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[Analytics] Crunch time for Apple in US-China trade war

All good? Apple boss Tim Cook has sounded optimistic that the trade war won't hit the iPhone maker. CREDIT: BLOOMBERG. Sketched by the Pan Pacific Agency.

Pan Pacific Agency | COMMUICATION AGENCY FOR PACIFICA REGIONS

Apple’s Mac Pro, a supercharged high-end computer designed for professional filmmakers and graphics designers, is not one of the tech giant’s more important products. It costs more than $6,500 for the most powerful model, and is seen within Apple as an engineering hobby rather than key to its bottom line. But in recent years, the computer has carried a significance that its better selling gadgets have not. James Titcomb specially for The Sunday Telegraph according to The Sydney Morning Herald.

Stamped on the underside of the computer are the words: “Assembled in the USA”. Since 2013, the Mac Pro has been put together at a factory in Texas, making it unique among Apple’s major products. “We’ve been working for years on doing more and more in the United States,” Tim Cook, Apple’s chief, said at the time.

This year, that changed. In June, Apple unveiled a new and more powerful Mac Pro. Amid a swirling US trade war with China and an unpredictable president, Apple moved production of the new computer to China, where it manufactures the vast majority of its other products.

Cook knew that the move risked angering Donald Trump, who had spent years both before and after his election arguing that Apple should make its iPhone and other devices in the US. Apple, more than any other company, has been a focus of Trump’s anger over the decline of American manufacturing. “We’re going to get Apple to start building their damn computers and things in this country, instead of in other countries,” he said on the campaign trail.

Apple CEO Tim Cook said China has not targeted the company as a result of the US-China trade dispute and he does not anticipate it will.

With Trump in the White House, the company’s fortunes have seemed as dependent on the president’s whims as on its own reputation for innovation and new products. Shares have whipped up and down as tariffs on Chinese imports have been threatened and then abandoned or delayed.

When Trump “ordered” companies to look for alternatives to China last month, shares fell by almost 5pc, knocking US $40 billion ($59 billion) off Apple’s value. Today, barring a last-minute reprieve, the US will begin imposing tariffs of 15pc on imports of items including smartwatches, speakers and headphones. The move will affect some of Apple’s fastest-growing products, including its Apple Watch and AirPod earphones, and potentially cost it hundreds of millions of dollars.

Much more damaging tariffs, affecting the iPhone and the iPad, are due to begin in December. “They’ll absorb the cost of the first batch,” says Daniel Ives of Wedbush Securities. “It obviously becomes more of a brushfire situation in December.” At that point, Cook will be faced with a choice to stick and twist: either remain in China, ride out the trade war and hope it is temporary, or move much of its manufacturing base outside of the country. It is more than just an important decision for Apple: as a symbol of the trade war, Cook’s decision will be felt outside of the company’s Silicon Valley HQ.

Major tech companies have moved production out of China in recent months in an attempt to offset the threat of tariffs. GoPro, the action-camera maker, said in December that products sold in the US would be made elsewhere. HP, Dell, Amazon and Microsoft have all moved production or are believed to be considering it.

Meanwhile, Asian manufacturing giants such as Foxconn and Pegatron that Apple relies upon to assemble its devices have said they would be able to accommodate any exit.

In June, Terry Gou, Foxconn’s founder, urged Apple to move production, telling shareholders at the company’s annual meeting: “I am urging Apple to move to Taiwan. I think it is very possible.” Gou’s words may not be entirely unbiased, however: at the same meeting he resigned as Foxconn’s chairman to run for the Taiwanese presidency.

Moving manufacturing out of China is not a simple case of transferring equipment and retraining workers, according to David Collins, a former Foxconn executive and the chief operating officer for China Manufacturing Consultants.

“There’s no better supply chain on the planet than in Shenzhen, they’ve been building it for 30 years,” he says, adding that companies have often gone abroad and been stung. Collins downplays claims from manufacturers such as Foxconn that they are quickly able to move manufacturing away from China, saying it is often a ploy to secure tax breaks and other incentives from other governments.

Ives is also sceptical that Apple will choose to move significant amounts of manufacturing outside of China. Foxconn has spent years fine-tuning its facilities into an ultra-efficient production line, as watertight as humanly possible in order to limit leaks of new products, and capable of producing hundreds of thousands of iPhones a day. “At the end of the day, a man could get to Mars easier than it would be for Apple to move production from China to India,” Ives says. “They have strategically looked at options with Foxconn and their partners, but realistically there’s little they can do.” Ives estimates that it would take a year and a half to move between 5pc and 7pc of iPhone production.

Complexity would not be the only downside to escaping China. While it might score points with Trump, Apple could face an equally powerful political backlash within China, a market that has become increasingly important in recent years.

At the start of 2011, the year Cook replaced Steve Jobs as Apple’s chief executive, it had just four of its stores in China and the country accounted for just 11pc of sales; today it has 43 stores, and the country makes up a fifth of its turnover. In January, Apple was forced to issue its first profit warning in 17 years, something Cook largely blamed on a slowing Chinese economy. Sales of the iPhone in China have recovered since, but Apple would risk it being seen as a US pawn at a delicate time if it moved investment away from the country – US attacks on Huawei have led some consumers to rally around the phone maker.

Staying in China, and dealing with tariffs that come its way, is a more likely option, albeit one with its own financial consequences. Analysts expect Apple to swallow the cost of the tariffs, rather than pass them on to consumers, something that could reduce profits by up to 10pc.

The alternative – raising prices – would put it at a disadvantage to main rival, Samsung, which manufactures most of its devices in Korea. Cook admitted last year that Apple had overpriced some iPhones, suggesting the years of customers paying more for each successive handset are at an end.

Instead, Cook has turned to diplomacy. Unlike other executives in the tech industry, who are wary of being seen with politicians in an increasingly bipartisan US, he frequently dines with Trump, who has expressed an affection for Cook. “Others go out and hire very expensive consultants,” the president said. “Tim Cook calls Donald Trump directly.”

Cook’s overtures have had some success. The most damaging Chinese tariffs on smartphones were recently delayed, meaning new iPhones due to be unveiled next week will not be affected in the run-up to Christmas.

But Trump has said he is only willing to help the company out in the short term. Eventually, Apple will have to make a decision on whether to double down on China and accept the tariffs, or make a risky switch abroad. Cook will not find either option particularly appealing.

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