Apple iPhone Spared Tariffs, But Could Face Challenges in China

AAPL stock - Apple iPhone Spared Tariffs, But Could Face Challenges in China

Source: Apple

In an escalating trade war between China and the U.S., Apple (NASDAQ:AAPL) is very much caught in the middle. That risk is reflected in AAPL stock, which has retreated from all-time highs as the trade conflict ramps up.

Apple has reportedly been told by the Trump administration that iPhone won’t be penalized with tariffs, however, the company has no assurances of “business as usual” from the Chinese government. With 41 Apple Stores in the country, nearly a quarter of its annual revenue generated in the Chinese market, and most of its iPhones assembled in China, the risk is growing for Apple.

If a full-blown trade war erupts between the U.S. and China, Apple stock could be hit hard, even if the U.S. itself ignores the company’s Chinese connections.

U.S. Announces Tariffs Against Chinese Goods, Apple iPhone Spared

The U.S. and China moved closer to an all-out trade war last week, with President Donald Trump announcing on Friday he was imposing $50 billion in tariffs on a range of Chinese-made goods. China retaliated with measures of its own, and earlier this week President Trump upped the ante by threatening tariffs on another $200 billion worth of Chinese products.

This all sounds very alarming in general, but even more so if you’re Apple. AAPL revenue, profit and AAPL stock valuation are tied directly to iPhone sales. And most of those iPhones are assembled in China…

According to a report in The New York Times, efforts by Apple CEO Tim Cook have paid off with the Trump administration assuring the company that the iPhone won’t be penalized with tariffs. With AAPL rumored to be looking at a lower price point for this year’s new iPhones –after taking heat for the $999+ iPhone X– the last thing the company needed was the possibility of tariffs pushing those prices back up.

However, being spared U.S. tariffs doesn’t mean Apple is out of the woods.

What Will Happen in China? There Are Big Implications for AAPL Stock

Assurances by the Trump administration don’t do anything to protect AAPL in China, and that could be a problem. The country has become a huge market for Apple. The company has 41 Apple Stores in China and in the last quarter, the Chinese market accounted for over $13 billion of AAPL’s $61.1 billion in revenue –up 22% compared to 2017.

Besides the current round of tariffs, several big Chinese tech companies have already faced punitive actions by the Trump administration, and China could retaliate in kind. Smartphone maker ZTE was crippled by penalties imposed after it was caught doing business with Iran and North Korea. And at the start of the year, Huawei’s planned U.S. smartphone launch was torpedoed by the U.S. government.

The New York Times points out that the Chinese government could take actions against Apple products in that country. Anything that threatens a market responsible for such a big chunk of AAPL’s annual revenue is not good news for AAPL stock.

There are also concerns the Chinese government could hit Apple’s supply chain and manufacturers with bureaucratic delays in retaliation for the U.S tariffs. With the exception of the iPhone SE — which is assembled in India — iPhones are assembled in China, and they use many components that are manufactured in China. Causing delays in production and shipping to the U.S. would be bad news for Apple. Lower than expected iPhone sales because of constrained supply is just as bad for the bottom line as lower than expected sales because of tariffs.

Concern about the potential for the Chinese government to target iPhone manufacturing in the event of a trade war is already hitting stocks of companies like Hon Hai Precision Industry Co., Ltd (OTCMKTS:HNHPF) –better known as primary iPhone assembler, Foxconn.

As pointed out by The New York Times, Apple CEO Tim Cook has been active in China, attending key conferences and meetings and continuing to build ties with the country’s leadership. With AAPL stock so reliant on iPhone sales –and iPhones being such a valuable and visible commodity– he’s likely going to be logging many miles in the air in order to keep Apple from becoming a casualty in this spat.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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