Apple (AAPL - Free Report) dropped 2.1% in after hour trading on Nov 26, following the U.S. President Donald Trump’s threat to impose tariff on all remaining imports from China. This batch of imports will surely include laptops and Apple’s flagship iPhone that has so far been successful in avoiding tariffs.
Per Reuters, which quoted Trump’s interview with The Wall Street Journal, the president is most likely to increase tariff rates from 10% imposed in September on $200 billion worth of Chinese imports to 25% from Jan 1, 2019.
Notably, Trump and his Chinese counterpart Xi Jinping are expected to meet at the G-20 summit this week in Buenos Aires to resolve the eight-month old trade dispute between two of the world’s largest trading nations.
iPhone Increases U.S.-China Trade Imbalance
China has a $37-billion trade surplus with the United States and the trade imbalance is one of the primary reasons behind the ongoing trade war. Consumer goods like smartphones and televisions were top items imported from China in 2017. Per Financial Times, the United States imported mobile phones and computers worth more than $100 billion in the last year.
Notably, iPhone has been blamed to increase the trade imbalance between the United States and China.
Apple assembles iPhone in China primarily to take advantage of the country’s abundant low-cost labor. While the company buys components from suppliers based in Japan, Korea, Taiwan and the United States, the final assembling is done by contract manufacturers like Foxconn at a significantly low labor cost. Per Reuters, assembling only represents an estimated 3-6% of the manufacturing cost of an iPhone.
However, the whole value of the assembled iPhone (including components procured from outside China) is attributed to China (due to an outdated trade deficit measurement process), which adds to its export numbers.
Per Reuters’ estimates, 61 million iPhones were shipped from China to the U.S. in 2017 and a single model, iPhone 7, accounted for $15.7 billion of the trade deficit due to the outdated measurement.
Apple to Hurt Most From Additional Tariffs
Apple is already plagued by concerns over lower demand for its new iPhones, which, reportedly, has compelled the company to cut production targets. Apple may also offer discounts to Japanese carriers to encourage iPhone XR sales in the country.
Hence, the imposition of tariff will make iPhone more expensive, thereby dragging down the demand. This is also expected to hurt Apple’s market share.
Moreover, Apple’s strategy to assemble iPhone in China helps it offer the device at a competitive price, which, however, will be hurt by imposition of tariff.
Notably, nearest competitor Samsung has significant manufacturing operations in Korea and Vietnam and is more insulated to the U.S. imposed tariffs on China imports.
Zacks Rank & Stocks to Consider
Apple currently has a Zacks Rank #3 (Hold).
Intel (INTC - Free Report) , Cadence Design Systems (CDNS - Free Report) and Microsoft (MSFT - Free Report) are stocks worth considering in the broader Computer & Technology sector. While Intel and Cadence flaunt a Zacks Rank #1 (Strong Buy), Microsoft has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Expected long-term earnings growth rate for Intel, Cadence and Microsoft currently stands at 8.4%, 12% and 12.5%.
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