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Miller: The Trump Effect — Apple Could Move 30% of Production Out of China

Miller: The Trump Effect — Apple Could Move 30% of Production Out of China

News today out of Southeast Asia is that Apple Inc. has stepped up efforts to move up to 30% of its iPhone and iPad production out of China.

According to Reuters, the tech giant has asked its larger suppliers to perform cost analysis of moving 15% to 30% of its production capacity out of the country and to other parts of Southeast Asia.

An original report from Nikkei Asian Review said continued pressure from the U.S.-China trade war is leading the company to step up its efforts. Conversely, the report suggested even a trade agreement would not change Apple’s mind, if it ultimately decides to move some production out of China.

“A lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse factors are not going anywhere,” said one executive with knowledge of the situation to Nikkei. “With or without the final round of the $300 billion tariff, Apple is following the big trend (to diversify production).”

Just last week, Apple’s main supplier, Foxconn, said it could handle production outside of China if Apple decided to take that course of action.

Regardless, Apple’s decision to potentially move out of China is thanks to U.S. President Donald Trump.

Because the American government is eyeing new tariffs on nearly $300 billion worth of Chinese goods, the cost to produce the iPhone or iPad in China would no longer be cost efficient.

If Apple were to make the move, it would likely cost Chinese labor even more.

According to Nikkei, nearly 5 million Chinese jobs are tied to Apple. Of that, more than 1.8 million jobs are for software development, and the company itself employs 10,000 in the country.

As of 2018, China now has more Apple suppliers than the United States.

Apple iPhone

Moving out of China would mark the first significant move at diversification for the Cupertino, California-based company.

It also would put added strain on suppliers like Foxconn, Wistron, Pegatron and others who are using Chinese labor to fulfill Apple’s orders.

 

Apple-iPhone-iPad

Shares of Apple Inc. were trading close to $198 per share in early afternoon trading Wednesday, a slight drop in share price of less than 0.5%.

It is not known how the Chinese government might respond to the news that nearly 5 million jobs are in jeopardy if the trade war continues, but it is likely to be a point of discussion when Trump holds extended talks with Chinese President Xi Jinping later this month at the G-20 summit in Osaka, Japan.

GF Securities analyst Jeff Pu said Apple was being prudent in looking at options for production outside of China.

“We feel that Trump’s warning of a 25% tariff hike … really serves as a trigger within the supply chain that they cannot keep pretending things will stay the same,” Pu said. “Everyone needs to initiate a workable plan B … and to look at production facilities outside China, even if it will take time to shift.”

The move could serve Beijing notice that the trade war will have bigger impact on its economy than just tariffs. How seriously that will moves the Chinese to better negotiations and better trade terms for the United States remains to be seen.