iPhones could cost up to $160 more if China tariff threat is followed through

Posted:
in General Discussion edited November 2018
The Trump administration's threat of more China tariffs could significantly raise the price of iPhones for consumers, with the iPhone XS family potentially costing between $60 and $160 more if Apple passes the extra cost on to its customers.

Tim Cook pictured in a meeting with President Donald Trump
Tim Cook pictured in a meeting with President Donald Trump


Following Monday's interview with President Donald Trump where the U.S. leader advises he intends to move ahead with tariffs on $200 billion of goods imported from China, if a summit with Chinese President Xi Jinping is less than fruitful, a note to investors penned by Katy Huberty at Morgan Stanley and seen by AppleInsider spells out some of the consequences of the tariffs if they do get applied.

The iPhone and many other Apple products assembled in China and imported to the United States has so far avoided being impacted by existing tariffs in the ongoing trade war between the two countries, but the administration has already signaled plans to apply similar tariffs on items not already on the import list. In the interview, Trump suggested a 10 percent tax could be applied to the iPhone and other goods, as "people could stand that very easily."

Production shifts unlikely

According to Huberty, Apple has one of the "most significant exposures to Chinese exports to the U.S.," due to its final assembly for most products located in China. While other firms could relocate factories outside of the country to escape the levy, China is "one of the only countries that can provide such a large and low-cost labor force with the expertise in manufacturing and tooling that is required" for the production of over 300 million devices a year, the analysts state, requiring upwards of 1 million workers in a single location.

Moving this base of operations out of China and into other areas of Asia "is largely inconceivable and would require heavy investment in robotics and automation," suggests analysts Katy Huberty, Elizabeth Elliott, Erik Woodring, and Kieran Kenny.

Shifting to the U.S. Is also out of the question for Apple, as the average assembly factory worker earns four times as much as their Chinese counterparts, and the population required for such high volume production would exceed that of Cincinnati, St. Louis, and Pittsburgh combined.

Apple also cannot ship almost-assembled products from China to another nearby country for the very last stage of assembly, as rules state the origin of a good is determined by the "last place in which it was substantially transformed into a new and distinct article of commerce." To get away with this, Apple would have to shift more of the assembly outside of the country to a level that satisfies the rules, requiring billions of dollars of investment over multiple years.

Taking the tariff option

Instead, Morgan Stanley believes the most realistic scenario will be Apple keeping its operations intact for the moment, and deal with the tariff head-on. Even doing this is considered as "value destructive" for Apple shareholders, as either Apple would have to eat the cost of the tax, reducing its profit per device, or pass it onto consumers.

According to estimates of $85 billion for U.S. Sales of the iPhone, iPad, Mac, and Apple Watch over the last 12 months, it is thought that about 32 percent of Apple's total cost of goods sold could be subjected to the import fee, which could range between 10 percent and 25 percent. If passed on to consumers, this could increase the cost of an iPhone XS by between $60 and $160, as an example, with similar increases for the iPhone XS Max and iPhone XR.

As main smartphone rival Samsung would be affected less by the tariffs, due to more than half of its manufacturing is performed in Vietnam and South Korea, prices for Samsung products should raise by a far lesser amount compared to Apple. Morgan Stanley suggests this means Apple "could face significant demand and unit headwinds" if the cost is passed on to consumers, as not all of its competitors will be impacted in the same way.

If Apple decided to consume the cost in its production and keep pricing for consumers static, it is suggested that demand will stay the same but the margins would "contract significantly." In this case, the full year 2019 earnings per share could be reduced by between $1 and $2.50, depending on the percentage of the tariff.
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Comments

  • Reply 1 of 41
    It's a lose-lose either way (from a dollar standpoint).

    But it's a huge PR win if Apple eats the cost and keeps iPhones priced the same during this "Presidential Transition".
    baconstangmikethemartian
  • Reply 2 of 41
    JWSCJWSC Posts: 266member

    The tariffs will be a lose-lose event for everyone in the short term.  But I’m slowly coming around to the realization that the kleptocratic Chinese leadership and US companies that continue to source their products from this regime need a hard ‘biff’ on the nose.

    China is not becoming more open with closer economic ties as many had thought it would.  China continues to aggressively steal US IP.  A wake up call is needed.  Whether tariffs are the best answer is debatable.   But the way everyone has been operating needs to change.

    tbornottechprod1gyeyeakel
  • Reply 3 of 41
    MplsPMplsP Posts: 893member
    It's a lose-lose either way (from a dollar standpoint).

    But it's a huge PR win if Apple eats the cost and keeps iPhones priced the same during this "Presidential Transition".
    It'll be interesting to see how this shakes out politically. Does Apple hold off on price increases so as not to annoy POTUS? THye have a decent profit margin on the phones, but I wouldn't expect any company to eat that much profit.

