In the June 9th edition of USA Today, page 2 of the Money section featured an article on the possibility of an upcoming trade war with China with the sub headline “Cyberspying dispute with China threatens U.S. tech industry.”  The gist of the article can be boiled down to this sentence: “It’s clear American gadget makers will see their Chinese market share erode in a brutal trade war, no matter how shiny and innovative U.S. phones may be.”

As political fallout from the NSA cellphone surveillance scandal continues to rain down much longer than anticipated, the long term business ramifications are beginning to become clear. But where we think the mainstream media is misinterpreting exactly how this might play out is in assuming that China’s primary interest will be in looking to replace the U.S. as a primary supplier of computer hardware.

In truth, China has already made quantum leaps in its ability to source the smartphones, PCs and other hardware that it currently imports directly from American manufacturers. Already well known is Samsung’s substantial and growing market share as a cell phone provider to Asian markets. Also presumably safe is Apple’s (NSDQ: AAPL) recent partnership with China Mobile to sell its iPhones. Unless the trade sanctions are particularly onerous, Apple should be able to squirm through whatever legal blockade is put in place via some sort of enhanced licensing agreement or smaller minority interest in a joint venture.

China Market Smartphone Sales Share August 2013

Between the two of them, Samsung and Apple can provide China with all the smartphones it needs for years to come (note that chart above is prior to consummation of Apple’s deal with China Mobile). So if selling smartphones to the Chinese isn’t really the issue, then what is? Over the past eighteen months two Asian companies have aggressively bought up hardware manufactures for PCs, servers, and printers. They are Chinese PC company Lenovo (OTC: LNVGY) and Japanese printer manufacturer Ricoh (OTC: RICOY).

At first both of these moves puzzled the tech intelligentsia, as the “smart money” was moving away from these legacy hardware markets as fast as possible. The conventional wisdom went like this: if IBM thinks it’s a bad idea to remain in the server market, then why would anyone else want to stay in it? And with respect to printers and copiers, the well documented implosion of Xerox (NYSE: XRX) over the past fifteen years is universally viewed as a cautionary tale of corporate tunnel vision.

So if a tech trade war between China and the United States materializes, the Chinese already have a ready stable of Asian vendors to ply its markets with almost all the hardware it needs. To the extent China will require a large trading partner to replace the U.S., its recent long term deal with Russia to purchase huge quantities of natural gas gives it enormous leverage to extract whatever “quid pro quo” it may need from its increasingly desperate neighbor to the north.

For better or worse Russia has set itself down an economic path that is now hugely dependent on China making good on its promise to generate billions of dollars in revenue from energy sales. Of course, China will continue to hold the ace of trumps in the unspoken but implicit threat that it could change its mind and eventually decide that it would prefer to buy less costly gas from Australia and the U.S. The specter of that unacceptable outcome will keep Russia tightly in Beijing’s grasp since the prospect of trying to kiss and make up with its soon to be former European trading partners is unthinkable.

Making this political shotgun wedding even more necessary from both Russia’s and China’s perspective is the recent landslide election in India of a Ronald Reagan-like leader who has promised major economic reforms that include lower taxes, smaller government and a much more business-friendly regulatory environment. If push comes to shove, India’s new Prime Minister – Narenda Modi – will feel compelled to side with the west rather than risk losing American economic support just when his country needs it the most, thus removing the only other viable option China has in the way of a major trading partner.

As we have said all along, our innogration theory does not attempt to identify exactly how the tech market will evolve, but rather which companies will be the ones to lead its evolution. Several months ago our proprietary methodology for measuring innogration – the BiQ – told us that Lenovo and Ricoh were on the verge of something significant, and now we have a pretty good idea of what that will be.

Both of them are poised to be the big winners if a tech trade war between China and the United States breaks out, and will still do well even if no formal restrictions are ever implemented given organic growth in the Asian market. Between the two of them Lenovo and Ricoh control several major segments of the PC ecosystem in Asia, and quite possibly Russia as well very soon.

We are raising our buy limit for Lenovo to $25, and also raising the buy limit for Ricoh to $65.

NASDAQ Composite Index:                                                                           

Friday, June 6 = 4,321.40                                                         

Year to Date = + 4.3%

Trailing 7 Days = + 1.9%

Trailing 4 Weeks = + 5.6%