With tensions between the U.S. and China ratcheting up and the prospects of a trade war growing, Apple Inc. (AAPL) investors are getting worried given its huge exposure to the Chinese consumer market.
With speculation abounding about which industries and companies will take the biggest hit, the Cupertino, California iPhone maker is being cited as one of the more exposed with Neil Campling, co-head of the global thematic group at Mirabaud Securities saying in a research report covered by CNBC that Apple has the most to worry about. After all close to 20% of its revenue came from Greater China in the most recent fiscal year while it shipped more than 41 million iPhones to the country. Apple also has a large physical footprint in the country with 40 retail locations across China as well as its App Store and Apple Music services in the country. Its iPhones are also assembled in China by Foxconn. (See more: 5 Chip Stocks At Risk In Expanding Trade War.)
Is Apple Stockpiling Inventory?
Apple Chief Executive Tim Cook reportedly received assurances from President Donald Trump that the iPhones made in China won’t be on the tariffs list Apple is preparing. Campling said in the report that inventories are increasing at the company jumping to $7.6 billion at the end of the March quarter compared to $4.4 billion in the last three months of 2017. The money manager argued that it is evidence that Apple is preparing for any disruption brought on by a trade war. "It is a defensive/protective measure in case there are difficulties in future procurement or supply chain disruption as Apple is potentially in the crossfire of the U.S./Sino trade war," Campling said in a research noted covered by CNBC. (See more:
Apple: Next iPhones to Have Cheaper LCD Displays.)
Smartphones May Not Face Levies But Apple Still At Risk
While smartphones may not face levies, there is concern that the trade tensions could impact suppliers to Apple, causing delays. There’s also the risk that authorities in China could ban Apple services, something it has done in the past. CNBC pointed to the Chinese government’s action in 2016 when it shut down Apple’s iBook Store and iTunes Movies service. An additional risk: China props up its own local smartphone companies such as Xiaomi and Huawei at the expense of Apple. Both have made inroads on Apple relegating it to the fifth-place spot in mobile handsets in the country.
Last week, Trump did as he promised by signing off on the tariffs. Citing the U.S. Trade Representative's Office, the Wall Street Journal reported the list of products getting levied focuses on 1,102 separate lines, including industries such as aerospace, information, and communications technology, robotics, automobiles, and industrial machinery, among others. The duties will be collected starting on July 6, noted The Wall Street Journal.
In response to that move by the U.S. government, China issued a terse statement saying it will retaliate immediately. The tariffs on American goods will be "equal scale and equal strength" to the ones levied by the U.S. The list doesn't include mobile phones and televisions, noted the paper. That prompted even more back and forth between the two countries, with Trump sending out the latest salvo threatening to impose tariffs on an additional $200 billion of Chinese products.