    Maybe I should go ahead and upgrade my 6s...
  • Reply 4 of 41
    avon b7avon b7 Posts: 3,069member
    It's a lose-lose either way (from a dollar standpoint).

    But it's a huge PR win if Apple eats the cost and keeps iPhones priced the same during this "Presidential Transition".
    That could he a poison chalice if Apple absorbs the tariffs and still announces high profits next year.

    There is the option to absorb part of the tariffs and pass the other half onto the consumer and create bundles to shift more product.
  • Reply 5 of 41
    Won't bother me. They're getting too expensive anyways. Same for the iPads. Apple needs to chill out, and China needs to be taught a lesson. 
    eyeakel
  • Reply 6 of 41
    adamcadamc Posts: 562member
    Perhaps the tariff is already baked into the price of the iPhones. Apple already saw it coming so they lowballed their forecast for the first quarter.
  • Reply 7 of 41
    That cost increase is a drop in the ocean to rich people, apple shouldn't be worried to pass on those costs. They aren't interested in the junk market, so higher the prices go, the more they distance themselves from it.
  • Reply 8 of 41
    ivanhivanh Posts: 246member
    "People could stand that very easily."  People could mean Apple investors, Apple shareholders, Apple top executives,.
    Apple could even lower the prices of iPhones by the equivalent tariff and still make huge profit.


    muthuk_vanalingameyeakel
  • Reply 9 of 41
    "Trump suggested a 10 percent tax could be applied to the iPhone and other goods, as 'people could stand that very easily.'" Trump didn't "suggest" this at all. The interviewer specificially fed him a question about "even iPhones?" to get a clickbait quote from "the president." And Trump delivered the "sure" response the interviewer calculated.
  • Reply 10 of 41
    lkrupplkrupp Posts: 6,530member
    ivanh said:
    "People could stand that very easily."  People could mean Apple investors, Apple shareholders, Apple top executives,.
    Apple could even lower the prices of iPhones by the equivalent tariff and still make huge profit.


    Prove it. Pojnt us to valid data that proves your allegation. Otherwise it’s just random blathering in the wind.
    ronn
  • Reply 11 of 41
    lkrupplkrupp Posts: 6,530member
    And I suppose this only affects Apple, right? Other manufacturers who import from China to the U.S. are exempt? Samsung is already exempt? Google is already exempt? 
    ronnivlad
  • Reply 12 of 41
    lkrupplkrupp Posts: 6,530member

    Shifting to the U.S. Is also out of the question for Apple, as the average assembly factory worker earns four times as much as their Chinese counterparts, and the population required for such high volume production would exceed that of Cincinnati, St. Louis, and Pittsburgh combined.

    And the clueless among us still clamor for Apple to move production to the U.S. Politics and reality often don’t mix do they.
    ronn
  • Reply 13 of 41
    It's a stupid tariff.  What are we supposed to do?   Buy an American made phone?  iPhone is about as American as it gets.

    It really is just a tax, on (almost) everyone, that doesn't have to go through Congress.  Yea!  More tax cuts for the the 0.1%!  More money to waste on sending troops to intercept refugees!
    edited November 2018 ronndougdthtgilly33
  • Reply 14 of 41
    dwighthousedwighthouse Posts: 1unconfirmed, member
    That’s it?! In the worst case, that’s less than a third of the profit margin. I was under the impression it would double the costs to consumers.
  • Reply 15 of 41
    lmaclmac Posts: 162member
    Who else thinks Trump looks like the Muppets' Swedish Chef and Tim Cook is Beaker!
    MplsP
  • Reply 16 of 41
    ...or Apple could make the phones in the US for the same amount.
  • Reply 17 of 41
    Mike WuertheleMike Wuerthele Posts: 3,872administrator
    tbornot said:
    ...or Apple could make the phones in the US for the same amount.
    If only this was addressed in the article! Oh, wait, it is.
  • Reply 18 of 41
    it is insane to assume that Apple could move the production to the US....the quality would be bad and prices sky high....Apple needs to eath the tariffs ! iPhones are way too expensive already...and most of the profit is dividended out anyway....Apple should choose its customers over its shareholder !
    baconstang
  • Reply 19 of 41
    It’s fun listening to Americans fretting about iPhone price increases. Welcome to the Rest Of The World where it’s possible to pay $3.4K for a cell phone.


    baconstang
  • Reply 20 of 41
    tbornot said:
    ...or Apple could make the phones in the US for the same amount.
    If only this was addressed in the article! Oh, wait, it is.

    I pointed it out because from the comments almost (!) everyone missed it.
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