THE ECONOMIST: Who will pay even more for an iPhone? Rotten tariff war bites Apple bottom line in US, China

Apple was once considered so important to both America and China that some even hoped it would help avert great-power conflict. Now the iPhone-maker finds itself more exposed than any big American company to President Donald Trump’s trade war. Not only will higher tariffs push up its costs in America, its biggest market. Retaliation could clobber its sales in China, its second-biggest. Never has Tim Cook, the firm’s boss, faced a more urgent need to justify his reputation for geopolitical fence-straddling.

The threat of Mr Trump’s tariffs knocked $US311 billion ($US508b) off Apple’s market value on April 3, the day after he announced “reciprocal” levies on almost all America’s trading partners. When China retaliated on April 4 with 34 per cent duties on all American goods and restrictions on rare-earth exports, the company’s shares fell further still. The hit was bigger than for any other tech giant because none of its peers are as dependent on the hardware business as Apple. The sell-off must have been particularly jarring for Mr Cook; less than six weeks ago he had conspicuously tried to butter up the new president with a post-inauguration gift. He announced that his company would invest $$US500b in America over the next four years.

Whether that was a believable promise or not, it was widely seen as a way of convincing Mr Trump to grant Apple relief from his tariff volleys — as he did in his first term. So far, it has not worked. When the duties were announced, they were worse than the company could have expected. Since returning to the White House Mr Trump has slapped tariffs of 5 per cent on China, where Apple makes as many as nine in ten of its iPhones. That comes on top of existing duties.

His tariff blunderbuss also peppered Asian countries where Apple is increasing production, such as India, an incipient maker of iPhones (a tariff of 26 per cent) and Vietnam, where it makes wearables like Apple Watches and AirPods (46 per cent). Partly because of trade wars launched in Mr Trump’s first term, these are countries where Apple had intended to shift more of its production as part of a strategy to reduce its dependence on China. So much for Plan B. Mr Cook now urgently needs a Plan C.

Unless Mr Trump grants Apple a last-minute reprieve, the immediate result of the new duties will be higher costs. David Vogt of UBS, a bank, estimates that about a third of iPhones, more than 70 million, are assembled in China and then sold in America. The tariffs, which he reckons in total amount to at least 60 per cent, will be applied to production costs rather than retail values. That means that they could add $US330 to the $$US550 raw cost of an iPhone (assuming that semiconductors, which are made in Taiwan but incorporated into the products in China, will not be tariff-exempt). That invites the question: who will bear the extra burden?

The costs could be passed on to consumers. But that is tricky. Sales of iPhones, which last year made up more than half of Apple’s revenues, have stagnated. With the retail price of its most advanced iPhones starting at $$US999, it is hard to imagine that Apple could make them even more expensive without further turning off customers. It doesn’t help that some of its artificial-intelligence features are delayed or have not lived up to expectations.

Alternatively, it could squeeze investors and suppliers. Mr Vogt estimates that the tariffs could lower gross profit margins from 46 to 40 per cent and hit earnings per share this year by as much as 20 per cent. Such foreboding partly explains the sharp drop in Apple’s share price. Gerrit Schneemann of Counterpoint Research, a consultancy, argues that the firm’s margins are sufficiently high that it can absorb the shock better than rivals such as Samsung, which also makes phones in Asia. In addition, he reckons Apple could encourage its army of loyal suppliers to absorb some of the burden. But tariffs would be a big blow nonetheless.

Rising costs in America are one thing. Another is China. It is possible that the country’s retaliatory tariffs will make some components more expensive to import into China; for instance, Apple’s “Gorilla Glass” is made by Corning, an American company, in Kentucky. Mr Schneemann speculates that China’s restrictions on rare-earth exports may affect suppliers to Apple.

Then there is the risk to sales in China, he adds. Apple’s revenues in the country fell by 8 per cent last year, mostly because of weakness in demand for iPhones and iPads. Chinese consumers may accelerate that slide by treating Apple as a scapegoat for Mr Trump’s antics. The appeal of home-grown alternatives, such as Huawei, Oppo and Xiaomi, is growing.

Moreover, the Chinese government could take retaliatory action against Apple, however much the country benefits from investment and employment by the firm and its suppliers. In February Bloomberg reported that its antitrust watchdog was considering a potential probe into the fees Apple charges app developers. That risks another flashpoint in the trade war.

If China is less hospitable, and the rest of Asia is no longer a haven, where could Apple turn next? The answer, according to Team Trump, is America. Top officials including Howard Lutnick, America’s commerce secretary, say Apple’s $US500b pledge should be a prelude to moving production to its home country. Yet that is harder than the MAGA crowd makes it sound.

Start with the promised investment. That was public-relations “fluff”, says Mr Vogt, noting that $$US500b over four years would require Apple to spend more than its free cashflow, which is about $$US100b a year. Apple made a promise to invest $$US350b over five years during Mr Trump’s first term, and another big pledge during the administration of Joe Biden, the former president. Neither produced much in the way of shovels in the ground.

There are also high technology hurdles to reshoring anything but Apple’s top-of-the-range Macs. It has taken several years and heavy subsidies for TSMC, which makes semiconductors for Apple, to start producing in Arizona. It would be a similarly lengthy process for Apple to encourage high-tech suppliers of the iPhone’s power systems, cases and other components to come to America. As yet the Trump administration has offered no incentives to woo them.

Mr Cook could have made a decision years ago to move production to America, using robots instead of low-cost labour, as an alternative to China, says Kevin O’Marah of Zero100, a supply-chain research firm. Now, though, Apple is “against a time crunch”. Cost is a factor too. Dan Ives of Wedbush Securities, an Apple bull, says an American-made iPhone could cost as much as $$US3500.

It is hard to picture a way forward for Mr Cook, who was once lionised among CEOs for his skills at navigating the treacherous waters of geopolitics. His biggest hope must be that Mr Trump carves out an exemption for Apple, but in this era of trade gangsterism it is not clear who — if anyone — will get special treatment. Apple’s status in China is waning, but the firm is in too deep to get out quickly. In both markets its main product is looking stale. Unless Mr Cook works wonders soon, his own almost 14-year tenure will start looking stale, too.