Why It’s Unlikely That Apple Will Move iPhone Production To The U.S.

AAPL: Apple logo

Japanese newspaper Nikkei reports that Apple (NASDAQ:AAPL) asked its key manufacturing partners in June to study the possibility of relocating iPhone production from Asia to the United States, likely driven in part by U.S. President-elect Donald Trump’s threat of imposing tariffs on Chinese imports and his criticism of the tech behemoth’s use of overseas manufacturing. Below we take a brief look at the feasibility of producing in the United States and also look at the potential financial impact on Apple.

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Asia’s Mature Electronics Supply Chain Difficult To Replicate In The U.S. 

Apple has a very asset-light model, relying entirely on contract manufacturers such as Foxconn and Pegatron to assemble its smartphones. These manufacturers, who largely operate out of China, help Apple keep costs low by leveraging Asia’s well-oiled and dynamic consumer electronics supply chain, which comprises major semiconductor fabs and component manufacturers that churn out components ranging from displays to microprocessors to batteries. The region also has a vast and relatively cheap labor pool, giving companies the ability to quickly scale up their production when required.

It could prove very time-consuming and inefficient to shift production to the U.S., given the costs of uprooting and relocating manufacturing facilities. Moreover, staffing these facilities at scale could prove a challenge. For instance, Foxconn employed a total of 690,000 workers in China at the end of April and it’s safe to assume that at least half of these workers were working on Apple products. It may be unlikely that American workers would take to these relatively labor-intensive roles.

Higher Costs Will Put Pressure On Apple’s Margins

According to estimates from IHS, it costs Apple roughly $225 to manufacture an iPhone 7 in Asia, with assembly costs standing at just about $5, or about 2% of the total cost. However, by some estimates, the cost of manufacturing an iPhone in the U.S. could be $30 to $40 higher, given the higher expenses associated with shipping components from various countries to the U.S. [1] Costs could rise by an estimated $80 to $90 if the various iPhone components were to be made in the United States as well. This cost escalation would come as a blow to Apple, which has already been seeing shrinking gross margins, amid higher manufacturing costs and currency headwinds. (related: Apple’s Flagship iPhone Keeps Getting More Expensive To Build)

Move Highly Unlikely Unless There Is A Drastic Policy Change

While Apple already assembles its Mac Pro desktop computer in the United States, the product sells in small volumes and at very high price points ($3,000 and upwards) that justify the higher costs of manufacturing. However, we think it is unlikely that Apple will shift iPhone production to the U.S. without a solid financial rationale for doing so. For instance, if Mr. Trump follows through on his campaign rhetoric of imposing tariffs as high as 45% on Chinese imports, the move could begin to make sense.

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  1. A Snag in Donald Trump’s Pledge to Make America Make Again: Asia, WSJ, November 2016 []