Apple has multiple options to lower potential import tariff impact

Posted:
in AAPL Investors
Apple will take multiple steps to mitigate the incoming 10% tariff on Chinese imports to the United States, Morgan Stanley believes, with the iPhone producer using non-Chinese assembly and supply lines for US-bound smartphones as a workaround that has been 16 months in the making.

President Trump helping to break ground at the future location of Foxconn's plant in Wisconsin.
President Trump helping to break ground at the future location of Foxconn's plant in Wisconsin.


The August 1 threat to levy a 10% tariff on $325 billion of electronics imported to the United States from China by President Donald Trump is one that would also cover Apple products, something previous tariffs that were implemented or threatened didn't include. For the new tariff, due to start from September 1, all of Apple's products from China arriving on US soil would be affected, with the company failing to secure tariff waivers this time around.

In an investor note seen by AppleInsider, Katy Huberty of Morgan Stanley writes the threat of tariffs is not new for Apple, and it has been an overhang of the wider tech industry since April 2018, when the first tariff proposals were made.

"Apple has had 16 months to work with supply chain partners and contract manufacturer on how to mitigate the tariff cost," the note states. "And we expect Apple to take multiple steps to limit the tariff impact."

The first step is for Apple to apply for removal of its products from Proposed List 4, which is the collection of products that will be affected by the tariffs. Apple is likely to follow up with an exclusion application after the tariffs go into effect.

Apple is expected to take advantage of the diversified manufacturing base of Hon Hai, its major assembly and contract manufacturer, as approximately 25% of its production is available in other countries, including Taiwan, India, Vietnam, Thailand, and other territories. It is also suggested that an increase of production in factories in India could serve as the "most near-term alternative location" for assembly to avoid tariff costs.

It is stressed that it is unknown how long it would take for Apple to shift production of 67 million iPhones, but it is "likely the most significant lever Apple has to mitigate tariffs on Chinese exports to the US over the long term."

The third "and likely more near term" step is for Apple to ask suppliers to make pricing concessions to help offset the tariff impact "such that the net pricing increase required to be passed onto consumers is far less than the full tariff impact." This is somewhat similar to a note from Ming-Chi Kuo, which believed Apple would absorb the tariff cost in its pricing instead of handing it to consumers to pay, though by spreading some of it to suppliers, this will reduce the amount of lost profit.

If Apple doesn't try to alter its supply chain and either absorbs the cost of tariffs or decides to offset the cost by raising prices in the United States, Morgan Stanley sees a worst case scenario of an 8% to 10% drop on its full year 2020 earnings per share of $12.68. In the most extreme case, the cost of iPhones, iPads, and Mac could go up by 5%, accompanied by lower gross margins and the number of shipments to China and the US each fall by at least 10% year-on-year, with Chinese iPhone shipments set to drop even more "due to more nationalistic behavior."

A "more aggressive trade stance" from the US administration that puts the tariff up to 25% would bring the EPS downside up to 20%.

It is assumed that in the near term, the Wearables and Services businesses will remain relatively unaffected, allowing Apple to maintain its valuation multiple.

As the downside to the near-term stock floor is more limited, Morgan Stanley still believes this makes "Apple's risk/reward skew relatively attractive." with the upcoming 5G iPhone cycle and the continuing growth of Services, the firm writes "Apple remains a top pick into year-end, despite the elevated tariff risk."

Comments

  • Reply 1 of 16
    robjnrobjn Posts: 220member
    You write: “with the company failing to secure tariff waivers this time around”

    Have the US government actually given Apple an answer on this yet? The President’s comment was probably based on what he saw reported on the news.

    Tim Cook later revealed that the basis for requesting exemption was that the parts would be assembled in the US, thus supporting US manufacturing jobs. He also revealed that Apple were still waiting to see what would be decided.
  • Reply 2 of 16
    seanismorrisseanismorris Posts: 1,015member
    robjn said:
    You write: “with the company failing to secure tariff waivers this time around”

    Have the US government actually given Apple an answer on this yet? The President’s comment was probably based on what he saw reported on the news.

    Tim Cook later revealed that the basis for requesting exemption was that the parts would be assembled in the US, thus supporting US manufacturing jobs. He also revealed that Apple were still waiting to see what would be decided
    Tweeter and Chief
    "Apple will not be given Tariff wavers, or relief, for Mac Pro parts that are made in China," Trump tweeted early morning Friday. "Make them in the USA, no Tariffs!"

