu Wenjun, analyst at China-based semiconductor research firm ICWise, told CNBC by email. He wrote in Mandarin and his comments were translated by CNBC.

Government push

Beijing highlighted semiconductors as a key area of the Made in China 2025 plan, a government initiative that aims to boost the production of higher-value products. China aims to produce 40% of the semiconductors it uses by 2020 and 70% by 2025. That’s backed by tens of billions of dollars of investment from Beijing into the country’s chip industry.

Last month, the Chinese government also announced tax breaks for homegrown semiconductor companies and software developers.

Currently, only 16% of the semiconductors used in China are produced in the country, and only half of those are made by Chinese firms, according to a report by the Center for Strategic and International Studies. In other words, the country is still reliant on foreign, largely American, technology.

That fact, along with Beijing’s backing, has helped kick China’s tech companies into action. Huawei has its own “Kirin” series of processors for its smartphones and even a 5G modem that can allows devices to connect to the newest version of the mobile internet. Huawei’s chips are designed by its subsidiary HiSilicon, which has said it’s prepared for such a move by the U.S. and can weather the storm.

China’s other technology giants are considering their own silicon. Smartphone maker Xiaomi told CNBC last year that it was exploring developing a chip that could power artificial intelligence products and Alibaba has begun work on its own AI processor.

Design is one part of the puzzle in creating chips. The other is getting the manufacturing right. For example, Huawei’s chips are designed by HiSilicon — the largest semiconductor company in China, according to market research firm International Data Corporation — but then they’re manufactured by a separate company in Taiwan. There are signs, however, that China is even ramping up manufacturing of semiconductors.

“I expect the current tension between the U.S. and China will only invigorate the spending in China on technology including software over the next five years,” said Mario Morales, program vice president for enabling technologies and semiconductors at IDC.

The US could feel the heat

The development of China’s own chip industry could hurt U.S. companies, according to ICWise’s Gu. He said the world’s second-largest economy could build closer ties to other countries like Japan and South Korea and create its own semiconductor “ecosystem” — in which America would play only a small part.

“At present, the global industrial system is dominated by the United States, and there may be a parallel ecosystem … where the United States is not dominant. This is very unfavorable for the long-term development of the U.S. industry,” Gu told CNBC.

“If the United States blocks the Chinese industry for a long time, it will inspire China to lead another ecosystem, which in turn will be a long-term disadvantage to the U.S. semiconductor industry,” he added.

Already some U.S. firms have reported worries about the potential results of Huawei being on the U.S. blacklist. Qorvo, a maker of radio frequency products, said sales to Huawei and its affiliates accounted for $469 million, or 15% of its total revenue, in the fiscal year that ended on March 30, 2019. It lowered its revenue outlook for the year, citing Washington’s actions against Huawei.

Lumentum, another Huawei supplier, said sales to the Chinese firm accounted for 18% of total revenue for the three months that ended on March 30. Lumentum also revised its revenue guidance lower for the subsequent quarter.

China ‘a decade or two’ away

Despite all its advances, China’s semiconductor industry won’t overtake its competitors anytime soon.

One of the biggest challenges for China will be finding and developing new suppliers if American firms remain off limits.

For one, Huawei’s HiSilicon still relies on basic chip design from Softbank-owned Arm. Even though HiSilicon produces processors for its devices, the architecture is from the British firm. The chip designer recently suspended business with Huawei to comply with the U.S. blacklist of the Chinese firm. Huawei will need to find an alternative to Arm, which is the biggest chip design firm by market share.

The next biggest companies are Synopsys and Cadence, but both are American and so are likely to be off limits for the Huawei unit, too.

For Gu, that all adds up to China only closing the gap with the U.S. on semiconductors “within a decade or two.”

Other analysts projected that more investment and an expanded talent pool may grow China’s semiconductor industry.

“This will not be easy, it will be a long journey but I do not underestimate the Chinese ecosystem given the talent that continues to move back into the region to drive more innovation and scale,” IDC’s Morales said.

And, eventually, China might be able to wean itself off of U.S. technology.

“If China as a whole is able to acquire the right human resources talent, companies, and partnerships, it should still be on track to create a homegrown semiconductor industry over the next decade without access to American tech,” said Neil Shah, research director at Counterpoint Research.

CNBC’s Hilary Pan contributed to this report.

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US, China expected to hold in-person trade talks next week

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US Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He at the Diaoyutai State Guesthouse in Beijing on Feb. 15, 2019

Mark Schiefelbein | AFP | Getty Images

American trade negotiators will soon head to China for face-to-face talks as the world’s two largest economies try to strike a deal, sources told CNBC.

The U.S. officials will travel to China for discussions sometime between Friday and Thursday, August 1. The discussions will continue renewed engagement between the sides as they try to end a potentially damaging trade war. 

White House officials are eyeing a longer-term timeline to strike a deal with China, two people who have met with White House principals in the last day said. It may take roughly six months to reach an agreement. 

In the meantime, the administration could shift its focus to ratifying the United States-Mexico-Canada Agreement. President Donald Trump sees approving his replacement for the North American Free Trade Agreement as a major economic and political priority. 

