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. 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. 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.
There's a "very real risk of higher import costs and/or U.S. consumer demand destruction depending on whether Apple decides to pass along some of the tariff cost," Krish Sankar, an analyst at Cowen Inc., wrote Tuesday in a note to investors. "Given that the majority of Apple's hardware products that include the iPhone, iPad, Watch, and Mac systems are assembled and imported from China, the earnings risk could be quite substantial."
China retaliated on Monday with plans to increase tariffs on U.S. imports to 25% from 10%. That would apply to components for the iPad and iPhone. So when U.S.-made parts including glass screen covers and facial-recognition sensors are shipped to China for assembly into iPhones and iPads, they will be more expensive, too.
The main concern is the iPhone, though. It accounted for 63% of sales in 2018, and serves as a hub for additional revenue from services and related devices like the Apple Watch. The newest iPhones cost $750 to $1,450, so any price increases could take the devices beyond the budgets of more consumers.
Apple shares slumped last week as the trade war flared up. The stock rose 1.1% on Wednesday.
The heightened trade tensions are a test for Cook and the global supply chain he helped build and run. Last year, the CEO showed political prowess by meeting with U.S. President Donald Trump to argue against tariffs.
Just over a year ago, Cook met Trump in the Oval Office. The CEO said he opposed the president's approach and focused on how cooperation between countries can boost the economy more than nations acting alone. After the meeting, the administration told Cook it would not place tariffs on iPhones, The New York Times reported.
Apple also wrote to U.S. Trade Representative Robert Lighthizer in September asking him to reconsider tariffs and instead take other measures that would support the U.S. economy and American consumers. Later that month, the White House spared Apple's Watch and AirPods.
By late 2018, Apple's strategy had become less effective. In late November, Trump told the Wall Street Journal he might impose tariffs on mobile phones and laptops, and said consumers "could stand" a 10% increase in prices "very easily." The day after, Cook toured schools in Idaho with Ivanka Trump, the president's daughter and senior adviser.
