Last week, President Trump sent out a tweet that threatened an additional 10% tariff on goods imported from China. Goods that include, among other things, technology. Apple's stock fell 2% that day wiping out earlier gains the company had after its Q3 earnings call on Tuesday. The news has caused a bit of hubbub regarding whether the 10% tariff would affect how much we as consumers pay for iPhones in the future. I've spent some time reading up on what tariffs are, what they are for, and whom they affect, and I've been listening to what analysts are predicting Apple might do if the 10% tariff goes into effect (and Apple is not given an exemption). What I've come up with is … it's complicated.
First, tariffs on imported goods, which is what Trump is threatening, are taxes that the country receiving the goods must pay. I'm absolutely not qualified to talk about the deeper purposes, reasons, and effects of tariffs, but if you'd like to know more, Investors.com has written a very clear, simple understanding of tariffs, including some historical relevance. Specifically relating to Apple, however, it means a 10% tax on what Apple pays factories in China to assemble its iPhones and other products. It doesn't mean Apple would be taxed on the consumer retail price of an iPhone, however. Tariffs are based on the wholesale cost of goods.
In 2012, China Daily reported on a research report written by three U.S. professors about the global economy. In this report, the researchers note that manufacturing of the iPhone is global. It's mostly the assembly that takes place in China.
They (people who think China's role is bigger in the production of Apple products) focus only on the trade deficit with China, and therefore they think China has a bigger role. What they don't understand is that China gets all sorts of input from other countries from Japan, the US, Malaysia and so on. So China's contribution is really a small amount of labor, one of the report's authors, University of California professor Kenneth L. Kraemer said.They think China's role is bigger simply because they don't understand how global supply chains work. They think everything from an iPad and iPhone is made in China rather than just shipped (components) and assembled there, Kraemer said.
Lifewire has listed some (but definitely not all) of the parts of an iPhone that are manufactured around the world, further hitting home the point Apple CEO Tim Cook made during the Q3 earnings call last Tuesday.
There's a significant level of content from the United States, and a lot from Japan to Korea to China, and the European Union also contributes a fair amount. And so. That's the nature of a global supply chain. I think, largely, I think that will carry the day, in the future as well.
Some analysts are predicting that Apple will diversify its iPhone assembly, which would not be an easy feat, but which would cost less for Apple, in the end. Others, like Morgan Stanley analyst Katy Huberty, think differently.
...given the reliance on China's established, low-cost labor force and expertise in manufacturing/tooling, a large-scale move out of the country would not only be costly, but could take multiple years to complete, potentially raising the odds of execution risk, in our view," Huberty wrote in a note to investors.
I believe Cook's remark in the investor meeting hints that the company is willing to take that risk.
Does this mean the next iPhone will be $100 more expensive in order to compensate for the tariff? I don't think so. I believe Apple will use its global influence to its advantage and ensure that production continues without a heavy hit to its bottom line or our pocketbooks.
Whether the price of the iPhone increases in 2020 might be a different story, but I don't think it will have anything to do with the trade war. It might just be because the iPhone 12 is rumored to have 5G, 3D cameras, and USB-C, which might be a bit more costly to manufacture, but not assemble.
What are your thoughts on potential tariffs to the latest list of Chinese imports to the U.S.? Do you think Apple will start charging $100 more for the iPhone to recoup any potential cost increase? If not $100, how much?
Lory
