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Recently the Trump administration has been stepping up plans for tariffs on imported Chinese goods. The move is generally a bid to both balance the United States-China trade deficit as well as bring China to heel when it comes to ending perceived unfair trade practices such as IP theft and massive subsidies for its homegrown companies. The point seems to be to incentivize moving back production to the United States that has been outsourced; production lines such as the ones in China churning out millions of Apple iPhones.
A single tweet from US President Donald Trump that discussed Apple moving manufacturing contracts Stateside has initiated a large sell-off for Apple component makers across Asia.
Apple is now in the spotlight as Saturday President Trump specifically called out the Cupertino-based maker of all things iDevice.
Apple prices may increase because of the massive Tariffs we may be imposing on China - but there is an easy solution where there would be ZERO tax, and indeed a tax incentive. Make your products in the United States instead of China. Start building new plants now. Exciting! #MAGA
— Donald J. Trump (@realDonaldTrump) September 8, 2018
The President is urging Apple to move production of iPhones and iPads stateside and as a result, Apple's Asian suppliers' share prices are plummeting. After all, Apple will always choose to source the very lowest cost component possible as long as it meets certain quality and lead-time criteria, and a 25 percent tariff on component imports would certainly put many suppliers out of a job.
As Adrian Ip discussed in his overview of Apple's situation in regards to the tariffs, the list of Apple products that have components imported from China is long:
- Apple Watch
- Time Capsule
- Magic Mouse and Trackpad
- Adaptors, chargers, cables, and cords
- Leather covers and cases for all manner of Apple products
Now we can report that world markets have reacted quickly, with every single one of Apple's publicly traded suppliers saw drops today.
Luxshare Precision Co Ltd, Shenzhen Subway Communication Co Ltd, and Suzhou Dongshan Precision Mfg Co all plummeted by at least 10 percent.
Suzhou Anjie Technology Co, Universal Scientific Industrial Shanghai Co Ltd, and Lens Technology Co Ltd, all were down anywhere between 6 and 8 percent.
It wasn't just Chinese suppliers hit either as investor fears ran rampant through Asian markets.
Taiwan's ASE Technology Holding Co Ltd, who supplies acoustic and vibration components, fell over 3 percent. Hong Kong-based AAC Technologies dropped 5 percent.
It's clear that the complex value-chains that Apple has fostered in Asia are clearly concerned about impending tariffs in the United States.
Apple (NASDAQ:AAPL) itself eased down over a percent today as the news brings an air of uncertainty around Apple's profitability ahead of the impending iPhone 9 release.
Apple will never move significant production to the United States
Trump's solution is to move production to the United States. Apple and its suppliers would be looking at multi-year and multi-billion dollar investments to on-shore what amounts to low-cost labor in high tech facilities. While Apple's components and manufacturing processes would be free from tariffs, production costs would increase due to significantly higher labor costs in the States.
US consumers would actually lose out on the deal, too. Bank of America Merrill Lynch turned its considerable analyst resources towards this problem and their findings won't thrill any iPhone fan in the least:
If Apple is forced to produce iPhones in the US, product prices would require a 20 percent hike to offset the incremental labor costs in the US market, at least according to BoA Merrill Lynch. That same study noted that US labor is 2.6 times more expensive than a Chinese worker, which is the basis of the 20 percent increase in price noted in the statement.
There are tons of "ifs" and qualifiers in a potential on-shoring move, and it would take a lot of Apple to ever consider that, even with 25 percent tariffs on droves of its components. However, if that ever was to occur, consumer demand would no doubt be affected considering last year's iPhone X that cost $999 would now suddenly cost $1199. Simple economic theory would hint that demand would be reduced for Apple's products while despite that 20 percent price increase, Apple's margins would remain flat while revenue would sag.
All this after investing billions just to on-shore. Just as the President says, "Exciting!"