    CNBC
    • Apple stock dropped more than 2% and erased previous gains after President Donald Trump said on Thursday that the U.S. will put an additional 10% tariff on a remaining list of goods imported from China starting on September 1.
    • The company assembles iPhones in China, making it vulnerable to price increases if a tariff were to be placed on Chinese exports.
    • Apple warned in June that a previously discussed list of tariffs would affect “all of Apple’s major products,” although Apple could still apply for exemptions or exclusions.
    As AI has said,  Apple will be looking to minimize the impact on earning by shifting production around.  They will likely be mostly successful, due to the long lead time.  Apple will take a small hit to margins, but in general consumers shouldn’t see a significant increase in product price.  The exception is the Mac Pro, you might want to buy one before September... just in case.

    It’s not like Apple is the only company to be affected.  The Microsoft Surface is made in China... it’s just hardware is a much smaller piece of Microsoft’s pie.  Still, consumers might not get quite the deals they were expecting come Christmas.  I haven’t looked a who is receiving exemptions, but the toy, shoes, apparel industries industries will feel the pain.  I also worry about autos, construction... tools, steel, etc.  We’re really playing Russian Roulette with the global economy.
    badmonkmuthuk_vanalingamrotateleftbyte
  • Reply 3 of 16
    I'm a bit concerned with the approach Ms. Huberty proposes, since it would mean reducing manufacturing in China, which will not sit well with the Chinese. An alternative would be for the Chinese to agree to "eat" some of the tariff as a way to keep Apple manufacturing in China. As a short term measure, it could help to keep those jobs in China. At the very least, I'd hope Mr. Cook is open to that kind of deal.

    More than likely there would be some combination of all possibilities which, on net, would see resultantly little change in the US consumer price tag.
  • Reply 4 of 16
    I'm thinking that the devaluation of the yuan has nipped this in the bud. But we'll see.
  • Reply 5 of 16
    sacto joe said:
    I'm a bit concerned with the approach Ms. Huberty proposes, since it would mean reducing manufacturing in China, which will not sit well with the Chinese. An alternative would be for the Chinese to agree to "eat" some of the tariff as a way to keep Apple manufacturing in China. As a short term measure, it could help to keep those jobs in China. At the very least, I'd hope Mr. Cook is open to that kind of deal.

    More than likely there would be some combination of all possibilities which, on net, would see resultantly little change in the US consumer price tag.
    Fortunately, not all sales are to the United States. Remember Apple Inc. is an international brand. They can still can ship Chinese components and phones throughout China, Europe and rest of Asia. 

    https://www.statista.com/statistics/382175/quarterly-revenue-of-apple-by-geograhical-region/

    There’s a lot that Apple can do to play around in their complicated supply chain so no one country gets seriously hurt. Also, Foxconn is having problems filling staff as many Chinese hate manufacturing jobs and are refusing to apply, so Foxconn is already replacing these unfilled positions with robots.

    stevenoz
  • Reply 6 of 16
    tzeshantzeshan Posts: 1,996member
    How you left out the most obvious step that Apple will definitely succeed? Apple can sue for unfair competition. 
  • Reply 7 of 16
    SpamSandwichSpamSandwich Posts: 31,301member
    sacto joe said:
    I'm a bit concerned with the approach Ms. Huberty proposes, since it would mean reducing manufacturing in China, which will not sit well with the Chinese. An alternative would be for the Chinese to agree to "eat" some of the tariff as a way to keep Apple manufacturing in China. As a short term measure, it could help to keep those jobs in China. At the very least, I'd hope Mr. Cook is open to that kind of deal.

    More than likely there would be some combination of all possibilities which, on net, would see resultantly little change in the US consumer price tag.
    I’m not sure a tariff of 10% would make moving assembly to the US financially viable. Seems unlikely to happen.
  • Reply 8 of 16
    sacto joe said:
    I'm a bit concerned with the approach Ms. Huberty proposes, since it would mean reducing manufacturing in China, which will not sit well with the Chinese. An alternative would be for the Chinese to agree to "eat" some of the tariff as a way to keep Apple manufacturing in China. As a short term measure, it could help to keep those jobs in China. At the very least, I'd hope Mr. Cook is open to that kind of deal.

