Apple Inc. (AAPL), the world's largest company by market capitalization, has made its way to the top by using China as both a major source of consumer sales and a manufacturing hub. As a result, shares of the Cupertino, California, tech titan have more than tripled over the past five years, driven by the sweeping success of the iPhone—still a core component of the company's total revenue.
Yet as President Donald Trump ups the ante on the U.S.-China trade war, threatening to impose a total of $500 billion in levies on imports from the Asian powerhouse, the smartphone maker could suffer, as outlined in a recent story by The Wall Street Journal. (See also: 4 Sell Signals, 1 Buy Signal for Tech Stocks: RBC.)
Apple's Strengths Become Its Achilles Heel
|More Than 60% of Sales From iPhones|
|iPhones Sourced in China|
|China Is Apple's No. 2 Consumer Market|
Tariffs to Disrupt iPhone Supply Chain
“They should be nervous,” said David Dollar, a China scholar at the Brookings Institution, who served as the U.S. Treasury’s top official in Beijing during the Obama administration, to the WSJ.
The White House's proposed tariffs would cover just about everything that China ships to the U.S., including iPhones, according to trade experts cited by the Journal. The U.S. imported about $45 billion in mobile phones from China last year, according to data from the International Trade Center. This leaves Apple vulnerable for a myriad of reasons, as noted by the WSJ, particularly ahead of earnings, slated for July 31.
Given that Apple generates a majority of its revenue from the iPhone, any threat to the assembly of its products in China could eat into margins. According to Statista, Apple generated 62.2% of its revenue from iPhone sales in the second quarter of 2018, down from nearly 70% in the first quarter of 2017.
Apple has tapped into China's massive workforce and strong manufacturing capabilities to turn its most profitable product into a Chinese export. That recipe could very well spoil if Trump taxes products as they come into the U.S., given the firm hasn't diversified its manufacturing like rivals such as Samsung Electronics, which makes more than 80% of its smartphones outside China.
Trade War to Lift Prices for Consumers
Further, if China retaliates by imposing tariffs on U.S. imports, including iPhones, it could squeeze Apple's iPhone sales in its largest market outside of the U.S. Apple could likely be a target for tit-for-tat tariffs given its 9% hold over the Chinese smartphone market, according to Brookings' Dollar and other trade experts cited by the WSJ.
Trump's proposed tariffs could anger U.S. consumers if they ultimately lead to higher iPhone prices, and could start a battle with one of the world's most powerful companies, which promised to contribute $350 billion to the domestic economy over five years. In China, Apple says it provides work for at least 4.5 million people, including app developers and supply chain workers, reported the WSJ.
The Bull Case
Despite trade fears, Street bulls remain optimistic on Apple's shift away from relying on hardware sales to new high-growth software and services businesses such as Apple Music and the App Store. Earlier this month, analysts at Citigroup issued a note highlighting at least five reasons to buy Apple stock, as outlined by CNBC, including its strong product lineup, growing services segment, presence in international markets and heightened demand during the "back to school/holiday quarter." (See also: 5 Reasons Apple Stock Is a Buy: Citigroup Analysts.)