FILE PHOTO: The new Apple iPhone X are seen on display at the Apple Store in Manhattan, New York FILE PHOTO: The new Apple iPhone X are seen on display at the Apple Store in Manhattan, New York
INTERNATIONAL - Apple Inc.’s most-important product, and the supply chain that underpins its success, may be about to avert a margin-crushing threat. At least for a while.
A 20-month trade war between the U.S. and China came to a head this week as a key deadline looms. This Sunday, 15% tariffs are due to kick in on the iPhone. Chinese officials expect U.S. President Donald Trump to delay the import duties, granting Apple a temporary reprieve. But negotiations have been fraught with missed deadlines and surprise about-faces.
“Like everyone else in technology, Apple is hoping the tariffs don’t go into effect,” said analyst Shannon Cross of Cross Research.
Even if the tariffs are delayed, the broader trade war has exposed a weakness at the heart of Apple’s business. The world’s largest technology company is also among the most global, relying on suppliers and manufacturing partners that are mostly based in China. Apple can’t quickly move production to other countries, so it’s relied on a furious White House lobbying campaign this year, led by Chief Executive Officer Tim Cook, to protect its key products from tariffs.
Apple already is paying 30% duties on the Apple Watch, AirPods headphones, iMac desktop computer and HomePod speaker -- and the company hasn’t raised prices to compensate.
If the company takes a similar approach with its more-popular products, the impact will be larger. The iPhone, iPad and Mac generate almost three quarters of Apple’s annual revenue.
Holding prices steady while swallowing additional tariffs would cut earnings per share by about 4% next year, according to Wedbush Securities analyst Dan Ives. The 15% hit would add about $150 to the price of each iPhone, he estimated.
“Apple continues to be in the crossfire given its flagship iPhone manufacturing footprint in China,” Ives wrote in a note to investors on Wednesday. Apple “more than any company out there has the most to lose if this tariff war does not see a truce.”
If Apple raises iPhone prices, demand would shrink 6% to 8% next year, Ives estimated.
The other option is tariff waivers. That has already worked for Apple’s Mac Pro, but the company had to pledge to have the pricey, niche computer assembled in the U.S. It’s also filed for relief on some iPhone parts, the Apple Watch, and the AirPods with less success.
Wall Street is already assuming the tariffs will be either delayed or abandoned in favor of a “Phase 1” trade deal between the U.S. and China. Apple analysts forecast a relatively rosy holiday period and 2020 for the company. Apple shares have surged in recent weeks and keep hitting records.
Still, the trade war is such an existential threat to Apple’s supply chain, that maintaining the status quo is considered a victory.
“Avoiding tariffs would be a positive, but it would also be business as usual since prices wouldn’t need to be raised,” Cross said. “Nothing would change.”
In October, Apple projected holiday quarter revenue between $85.5 billion and $89.5 billion, ahead of Wall Street expectations. On a recent conference call with analysts, Cook said he was “very positive in terms of how things are going, and that positive view is obviously factored in our guidance.”
The Dec. 15 tariffs would hit Apple’s fiscal second-quarter results more, but analysts are still expecting sales to grow 7% to $62.2 billion in that period. For the company’s 2020 fiscal year, Wall Street sees revenue climbing 6% to more than $275 billion, according to data compiled by Bloomberg.
If Apple manages to avoid this next round of tariffs, Cook’s lobbying efforts will have paid off handsomely. The Apple CEO met frequently with Trump this year, and even took criticism for standing beside the president as he blasted the media and House speaker Nancy Pelosi at a Mac Pro assembly facility in Texas last month.
“Cook has solid arguments to get the iPhone and other company products off the list of China-made goods slated for a 15% tariff,“ Bloomberg Intelligence analyst John Butler wrote in a note. “Apple can’t easily relocate its production facilities out of China, which took years to establish.”
At the Texas event, Trump seemed swayed, saying the government would look into exempting Apple from the December tariffs.
While the president has embraced tariffs, he conceded that these tools create winners and losers, and that Apple could be the loser. It isn’t fair for Apple to be taxed on iPhones built in China given that South Korean rival Samsung Electronics Co. wouldn’t have to pay the duties, Trump said.
“We have to treat Apple on a somewhat similar basis as we treat Samsung,” Trump said.