Lower iPhone production cost may help Apple absorb 10% tariff
Apple may be able to help offset the impact of December's tariffs on the iPhone due to alterations in its production cost, JP Morgan believes, with the bill of materials per iPhone said to be lower for the upcoming 2019 models than for previous versions.
Tim Cook visiting a Foxconn plant in China
The ongoing trade war between the United States and China has, so far, not affected the iPhone, though one threat of a 10% tariff directly affecting electronics like the iPhone was close to being implemented, before being delayed until December. Due to the ongoing rising cost of importing goods to China, manufacturers like Apple have been working on ways to mitigate the extra charges and protect their revenues.
In a note to investors seen by AppleInsider, JP Morgan believes the primary lever for Apple to adjust the impact of the cost of the tariff is the production cost of the iPhone itself. Analysts believe the bill of materials has been reduced by between $30 and $50 per 2019 iPhone, which will enable Apple to absorb a large portion of the tariffs without affecting its US retail prices.
The need to keep prices the same is important, as "pricing power is higher given limited competition" for Apple in a number of areas, including AirPods, Apple Watch, and iPads. While estimates of a 10% tariff on the products would result in an 8% annualized earnings impact if Apple elected to completely absorb the tariff cost, JP Morgan believes "Apple has a silver lining from the decline in memory prices, which will likely offset a large portion of tariffs," even if Apple kept pricing consistent relative to the 2018 models.
The lower cost of the bill of materials will affect all iPhones shipped globally, but would only offset the tariffs paid on roughly a third of total units, meaning Apple will still overall benefit from the reduced production cost.
The recent decision by China to apply tariffs on $75 billion worth of US goods did impact Apple's share price on Friday, dipping down by 5%, but JP Morgan isn't worried, as "the tariff standalone will have limited impact on Apple."
For the US tariff, there has been some speculation by Apple analyst Ming-Chi Kuo that the company would absorb the cost of any tariffs, though it was unclear as to where that conclusion came from. There has also been the suggestion of Apple bringing more production out of China and into more markets for iPhones destined for US shores, but Apple CEO Tim Cook has warned not to rely on reports suggesting it would do so.
JP Morgan rates Apple as "Overweight," and has a price target set at $243.
Tim Cook visiting a Foxconn plant in China
The ongoing trade war between the United States and China has, so far, not affected the iPhone, though one threat of a 10% tariff directly affecting electronics like the iPhone was close to being implemented, before being delayed until December. Due to the ongoing rising cost of importing goods to China, manufacturers like Apple have been working on ways to mitigate the extra charges and protect their revenues.
In a note to investors seen by AppleInsider, JP Morgan believes the primary lever for Apple to adjust the impact of the cost of the tariff is the production cost of the iPhone itself. Analysts believe the bill of materials has been reduced by between $30 and $50 per 2019 iPhone, which will enable Apple to absorb a large portion of the tariffs without affecting its US retail prices.
The need to keep prices the same is important, as "pricing power is higher given limited competition" for Apple in a number of areas, including AirPods, Apple Watch, and iPads. While estimates of a 10% tariff on the products would result in an 8% annualized earnings impact if Apple elected to completely absorb the tariff cost, JP Morgan believes "Apple has a silver lining from the decline in memory prices, which will likely offset a large portion of tariffs," even if Apple kept pricing consistent relative to the 2018 models.
The lower cost of the bill of materials will affect all iPhones shipped globally, but would only offset the tariffs paid on roughly a third of total units, meaning Apple will still overall benefit from the reduced production cost.
The recent decision by China to apply tariffs on $75 billion worth of US goods did impact Apple's share price on Friday, dipping down by 5%, but JP Morgan isn't worried, as "the tariff standalone will have limited impact on Apple."
For the US tariff, there has been some speculation by Apple analyst Ming-Chi Kuo that the company would absorb the cost of any tariffs, though it was unclear as to where that conclusion came from. There has also been the suggestion of Apple bringing more production out of China and into more markets for iPhones destined for US shores, but Apple CEO Tim Cook has warned not to rely on reports suggesting it would do so.
JP Morgan rates Apple as "Overweight," and has a price target set at $243.
Comments
I've read credible speculation elsewhere that Apple plans to absorb the cost of the tariffs rather than pass them on to their customers.
In addition, I think there is a good chance that there will not only be no new tariffs but existing ones may be rolled back as Trump is beginning to realize that:
1) This is quickly getting out of control
2) China isn't going to back down
3) The U.S. is being hurt more than China (contrary to FauxNews reporting the U.S. stock market plummeted, not China's. And U.S. treasuries are a disaster.)
4) The likelihood of Trump's re-election is increasingly running in indirect proportion to the intensity of his trade war
5) U.S. companies, even a Republican stalwart like the U.S. Chamber of Commerce are increasingly opposed to his trade policies
6) The entire western world is increasingly opposed to his trade policies -- even Trump's evil twin Boris slammed his trade wars.