    More than likely there would be some combination of all possibilities which, on net, would see resultantly little change in the US consumer price tag.
    I’m not sure a tariff of 10% would make moving assembly to the US financially viable. Seems unlikely to happen.
    "I’m not sure a tariff of 10% would make moving assembly to the US financially viable." I never suggested it would. Basically, the cost of assembling in the US would have to equal the cost of assembling everywhere else (i.e., not just China) for assembling to be brought back to this country. Won't happen. Also, there's a reason our country has so many non-US workers; US workers aren't interested in the jobs those non-US workers fill. Assembly work would be in that category.
  • Reply 9 of 16
    I'm thinking that the devaluation of the yuan has nipped this in the bud. But we'll see.
    This has been going on for years, it’s a global issue and has nothing to do with Trump vs China trade war.
  • Reply 10 of 16
    Option 1: squeeze suppliers
    Option 2: move production out of China
    Option 3: use less expensive parts
    Option 4: rise prices (not likely)
    ”absorbing higher costs” is not a viable option
    vesalius
  • Reply 11 of 16
    GeorgeBMacGeorgeBMac Posts: 4,946member
    Apple put production in China because it was the BEST place to do it in:  Lowest Cost, Highest Quality, Fastest turnaround, etc....

    Why should Apple, and by extension, its customers have to accept second best because of the Tweeter in Chief waging a political battle for his base?

    Apple needs to do what China has been doing.  Wait till the short timer is gone.   It won't be that long.
  • Reply 12 of 16
    larryjwlarryjw Posts: 394member
    sacto joe said:
    sacto joe said:
    I'm a bit concerned with the approach Ms. Huberty proposes, since it would mean reducing manufacturing in China, which will not sit well with the Chinese. An alternative would be for the Chinese to agree to "eat" some of the tariff as a way to keep Apple manufacturing in China. As a short term measure, it could help to keep those jobs in China. At the very least, I'd hope Mr. Cook is open to that kind of deal.

    More than likely there would be some combination of all possibilities which, on net, would see resultantly little change in the US consumer price tag.
    I’m not sure a tariff of 10% would make moving assembly to the US financially viable. Seems unlikely to happen.
    "I’m not sure a tariff of 10% would make moving assembly to the US financially viable." I never suggested it would. Basically, the cost of assembling in the US would have to equal the cost of assembling everywhere else (i.e., not just China) for assembling to be brought back to this country. Won't happen. Also, there's a reason our country has so many non-US workers; US workers aren't interested in the jobs those non-US workers fill. Assembly work would be in that category.
    It's not that US workers aren't interested. Cook has been clear that neither the skill sets nor the numbers of potential qualified US workers are available in the US. It's stadiums-full of skilled Chinese vs small room of US workers capable of doing the work. The hiring process in the US would itself prevent hiring the numbers required for assembly, given the "seasonal" nature of manufacturing process; add the US has no capacity to transport employees to manufacturing sites (no mass transit to speak of). 

    And, not only must Apple move all such manufacturing to the US but all similar industries would have to also to make it feasible. Sure, the Mac Pro could be built in the US, but that would be because the Mac Pro might sell at a rate of 1000/month, not millions like the iPhone. 
    GeorgeBMac
  • Reply 13 of 16
    mcdavemcdave Posts: 1,169member
    From an outsider perspective, Apple is far too dependent on the US market especially with Trump’s knee-jerk policies.
    They should extend and standardise product and service availability outside the US.
  • Reply 14 of 16
    felix01felix01 Posts: 248member
    It would be silly to make any irrevocable manufacturing decisions if Cook can be taken at his word that the US industrial base just isn't available to do the job in the numbers required and the assembly job still can't be done without very skilled human intervention despite the use of extremely sophisticated robotics.

    Trump is destined to be a short termer and you can bet the next president and Congress will move quickly to end this trade war with China. While I applaud the goals, the pain outweighs the gain. 
    GeorgeBMac
  • Reply 15 of 16
    why all the worry about Chinese Jobs and manufacturing? Having a more distributed manufacturing base that is less dependent on 1 country (a single communist, authoritarian dictatorship that treats its people worse than the US does) is a good thing for Apple once the initial energy is spent to make a limited change. Not even suggesting the jobs are coming to the US, except in limited small amounts.  

  • Reply 16 of 16
    GeorgeBMacGeorgeBMac Posts: 4,946member
    vesalius said:
    why all the worry about Chinese Jobs and manufacturing? Having a more distributed manufacturing base that is less dependent on 1 country (a single communist, authoritarian dictatorship that treats its people worse than the US does) is a good thing for Apple once the initial energy is spent to make a limited change. Not even suggesting the jobs are coming to the US, except in limited small amounts.  

    Not quite.
    Just as we choose Apple because of its quality and other things, Apple chose China as the best possible place in which to manufacture its products.   There is no need to placate an unstable short timer by ripping things up and moving to a less desirable locale.
Sign In or Register to comment.