Why Apple Will Keep Most iPhone Production In China Despite Tariff Threat


Earlier this week, Apple's biggest manufacturing contractor said that it could move iPhone production from China so that Apple could avoid any additional import tariffs imposed by the Trump Administration. The problem is that actually making the move may be too complicated and expensive for Apple.

Speaking to investors this week, Young Liu, semiconductor chief of Hon Hai Precision, also known as Foxconn, said that 25% of his company's production capacity is outside China and that those facilities could handle any needed iPhone work, according to Bloomberg. He didn't specify what countries the manufacturing could be moved to.

But in the end, that doesn't really matter, according to analysts. Moving production isn't feasible.

"Apple has made a big bet on Foxconn and China and in our estimation, can only move 5% to 7% of iPhone production to India in a best case scenario over the next year," Wedbush analyst Dan Ives told Fortune. He described Foxconn's China factories the "hearts and lungs of iPhone production globally" and that they were irreplaceable.

Questions about Apple overseas manufacturing come amid increasing tensions between the U.S. and China over trade relations. Because of Apple's size and dependence on Chinese sales and labor, the company has become a focal point in the trade war.

Apple CEO Tim Cook has waged one of the highest-profile campaigns in tech to convince President Donald Trump to ease tensions with China. Cook has also been outspoken in news interviews, telling CBS News last week that he wanted the trade battle to end while he minimized its impact on Apple.

However, the U.S. and China are still fighting. President Donald Trump is considering a new $300 billion tariff on China that could, some analysts said, increase Apple's iPhone production costs by as much as 14%.

But according to Ives, "Apple's hands are tied" from moving iPhone production outside China. The cost, plus the difficulty of finding new component suppliers in a new country, would make exiting China a difficult if not impossible.

"Apple has billions of reasons to calm down this U.S.-China situation," Ives said.

However, William Ho, an analyst at 556 Ventures, told Fortune left the door slightly open to Apple moving from China, saying that "anything is possible." But he added that there would be "pain" and that the increased costs associated with a move would reduce Apple's profit margins on its devices.

Still, during the past two years, Apple has produced its cheaper iPhone SE models in India, using Wistron, another contract manufacturer. In April, The Economic Times reported that Apple may move production of another device-iPhone X- to Foxconn facilities in India next month.

But that's a long way from Apple moving all iPhone production from China, or its iPad and Mac manufacturing. And although Ho told Fortune that Apple should always manufacture devices in a variety of countries as a hedge against local trouble, there are inevitable consequences.

For example, exiting China could alienate Chinese consumers, who account to a big part of the company's business. The result could be a financial disaster for Apple.

For the record: In its fiscal second quarter in China, Apple had $10.2 billion in revenue and $3.6 billion in adjusted profits, which exclude certain expenses. To complicate matters further, Apple's sales in China have shrunk recently, partly because of support by Chinese consumers for domestic device makers.

So, while it's theoretically possible for Foxconn to manufacture Apple products outside China, according to analysts, the chance it will happen is small. The risks are too high, they say, and the potential benefits are too limited.

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