Apple’s tariff tradeoff: Raise prices, suffer margin hit, or build more products outside of China

“For more than a year, Apple Inc. avoided major damage from the U.S. trade war with China, thanks in part to a White House charm offensive by Chief Executive Officer Tim Cook,” Mark Gurman and Shawn Donnan write for Bloomberg. “But the company now faces its first major hit — from both sides of the dispute.”

“A new round of tariffs proposed by the U.S. on Monday includes mobile phones, meaning the iPhone, Apple’s most-important product that is made almost entirely in China, may be encumbered with a 25% import levy,” Gurman and Donnan write. “There are other products on the list that would affect Apple too, such as laptops and tablets.”

“That leaves the company with a difficult choice: Raise prices on already-pricey products and risk missing out on sales, or absorb the extra cost and let profits suffer,” Gurman and Donnan write. “Apple could eat the cost and leave iPhone prices untouched. That would dent earnings per share by 6% to 7%, based on a $450-per-device import cost and annual U.S. unit sales of 40 million, according to [Krish Sankar, an analyst at Cowen Inc]. Still, Apple has experience absorbing extra costs. When currencies swing, the company manages to protect its gross profit margins, [Shannon Cross of Cross Research] noted.”

“Apple could work around the tariff issue as well,” Gurman and Donnan write. “There’s a possibility of Apple re-jiggering its supply chain to build more products outside China. Apple is ramping up production in India to avoid local taxes and has done similar work with Foxconn in Brazil.”

Read more in the full article here.

MacDailyNews Take: Navigating issue such as this is why Tim Cook gets the big money. Still, this whole China thing, at this point, is still overblown by far too many.

People tend to fear the worst. It almost never happens.MacDailyNews, May 14, 2019

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