Apple Avoids Tariffs on Smartwatches, Earbuds -- Update
September 17 2018 - 08:53PM
Dow Jones News
By Tripp Mickle
Apple Inc. dodged stinging duties on its smartwatches and
wireless earbuds after the U.S. excluded those gadgets from tariffs
on $200 billion in Chinese goods, though the tech giant still faces
retaliatory measures being weighed by China that could strike
iPhone production there.
The trade tensions are rattling companies in a range of
industries, but Apple's heavy dependence on the U.S. and China
makes it especially vulnerable as the world's two largest powers
escalate their economic feud. Because Apple assembles almost all of
its gadgets in China, its watches, AirPods and other devices are
vulnerable to the Trump administration's plans to widen the scope
of tariffs on Chinese imports -- a risk Apple warned about earlier
this month.
That reliance also could make the iPhone and other devices
vulnerable if Chinese officials follow through on retaliatory moves
to restrict sales of materials, equipment and parts key to U.S.
manufacturers -- measures The Wall Street Journal on Sunday
reported that Beijing is considering.
The timing of the countries' new measures could be especially
bad for Apple, which this week starts shipping two of its three new
iPhones and a new smartwatch. Those new devices are expected to
help fuel the company's sales in the final three months of the
year, when Christmas shopping helps deliver about one-third of
Apple's annual revenue.
China's threatened retaliatory moves in particular "could be
fairly devastating," said Mark Vena, an analyst with Moor Insights
& Strategy, a technology research firm. He said Apple should
have enough inventory of key components for iPhones and
smartwatches to maintain production through the holidays, but in
the long term, Chinese retaliation "could be a serious
problem."
In a statement Monday, the Trump administration said it would
respond to any retaliatory action by China with another round of
tariffs on approximately $267 billion of Chinese imports.
The Trump administration's break for smartwatches and wireless
headphones, which were slated to be hit by 10% tariffs starting
Sept. 24, come at a critical moment for Apple. The company this
week starts shipping a new smartwatch along with two of its three
new iPhones. Those new devices are expected to help fuel Apple's
sales in the final three months of the year, when holiday shopping
helps deliver about one-third of annual revenue.
Apple Chief Executive Tim Cook has urged Mr. Trump to avoid a
trade battle, saying it would hurt U.S. companies. Mr. Cook had
expressed optimism during a July call with analysts that the trade
dispute would "get sorted out" because each country needs the other
to prosper.
But Apple early this month said in a filing with the U.S. Trade
Representative that the administration's planned tariffs on $200
billion in Chinese goods would hit its smartwatches and wireless
AirPods headphones.
In the U.S., the proposed tariffs of 10% would have added more
than $11 to the import cost of about $115 for a Chinese-made Apple
Watch Series 3, according to market researcher IHS Markit. Analysts
say Apple would either eat those costs on the device, which retails
for $269 -- and similar costs on other products such as AirPods --
or pass the costs on to retailers and consumers.
"Apple's profit margins are very healthy," so the company could
have withstood the tariffs better than most, said Wayne Lam, an
analyst with IHS Markit. Still, he said absorbing the costs of the
tariffs would have reduced Apple's gross margins on its smartwatch,
which are now more than 40%.
The Trump administration's decision to spare smartwatches and
wireless headphones comes despite the president's suggestion the
only way Apple products would be spared would be if the company
started making its products in the U.S. He called on Apple in a
tweet last week to "start building new plants now."
Though the U.S. removed smartwatches and wireless headphones, it
estimates the tariffs will still affect about $200 billion in goods
when they are implemented. Other products that came off the list
included chemical inputs, bike helmets and child-safety furniture
such as high chairs and playpens.
Those planned tariffs, and others already imposed on about $50
billion of Chinese imports, don't affect the iPhone, which accounts
for about two-thirds of Apple's total sales. That could change for
the iPhone if the Trump administration follows through with earlier
threats to expand its levies to a total of $500 billion in imports,
or nearly all the goods the U.S. gets from China.
A big risk is possible Chinese retaliation, said Toni
Sacconaghi, an analyst with Sanford C. Bernstein & Co. Sales in
China accounts for about one-fifth of Apple's total revenue, and
trade experts, and analysts have long feared the country could
increase the value-added tax of 16% it already levies on iPhones
and other goods.
A move to block suppliers from delivering key components to
Apple "is the embodiment of the worst-case scenario," said Mr.
Sacconaghi. Apple's supply chain is so established in China that
"there's no short-term workaround," he said.
China will have to be sensitive to how any such retaliation
might affect Chinese workers. Apple employs about 10,000 people
directly in China and indirectly accounts for three million jobs
there through its supply chain.
In the U.S., Apple directly employs about 80,000 people and
claims responsibility for two million jobs around the country,
including those of suppliers, app developers and entrepreneurs who
offer products across its devices.
Write to Tripp Mickle at Tripp.Mickle@wsj.com
(END) Dow Jones Newswires
September 17, 2018 20:38 ET (00:38 GMT)
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