7) The Fed will placate the markets but they won't / can't cover Trump and his trade wars.
But, 2 intractable things stand in the way of a roll back of Trump's trade war with China:
1) He can't let himself appear weak to his base. And, any sign of backing down will be taken as weakness and surrender. For Trump, that would be disaster.
2) Trump's hardline, extremist advisers will continue to undermine any attempt to resolve the trade war without a total, abject surrender from China.
Get your popcorn here!
I think the Iraq War serves as a good analogy to Trump's trade war with China: Both are based on a fact-free, testosterone fueled cock fight propelled by extremist, hard-line advisers -- and neither has a clear goal, end-point or exit strategy.
Trump may be crazy, but he isn't stupid. Our future depends on whether his emotions or his intelligence prevail -- and there seems to be an ongoing tension between the two.
My feeling is that Apple will trend away from using older products to serve the lower priced markets and instead use newer but lower featured products (like the Xr) to serve those markets. From a manufacturing side I think that is misguided. But, from a marketing side that might play well. But, at least for a while, we will see both strategies playing out.
I think this may happen too. Though what features they can remove from the lower tier phone while still keeping up with the competition and still having enough to differentiate a "pro" phone I'm not sure. They'd have to be really careful with this strategy, as people do like top tier phones to be top amongst their peers. And the top-of-the-line Huawei phone is still cheaper than the Xs, but they can still claim its top of the line. Phones by Xiaomi and Huawei etc are really surprisingly good for their price point, both for hardware features and the quality of the features (software is another matter though). The cameras on Huawei phones are for lack of a less enthusiastic word: stunning.
I see a lot of sales on Apple devices just here on AI. Prices on the existing product line have never been lower. I don't look forward to buying the latest devices...I am interested in their release because ti makes the previous generation (almost always suitable for my needs) that much less expensive. And if I buy from current stock, no tariff would apply.
I've long argued for this as a strategic option and now would be a reasonably appropriate time.
I have no criticism of Apple for trying other options first (moving to a three model refresh and keeping more older hardware available). However, if that hasn't had the desired effect and if they want to move the needle on unit sales, introducing new mid range offerings at mid range prices is a viable, if risky, option.
Risky in the sense that those lower end models could become the 'good enough' options for some (many?) iPhone users. Clearly, differentiation would have to be enough to make people see the benefits of a higher priced model.
Before deciding, they could opt to keep things as they are and simply reduce pricing, but on a yearly upgrade cycle, it takes a long time to react so they need to know (which they already do) how much of the installed base is really 'profitable' from an active user perspective.
My preferred option would be for a smallish mid range (but new) phone (a la SE) released out of the main refresh cycle (for example around MWC Barcelona) with a competitive price.
A 'safety net' of sorts for people like me who originally switched to Android after being priced out of a new iPhone. Ironically, I like Android (EMUI) more than iOS on phones and have plans to return but I wouldn't have switched if Apple hadn't put hurdles in my way (including upsell).
Someone mentioned here the other day (I think jokingly) the term iPhone Air. I kind of like the idea.
By the time, you should have learned he can always twitted facts to make himself the winner no matter what is true.
Do JP Morgan's Analyst even have the slightly idea how much do Memory, NAND, and actual BOM of the iPhone cost. $30 to 50 off BOM is. A LOT.
It is not like NAND and DRAM suddenly cost nothing. Not to mention if Apple decide to use 7nm EUV for their next SoC AND add additional camera module and lens.
The only way that is possible is if Samsung's OLED being used by Apple this year is no longer custom made ( like the previous two generation ) and is a lot cheaper by sharing production capacity and volume with Samsung S10 series.
First the victim stood up to the school yard bully and told him #Enough! Then the bully realized that the victim wasn't the 98 pound weakling he thought he was. But then the rest of the school yard -- even the bully's friends -- cheered for the victim while jeering the bully. Bullies can't bully under those conditions. Not for long.
If I were running a company that had major CE product affected by new tariffs my next product would take into account the tariff and then adjust costs so that I can maintain the same price point without losing profit. With so many components involved it would only be difficult to choose with components need to be held back from being updated that year or which vendor(s) I can turn to which have components within a new, lower acceptable window of usability. I certainly wouldn't be eating $120 in profit on a device that costs $1,200 to make—with a 21.50% net profit margin do you really think we'll see a 11.50% next year?
Surely Tim isn't going to use his overseas customers to offset his tariff bill .. oh yes he probably is isn't he.
That said, 10% YoY? I wouldn't consider that delusional. $674 for an entry level 2019 iPhone? Why not? Why not go for $650 and grab everyone's attention. Or go one step further and bundle a six month subscription to something?
Trading in an iPhone 6 gets you an XR today for $649. With cost reductions, $650 for an entry level 2019 iPhone is far from delusional.