Trade war: Apple may move iPhone production out of China if tariffs hit 25%

By: | Published: December 13, 2018 5:13 AM

Apple’s suppliers will consider shifting iPhone production away from China should tariffs on US imports skyrocket, but the US company plans to sit tight for now, people familiar with the company’s thinking said.

apple iphoneIllustration: Rohnit Phore

Apple’s suppliers will consider shifting iPhone production away from China should tariffs on US imports skyrocket, but the US company plans to sit tight for now, people familiar with the company’s thinking said.

The tech giant’s suppliers intend to stick with the existing model even if the US levies a 10% import tariff on smartphones, the people said, asking not to be identified talking about a private matter. But it will have to reassess the situation should US President Donald Trump decide on a more punitive 25%, the people said.

iPhones — the majority of which are made by assembly partner Hon Hai Precision Industry in China and shipped around the world — have so far been spared in a tit-for-tat trade war between the world’s two largest economies. But Trump told the Wall Street Journal last month that tariffs could be slapped on smartphones and laptops made in China, the world’s largest manufacturer of electronics.

Apple has long used the world’s No. 2 economy as its production base for everything from its signature device to iPads and Macs. The company’s supply chain now spans hundreds of companies, culminating in assemblers such as Hon Hai and Pegatron.

Apple wasn’t available for comment outside of US business hours. Hon Hai and Pegatron declined to comment.

Apple’s manufacturing partners are largely beholden to the US company’s wishes.

Migrating parts of the sprawling network they underpin will be difficult and the US company seems to be in wait-and-see mode for now, one of the people said. An Apple partner has already suggested alternative locations for non-iPhone production, but the US company has indicated there’s little need to make such a move for now, another person said.

That may change if tariffs escalate, an outcome now in the balance as Washington and Beijing begin thorny negotiations on a trade deal that could scale back a series of tariffs implemented this year.

Apple, already grappling with mounting evidence that its latest iPhone line-up has failed to excite consumers, can ill-afford a sharp hike in import taxes.

A 10% tariff could result in an earnings-per-share decline of just $1 for Apple, should all its hardware sold in the US be subject to the levy and the company absorbs the cost, RBC analyst Amit Daryanani wrote in a November 28 research note. That compares with the average 2019 Apple-EPS estimate of $13.32, according to data compiled by Bloomberg.

However, a more severe scenario of a 25% tariff — absorbed by Apple — could result in an EPS decline of about $2.50, he added.

Also read: iPhone ban in China: Apple Stores defy court order to continue selling iPhone

In his early years running Apple, Tim Cook would respond to questions about increasing manufacturing in the US by saying the skill sets in China are more conducive to producing the company’s products. However, in recent months, he has modified that view, saying in an interview this year that “it’s not true that the iPhone is not made in the United States.” Some components, like the smartphone’s glass cover, are manufactured in the US and shipped for assembly in China.

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