Apple warns of higher prices with looming Chinese tariffs

Apple’s relationship with the White House looks to be straining at the seams as the iLeader continues to criticise the impending trade war, while the President offers little knowledge of how supply chains actually work.

Using his favourite means to spread tripe, President Donald Trump took to Twitter to hit back at a filing make by Apple with the US Trade Representative. In the filing, Apple argues the tariffs would lead to higher consumer prices, slower economic growth in the US and Apple being exposed to higher competition from foreign rivals.

“Apple prices may increase because of the massive Tariffs we may be imposing on China – but there is an easy solution where there would be ZERO tax, and indeed a tax incentive,” the President wrote in a tweet. “Make your products in the United States instead of China. Start building new plants now. Exciting!”

While some of Apple’s products have been hit by the current tariffs placed on Chinese exports, the iPhone, which accounted for 56% of revenues over the second quarter of 2018, is yet to be effected. As a company which manufactures the majority of its good in China, Trump’s next tariff proposal, essentially covering everything coming out of China, would have a very negative impact.

On the surface, forcing Apple’s manufacturing process back onto US shores would be a political PR win for the President, though the move could be disastrous for Apple and iLifers. There might well be tax incentives in moving the manufacturing process back to the US, but cost of building the factories would be incredibly high, while labour costs are also much higher. Tax incentives might compensate for these incurred costs, as would a price hike to consumers, but there is a bigger issue at hand which the President doesn’t seem to understand.

Managing a supply chain in the manufacturing trade is more than simply understanding how much labour costs. It’s access to raw and manufactured materials, cheap energy and real estate and finally, skilled workers. Once the plant has been built, the transportation and logistics puzzle to access materials will have to be addressed. Finding the right plot will also be tricky, as real estate will have to be cost effective, but it will also have to be close enough to a large enough workforce. This in itself is perhaps the biggest challenge as important aspects of this workforce do not actually exist at scale in the US.

Precision tooling is an excellent example of one of these skills. Precision tooling is a trade which requires years of training, combining artisanal craftsmanship with precision engineering skills. Apple CEO Tim Cook pointed out a couple of years back at a Fortune conference China actually stopped being the low-labour market and instead has a skilled workforce which enables the manufacture of smartphones and other advanced electronics. There are of course cost savings to be made in Chine, but these skills are critical in the smartphone manufacturing industry, and simply cannot be created overnight in the US.

The risk for Apple when it comes to moving the manufacturing process into the US, isn’t simply the cost as President Trump is suggesting. There are immensely complicated supply chain issues which will take months and years to perfect, this was the case for China as well, but the manufacturing industry here has evolved with technology industry. Skills have been taken forward and adapted to the manufacturing process as more complicated techniques and processes become commonplace. The learning process in the US will have to be much sharper.

When you take these elements into consideration, the risk is much more than financial. Apple could probably absorb a couple of years of heightened manufacturing costs, such is the profitability of the organization, but what it cannot allow is for a glitch in the supply chain. This is an incredibly well-oiled machine which produces hundreds of millions of devices every single year. Poking, prodding, moving and shifting this machine will impact Apple’s ability to meet consumer demand.

On one side of the coin, this is not worst case scenario. Less products on the market create a sense of exclusivity, which is turn increases the value of the products. Many luxury brands limit supply to create this sense of exclusivity which inflates prices. Some in the accounting department might like this idea, but Apple is a different beast. Somehow, Apple has managed to create the image of an exclusive, luxury brand, while flooding the market with supply and still maintaining incredibly high prices. Its contradictory and defies logic in the branding and price game.

If there is money to be made, Apple will profit. If it can offer a customer an Apple product, it will make the offer. When there is an opportunity, Apple usually capitalises. However, this saga threatens to impact Apple’s ability to supply the masses with their iFix.

Most of the time, disagreements are about money. But President Trump doesn’t seem to understand anything more than surface complications here. Tax incentives and price hikes will not compensate for the massive issues the Apple supply chain could face.