Investors have watched the China talks closely. A widening trade war between Washington and Beijing would risk more damage to American companies and the global economy. 

The Trump administration has put tariffs on $250 billion in Chinese goods — and threatened to put duties on even more products. Beijing has slapped tariffs on $110 billion in American goods. 

Both the U.S. and China have taken steps to deescalate tension in recent days. Trump agreed to make “timely” decisions about whether to allow American tech companies to sell to blacklisted Chinese firm Huawei. 

Meanwhile, Chinese state media reported that China had taken steps to start following through on its promise to buy more U.S. agricultural goods. Trump sees the step as important to reaching an agreement as American farmers take a hit from tariffs on crops. 

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UBS earnings Q2 2019

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UBS announced a net profit of $1.4 billion for the second quarter of 2019. This compared to a net profit of 1.28 billion Swiss francs ($1.29 billion) in the second quarter of 2018.

The Swiss-lender announced that this is the highest second-quarter net profit since 2010. The profit boost comes in despite declines in both its investment bank and wealth management divisions.

Here are some key highlights for the quarter:

  • Operating income hit $7.5 billion versus $7.6 billion a year ago
  • Return on tangible equity stood at 11.9% versus 12% a year ago
  • Common equity tier 1 capital ratio of 13.3% versus 13.4% a year ago

“We saw a normalization of the environment coming out of a good March into the rest of the quarter. I’d say the highlights were clearly: diversification paid off again,” Sergio Ermotti, chief executive officer of UBS told CNBC’s Joumanna Bercetche.

UBS shares hovered around the flatline shortly after the market open.

Global Wealth Management down

UBS, however, saw a decline in its global wealth management business compared to a year ago. The bank reported an operating profit of $886 million compared to over $1 billion in the second quarter of 2018.

Profits in its investment bank division also fell from a year ago. It registered an operating profit of $440 million in the second quarter for this year compared to $571 million a year ago.

Speaking to CNBC, Ermotti explained that “the u-turn in the interest rate environment in the U.S. has created pressure.”

Market expectations point to an interest rate cut by the Federal Reserve later this month. The central bank had embarked on a normalization path in 2015, after the global and sovereign debt crises. However, recent data has shown worsening economic conditions in the U.S.

In Europe, the outlook is similar for monetary policy. The European Central Bank (ECB) said in May that if incoming economic data does not show an improvement, then the central bank will be prepared to announce more stimulus.

Ermotti told CNBC that he is not sure whether further easing will propel the economy. “I’m not sure going deeper into negative territory or using the QE (quantitative easing) is the way to get out of the problems…We need more structural answers,” he said.

Ermotti warned “there are severe broader considerations than just the banking industry” from low rates.

Outlook

Ermotti’s comments come in after the Swiss-lender warned in its latest results that a return to monetary stimulus from various central banks could dent profits going forward. “A sharp drop in interest rates and expected rate cuts will continue to adversely affect net interest income compared with last year,” UBS said.

However, the Swiss bank expects that a diversified business, stronger investor sentiment and higher market volatility will help offsetting impacts from changes to monetary policy.

In the previous quarter, UBS had announced that cutting an extra $300 million from its 2019 costs after anticipating the fall in revenues.

“We constantly look at ways from a structural and tactical point of view, and the 300 million were pretty much tactical. We always think constantly on how to optimize our cost base but at the same time we are investing in the future,” Ermotti said Tuesday.

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Q2 net profit falls 18% amid Popular costs

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Santander said on Tuesday second-quarter net profit fell 18% from a year earlier, due to one-off restructuring costs from its acquisition of troubled lender Banco Popular and a weak performance in Britain.

The euro zone’s largest bank in terms of market cap — which took over Banco Popular in June 2017 — reported a net profit of 1.39 billion euros ($1.56 billion) for the April to June period, topping analysts’ expectation of 1.29 billion euros in a Reuters poll.

Steady growth in Latin America business volumes, where it makes 46% of its earnings, was not enough to offset charges of 706 million euros, mainly in Spain.

Like its European rivals, Santander is struggling to lift earnings from loans in its home market with interest rates hovering at historic lows.

“We have delivered the strongest underlying quarterly performance in over 8 years, reflecting the progress that we have made in our commercial and digital transformation,” Jose Garcia Cantera, chief financial officer of Santander, told CNBC’s “Squawk Box Europe.”

“Our businesses in both North and South America continue to perform extremely well and while the charges relating to ongoing infrastructure in Europe have impacted attributable profit — something that we anticipated — we are already starting to see the value that this will create going forward,” Cantera said.

Net interest income, a measure of earnings on loans minus deposit costs, was 8.95 billion euros, up 5.6% from the second quarter of last year and 3.1% higher against the previous quarter due to a solid lending growth in Latin America.

Analysts had forecast a NII of 8.76 billion euros. 

In Britain, its third-largest region, profit fell 41%, partly due to restructuring costs of 26 million euros and provisions of 80 million euros.

Santander ended the quarter with a core Tier-1 capital ratio, a closely watched measure of a bank’s strength, of 11.3%, compared with 11.23% in the previous quarter.

Shares of the bank were up over 2% shortly after the opening bell.

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