How A Trade War With China Would Impact Apple’s Valuation: An Interactive Analysis

On Saturday, U.S. President Donald Trump indicated that he was planning another round of tariffs against China to the tune of $267 billion, which would come on top of the $200 billion in Chinese goods that the U.S. is already targeting. The President also tweeted that the escalating trade barriers could raise the prices of Apple (NASDAQ:AAPL) products in the U.S. while also calling on the company to build more plants in the U.S to keep costs low. Although we believe that the odds of a full-blown trade war remain low, considering the magnitude of trade between the two countries and also due to China’s massive U.S. dollar holdings, Apple investors could be concerned given that the company is dependent on China both as an important manufacturing hub and also as a lucrative market for its products. Below we take a look at the potential impact of a trade war on Apple’s stock. Although we are in the process of updating our Apple model and price estimate for Wednesday’s special event, where the company is expected to launch its three new iPhones, we will use our existing model and price estimate to get a sense of how a potential trade war could impact the company.

Margins Could Take A Hit On U.S. Tariffs

Apple does a bulk of its manufacturing in China via contract manufacturers such as Foxconn. Although the net value added in China is not very large for most Apple products (for instance, these manufacturing costs on the $800 iPhone 8 Plus are estimated at under $8, or 1% of the selling price), Apple’s landed costs in the U.S. could rise if tariffs are imposed as its finished goods are shipped from China. In order to circumvent these duties, Apple may be compelled to move production to the U.S. or other markets. While the impact on device assembly costs per se is unlikely to be very significant, the disruption in the company’s well-oiled supply chain could be a larger issue as Apple may have to rework its logistics and suppliers. Apple could continue importing products from China even if duties are imposed, although this would increase the company’s landed costs and hurt gross margins. Alternatively, the company could rethink its manufacturing strategy (although this is likely to take several years to put into effect). If we assume that Apple’s gross margins decline by about 2% from 38% to 36% in FY’19, it could result in a downside of just over 5% to our price estimate for the company based on its forecast FY’19 earnings.

A Retaliation Could Hurt Apple’s Greater China Operations

Another issue is likely to be Apple’s business in Greater China (including Hong Kong and Taiwan). The company shipped over 41 million iPhones to China over 2017 and sales to the country over FY’17 stood at about  $44.8 billion, accounting for about 20% of total revenues. If a trade war escalates, the Chinese government could make it more difficult for Apple to operate in China, via regulatory pressures and taxes, treating the company as a proxy for the broader United States, making it more difficult for the company to sell its devices in the country. For instance, if iPhone sales in China were to fall by 10 million units in FY’19, it could impact Apple’s valuation by close to 5%. That said, it’s possible that the Chinese government could be circumspect about retaliation, considering that the Apple supply chain indirectly accounts for roughly 3 million jobs in the country through contract manufacturers. Our interactive dashboard analysis that analyzes the impact of the trade war on Apple outlines the above two scenarios and allows users to modify various drivers to arrive at their own price estimate for the company.