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Home / Business / Apple's $ 44 billion drop shows rising costs for China's addiction

Apple's $ 44 billion drop shows rising costs for China's addiction



(Bloomberg) – Apple Inc.'s dependence on China increasingly looks like its biggest handicap.

The world's most influential consumer electronics company threw $ 44 billion in market value Friday after a pair of statements from Beijing and Washington shed a spotlight on the huge Chinese production base, of which almost all the world's iPhones are made.

US President Donald Trump over the weekend "ordered" US companies immediately to start looking for alternatives to manufacturing in China, which is something Apple is thoroughly unprepared for, according to analyst Daniel Ives of Wedbush Securities Inc.

"At best case, "says Ives, Apple" will be able to move 5% -7% of iPhone production out of China "in 18 months. The company will require three years to move 20% out, he adds, which is still less than 25% of iPhone production Apple needs for the domestic US market, so US tariffs on goods from China will directly affect Apple's biggest money makers.

Ives calls Trump's recent comments about China "a cup punch to Cupertino" in the title of

Apple's main assembly partner, Foxconn Technology Group, has claimed that it has the capacity to build all of the Cupertino company's US-bound iPhones outside of China, but all indications are that to distract it will require a lot of time and money. Apple's stock price took two big hits on Friday in the wake of the latest tariff announcements.

The president's comments were followed hours later by tweets declaring that the United States would increase the rate of existing and imminent duties on Chinese goods. Trump's move was in response to an earlier announcement that China was planning to introduce US $ 75 billion in US tariffs.

People familiar with iPhone production have said that it is virtually impossible to move production of Apple's iconic device on a wholesale basis to the difficulty of acquiring a skilled workforce elsewhere, a point that Apple's CEO Tim Cook has hammered away on in public as well. The challenges of recreating the complicated production lines and necessary infrastructure are also major obstacles.

There may also be less purely economic reasons for sticking to the world's No. 2 economy. Apple and the army of contract manufacturers, led by Foxconn, are collectively China's largest private employer, providing work for millions of people. A reduced Apple presence could have significant implications for the local labor market and rub Beijing's wrong way at a time when Chinese authorities see a receding economy as a significant risk of stability. The government has shown a penchant for turning down foreign companies that dislike it.

And Apple needs to fend off leader of smartphone market Huawei Technologies Co. and win back consumers in China, its largest market after the United States

What Bloomberg Intelligence says

Apple could see 71bps extra pressure on gross margin if President Donald Trump follows up on his threat to increase expected tariffs on US imports from China when the countries' trade war is escalating.

– Analysts John Butler and Boyoung KimClick here for the research

Read more: China's online army shows foreign brands under indictment

While Apple has asked at least some vendors for suggestions on China production, there are no sign that the Cupertino company is preparing for a large-scale migration.

In one case, a collector suggested a place outside of China, but Apple rejected it and the supplier ended up expanding in China. GoerTek's recent effort to move some of its AirPods production to Vietnam was made by its own will, people said of the decision. But none of these relate to the iPhone, which is still mainly manufactured in China, with some collection of older models happening in India and focused on the domestic market there.

Cook's ability to lobby Washington for duty will be tested in the coming weeks. He has so far been able to get a temporary reprieve on iPhones, iPads and Apple laptops, which will not be subject to US tariffs until December 15. But going forward, unless an unlikely quick fix to the trade war is achieved, Apple looks like it will have to work out comprehensive plans to build iPhones outside of China, no matter how expensive it may be.

(An earlier version of the story was corrected to reflect Wedbush analysts' own name.)

(Updates with Eighth Paragraph Chinese Market Context)

– With help from Edwin Chan.

To contact the reporter about this story: Debby Wu in Taipei at dwu278@bloomberg.net

To contact the editors responsible for this story: Edwin Chan at echan273@bloomberg.net, Vlad Savov, Peter Elstrom

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