Apple's Challenge In China As Latest Tariffs Take Hold
STEVE INSKEEP, HOST:
It is now September, which means more U.S. tariffs on Chinese products have taken effect. The 15% charge hits consumer goods like tools and clothes and shoes and electronics, which means the tariffs are moving closer and closer to the core business of Apple. President Trump may have urged U.S. businesses to get out of China, but reporter Stephen Nellis of Reuters says that is not so easy for Apple.
STEPHEN NELLIS: It's kind of married to China, in as much as Apple is big - it's one of the biggest - and China is big - it's one of the biggest.
INSKEEP: Nellis covers Apple - has for a long time - and says the company has found ways to avoid many tariffs up to now. But getting out of China entirely, that's not very likely because Apple makes so many phones in China that are shipped to the United States.
NELLIS: So when you're making 200 million-plus devices a year and you want to have them move very quickly through that supply chain, it's hard to find it anywhere else but China. So one of the things that Tim Cook, who's the current CEO of Apple, is famous for is he built out this supply chain where Apple could make tremendous numbers of devices but only hold a few days of inventory at a time. So 200 million devices per year - any given time, Apple only has maybe five days' worth of inventory on hand. That's what's made the company so tremendously profitable because inventory that's sitting around costs money to a company. So unless Apple wanted to sacrifice that profitability, it'd be difficult to move anywhere else but China.
INSKEEP: Wow. The just-in-time delivery on that scale and on a global scale is about as breathtaking as anything I've heard about Apple.
NELLIS: That's right. And, you know, you probably have seen some stories that other companies are looking at moving manufacturing to places like Vietnam. And I think it's important to keep in mind with Apple that most other companies are shipping not nearly as many phones as they are, so they have a lot more flexibility in being able to move their supply chain.
INSKEEP: How has Apple largely avoided tariffs up to now in the trade war?
NELLIS: One way that it's done so is simply by asking the government not to impose a tariff. So some Apple products, like the AirPods wireless earbuds or the Apple Watch, were actually set to be tariffed almost a year ago now, and the company, along with many other electronics manufacturers, sent a comment letter to the government and said please don't do this. And also, you've seen CEO Tim Cook go have dinner with President Trump and try to impress upon him what these tariffs will mean to companies like Apple.
INSKEEP: Isn't China also a market as well as a supplier for Apple - they sell a lot of iPhones in China?
NELLIS: Absolutely. So the greater China region - which includes mainland China and a few other places like Hong Kong and Macao - it accounts for more than a fifth of Apple's revenue. The primary way the trade war has actually hurt Apple so far has not been through tariffs but the impact of the trade war on the Chinese economy. So the trade restrictions that the U.S. has imposed have slowed economic growth, and that in turn has made it very difficult for Apple to sell its phones in China.
INSKEEP: We are in a situation where the Trump administration keeps adding or threatening more tariffs on products from China. What is happening to Apple now that we're into September?
NELLIS: Well, most analysts are expecting Apple to essentially absorb these tariffs. Passing the cost on to consumers would raise prices for Apple products, which are already priced at a premium, and that would simply result in Apple selling fewer products. So they'll probably absorb it, and then there are multiple levers they can try to pull to essentially avoid them.
INSKEEP: If Apple eats the cost of the tariffs to some extent, does the stock price go down? Do the dividends get smaller? What happens?
NELLIS: So Apple investors will largely eat this because Apple's profits will dip, and the stock is valued on the basis of those profits.
INSKEEP: And if the president goes through with even more tariffs on December 15, is Apple finally going to get to the point where they cannot avoid massive tariff penalties?
NELLIS: December 15 is the big day for Apple because that's the day where the iPhone would be hit, unless they make some kind of partial solution, like making the circuit boards for iPhones in a separate country and putting those circuit boards in the ones bound for America. But even that is bound to incur significant amounts of costs for Apple because the supply chain is just so highly efficient and has been smoothed out over a decade now.
INSKEEP: Steven Nellis of Reuters. Thanks very much for your insights.
NELLIS: Thank you for having me.
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