The Wall Street Journal reported yesterday that President Donald Trump claims Apple Inc. (NASDAQ:AAPL) has committed to building three new U.S. Apple factories. Doing so would be a big win for the Trump administration, which has been aggressively pushing to create more U.S. jobs. But what effect would such a move have on AAPL stock?
President Trump granted The Wall Street Journal a 45 minute interview, during which he made a bombshell claim: AAPL CEO Tim Cook is supporting his administration’s goal of reviving American manufacturing and bringing back U.S. jobs by committing to build three new U.S.-based Apple factories.
The actual quote from President Trump’s interview was a little more colorful: “I spoke to (Cook), he’s promised me three big plants—big, big, big.”
The Potential Upside to AAPL Stock from Apple Factories
Building Apple factories in the U.S. could have some big positives for AAPL stock. For one thing, with the increased popularity of buying American-made products, the company would gain a competitive advantage over some of its rivals. That could boost sales and revenue.
The move would obviously be a significant win for the Trump Administration, and that in turn could be the key to something big for AAPL and its shareholders.
President Trump has been talking up corporate tax reform. It’s estimated that $230 billion of the $246 billion in cash AAPL is sitting on is tied up in foreign subsidiaries. That money could find its way back to the U.S. if President Trump followed through with a tax repatriation holiday and/or a lower corporate tax rate — something he would presumably be more inclined to do with the prospect of those new Apple factories.
According to Business Insider, if this scenario happened, AAPL would likely use a chunk of that cash to increase its stock-buyback program. The effects of the buyback and a lower tax rate combined could improve earnings per share by up to 16%.
Potential Downside for Apple Stock
Building Apple factories in the U.S. could also have a downside for AAPL stock.
In addition to the cost to actually build the plants, AAPL’s operational costs would be significantly higher. Three “big” factories would likely mean thousands of new employees on the payroll, plus the equipment and logistical costs.
Then there’s the potential for a rise in price for Apple products. One of the reasons Apple chooses to manufacture its products overseas is lower labor costs. Another is the fact that virtually all Apple suppliers are also located overseas. No matter how you slice it, U.S.-based Apple factories are going to mean higher prices. Labor costs will be higher, and those Apple suppliers will have to either relocate or ship their components a much greater distance.
MIT Technology Review did the math for an iPhone and concluded that U.S. Apple factories assembling foreign-produced components would raise the cost by $30 to $40. Also, switching to American-made components (where available) would raise the final price of an iPhone by “at most” $100.
That doesn’t sound like much — especially when the idea of a $1,200 iPhone 8 is being thrown around — but any cost increase means AAPL has to either reduce its profit margins or pass the cost increase on to consumers. And a price hike means the potential for lost sales. Both scenarios are likely to have a negative impact on AAPL stock.
Reality Check: Are There Any Apple Factories, Anywhere?
New York Magazine quickly published what might be the ultimate flaw in this whole argument about bringing back U.S. jobs by having the company build Apple factories in America. That’s the fact that AAPL only owns a single manufacturing plant, worldwide — in Cork, Ireland.
It does also operate a Texas factory through a partnership with a Taiwanese company, but that plant (which makes the Mac Pro) has struggled to the point that Apple engineers have been pushing to have it shut down when the new Mac Pro is launched, and production moved to China.
New York Magazine speculates that perhaps President Trump misunderstood AAPL’s efforts that began last year to have some of its key manufacturing partners, including Hon Hai Precision Industry Co., Ltd (OTCMKTS:HNHPF) — better known as Foxconn — investigate the possibility of building U.S. assembly plants. But, those wouldn’t be Apple factories.
AAPL simply isn’t in the business of manufacturing, and the prospect of building three new U.S. Apple factories seems highly unlikely.
Not surprisingly, The Wall Street Journal says Apple has declined to comment on this story. The company may ultimately create more U.S. jobs by pushing its manufacturing partners and suppliers to increase their American presence, but for now “Designed by Apple in California” seems more likely to be found on the back of AAPL products than “Built by Apple in America.”
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.