Apple’s tariff tradeoff: Raise prices, suffer margin hit, or build more products outside of China

“For more than a year, Apple Inc. avoided major damage from the U.S. trade war with China, thanks in part to a White House charm offensive by Chief Executive Officer Tim Cook,” Mark Gurman and Shawn Donnan write for Bloomberg. “But the company now faces its first major hit — from both sides of the dispute.”

“A new round of tariffs proposed by the U.S. on Monday includes mobile phones, meaning the iPhone, Apple’s most-important product that is made almost entirely in China, may be encumbered with a 25% import levy,” Gurman and Donnan write. “There are other products on the list that would affect Apple too, such as laptops and tablets.”

“That leaves the company with a difficult choice: Raise prices on already-pricey products and risk missing out on sales, or absorb the extra cost and let profits suffer,” Gurman and Donnan write. “Apple could eat the cost and leave iPhone prices untouched. That would dent earnings per share by 6% to 7%, based on a $450-per-device import cost and annual U.S. unit sales of 40 million, according to [Krish Sankar, an analyst at Cowen Inc]. Still, Apple has experience absorbing extra costs. When currencies swing, the company manages to protect its gross profit margins, [Shannon Cross of Cross Research] noted.”

“Apple could work around the tariff issue as well,” Gurman and Donnan write. “There’s a possibility of Apple re-jiggering its supply chain to build more products outside China. Apple is ramping up production in India to avoid local taxes and has done similar work with Foxconn in Brazil.”

Read more in the full article here.

MacDailyNews Take: Navigating issue such as this is why Tim Cook gets the big money. Still, this whole China thing, at this point, is still overblown by far too many.

People tend to fear the worst. It almost never happens.MacDailyNews, May 14, 2019

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6 Comments

  1. Apple’s choices are not binary – this OR that – rather, they should be this AND that…

    Apple can do whatever it needs to do for margins and sales volumes, but at the same time they should be dedicated to moving the bulk of their iPhone production out of China in a hurry…

    Regardless of the next President in two-years, China is hell-bent on owning the south China sea (meaning controlling and charging for trade routes) and never ending expansion of their Communist regime – period.

    Apple should continue to move towards regional builds, much like they have facilities in Brazil for iPad and iPhone, they should set up shot in Mexico or the US for North America and equally so in Europe. Asian builds should be moved to a 50/50 split between China and India or Vietnam.

    Cook seems to be aware of China on a much broader scale, as we see services (which have little expansion push any time soon into China), and a forthcoming car, being China-independant for revenue and profit growth for the company – a good thing.

    The more economically successful the US can continue to become with China being less and less a partner to that success the more we can push that jeanie back into it’s bottle and leave it isolated – then one thing China absolutely does not want.

    Thanks Nixon for opening the door to China and your EPA creation… NOT. A. Give communism world-wide reach and power. B. Create another no-checks-and-balanced Agency hell bent to become it’s own massive power in the US. Ugh…

    Watergate? Ha! These were Nixon’s two biggest crimes against America…

  2. MDN take. No offense, I love this site and the company. But Tim Cook did have a fund raiser for Hillary Clinton. Apple is a public company. It belongs to the shareholders not Tim Cook. He should be neutral when it comes to politics. Also, the China issue is not new, and given big bucks Tim he again seems to be caught off guard. He has all his apples in one basket. I think the “Apple is only an iPhone” company with little diversity is going to bit Tim and Co again.

  3. “moving the bulk of their iPhone production out of China in a hurry”
    You DO realize that Apple doesn’t “make” anything, they just contact to Foxconn. Apple will just wait for Foxconn to set up shop elsewhere (India) and then make phones there. Anyone saying that Apple should open a factory ANYWHERE is just showing their age 🙂

      1. As I said, it shows your age if you think that Foxconn became what it is today in China over the past 2.5 years. That’s not even considering all the support companies that are NOT Foxconn that provide just-in-time manufacturing at the speed and scale that’s required to make it worth doing. What’s happening in India today is NOT the result of 2.5 years work.

        Now if you START with a long term plan over the next 20 years that puts everything (education, etc.) in place required to ACTUALLY make it happen, you’re starting down the right path. However, that’s really hard to do, so yeh, you just stick with your 2.5 year impossible plan 🙂

  4. Apple should have created or acquired a cloud business when other tech companies were doing that. It would have greatly diversified its revenue stream and definitely lessened Apple’s exposure to China. Cloud businesses have always been considered by Wall Street as an unlimited growth market.

    Currently, Apple is stuck with a failing iPhone business where consumers are unwilling to pay those high prices and thanks to tariffs, those prices will go up even further. If China boycotts Apple products, then Apple will really be screwed up along with Apple shareholders.

    I think it would have been better for Apple to push more into the enterprise but with Apple being slow to upgrade products and being secretive about future products, I don’t think that would work out very well if businesses need a reliable roadmap. Apple bet too heavily on China and now the losses are definitely showing.

    It’s easy to criticize a company in hindsight, and basically a waste of time. I had always wanted Apple to have a cloud business because I thought they could even build their own servers using powerful A-series ARM-based server hardware. Companies such as Microsoft and Amazon aren’t suffering in the least because of China and Apple could have done the same with their mountain of cash. What’s done is done and there’s no turning back time. Apple shareholders will simply have to bite the bullet thanks to Tim Cook and his love for China.

    I’m sure Chinese consumers wanted Apple products at one time but consumers are a fickle bunch, indeed. However, they probably should support their domestic brands as loyal citizens of China.

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