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Is Apple "Losing" in the US-China Trade War?

Omri Wallach Omri Wallach, Stockhouse
1 Comment| August 26, 2019

(Analysis shows that tariffs increase the prices of some goods, but they lower others.)

Just over a week ago, US President Donald Trump said he was considering the effects of the US – China trade war after sharing a meal with an unlikely dinner companion, Apple Inc. (NASDAQ:AAPL) CEO Tim Cook. It seems that ahead of an upcoming round of US tariffs on $300 billion worth of Chinese goods (at the time), set to go into effect in two stages on Sept. 1 and Dec. 15, Cook “made a very compelling argument” that Apple would be set back compared to its main competitor Samsung Electronics Co Ltd.

The Apple CEO’s pitch was simple: most of its production is based in China and it will be subject to the additional tariffs, elevating prices. Because Samsung operates primarily in South Korea and isn’t impacted by the tariffs, its products will have a price advantage over Apple.

The first round of tariffs will affect Apple’s secondary products like the Apple Watch and AirPods, but the second round will impact the Company’s major products, including iPhones, iPads, and Macbooks. While the second round was delayed to account for holiday shopping, it is still set to go into effect heading into the new year.

China retaliated in kind on Friday, threatening tariffs on $75 billion of US goods. In respose, Trump announced that both the new round of tariffs and existing tariffs would be increased, and earlier lashed out on Twitter that the US “doesn’t need China” and that American companies should start looking for alternatives.

But Apple, for one, has already seen the warning signs and started looking to diversify its productions. According to Nikkei, Apple is considering moving 15%-30% of production capacity out of China. Given recent analysis from Goldman Sachs showing that prices of consumer goods hit by tariffs have risen by 3% (while prices for other consumer goods have fallen by 1%), it seems like Cook’s words definitely hold water.

Unfortunately for Trump, the Company is eyeing South East Asia as the destination over the US, with India and Vietnam as the frontrunners. Any shifts in production would likely take more than a year to implement, but one of Apple’s primary manufacturing partners, Foxconn, already claimed it has enough capacity outside of China to meet the US demand for iPhones.

And Apple isn’t the only company looking to move. Game console makers Nintendo, Sony (NYSE:SNE), and Microsoft (NASDAQ:MSFT) have written to the US government decrying the tariffs, with Nintendo already moving some production from China to Vietnam. A recent JPMorgan analysis highlighted tech hardware as one of the sectors most likely to feel an impact from tariffs, alongside chemicals, machinery, and textiles.  

Overall, one outcome of the trade war has been that companies are now heavily weighing the risks of centralized production. While the US and China haven’t gained much ground from their dispute, countries on the side like South Korea (unaffected by the tariffs) and Vietnam (picking up production) are coming out ahead as unlikely winners.

While it seems like Cook’s worry that Samsung will gain an edge against Apple is true, the Korean conglomerate has its own troubles with production at home. Thanks to an entirely different trade war between South Korea and Japan, the Japanese government has been holding back exports on key semiconductor materials. 

The key for companies reacting to constantly shifting political climates is not to react, but to diversify. It’s the same standard advice aspiring investors get when they meet with portfolio managers for a reason. Because with trade disputes, tariffs, and even potential slowdowns, there are ways to win.

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August 28, 2019

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