Shares of Apple (AAPL - Free Report) took a hit on Tuesday after a Monday Wall Street Journal report quoted President Trump as saying he is considering imposing 10% tariffs on the company’s iPhones and laptop computers that are manufactured in China and imported for sale in the US. It’s the latest volley in the tit-for-tat trade war between the US and China and it’s also consistent with Trump’s previous statements expressing his desire to see Apple’s phones made in the USA.
Apple has already been suffering lately amid rumors of its reduction in parts orders for the new line of iPhones and speculation that the company is seeing decreasing customer demand – especially now that the least expensive iPhone starts at $749 and some models are priced above $1000. The imposition of additional tariffs would raise the price even more, further hurting demand.
In addition to increasing the end cost of phones, new tariffs could also prompt China to retaliate to protect its suppliers and manufacturing companies who would also suffer from lowered iPhone production and sales.
It has been speculated that President Trump’s tariff threats are simply posturing for a better bargaining position on trade issues ahead of his scheduled meeting with Chinese President Xi at the end of the week in Argentina. China might be more prone to cede to his demands if he makes it clear that he’s willing to inflict pain on even the most successful American companies.
So why can’t Apple simply move iPhone production to the United States?
Technically, they actually could, but the increased costs and other logistics issues would make the move impractical at best.
Apple CEO Tim Cook has pointed out that many of the components of the phone actually have been manufactured in the US at various times, including display screens, face ID modules and processor chips.
The most obvious problem is the cost of labor. Manufacturing jobs in China typically pay about $100/week – a fraction of what similar positions in the US pay. Lower labor costs have been the primary reason for the exodus of US manufacturing jobs to other countries over the last 30 years. Apple didn’t invent labor outsourcing, they are merely playing the cards the world has dealt. Competing in a global economy while also drawing the ire of the president over its manufacturing process puts Apple between the proverbial rock and hard place.
Labor is not the most significant cost savings related to Chinese production, however. The availability of specialized parts on demand and at affordable prices is the bigger reason so many consumer electronics products are manufactured in China. Shenzhen province in particular is home to a multitude of manufacturers of electronic components. The physical proximity of those suppliers to the sites of final assembly of electronics gives Apple enormous flexibility in deciding what parts get delivered and when.
Additionally, Chinese component manufacturers tend to be quite flexible in making small changes on the fly, allowing Apple and other companies to make modifications to products that are already being manufactured to address bugs and improve performance.
That manufacturing infrastructure has been created over the past 20 years or more and could not be re-created easily in the US.
Industry experts estimate that an iPhone that is assembled in the US from exclusively American components would retail for $2000, more than double the current price. Clearly that magnitude of increase would have a chilling effect on sales. In that context, a 10% tariff seems like the much more tenable situation.
It’s no secret that President Trump is playing hardball in trade negotiations. We have to hope for some real progress later this week because the casualties are starting to pile up among US companies.
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