As we near the release of the next iPhone, it’s been a bad news parade for Apple. While their quarterly results announced last week were ok, they had a mini-scandal over contractors listening to recordings of Siri interactions. Far worse, their stock price has fallen off significantly in the last two days of trading based on news of a fresh round of tariffs on goods produced in China.
These additional tariffs are a blow to not just Apple, but pretty much the entire tech industry. All of these companies use Chinese components and most of them have some, if not all, of their devices manufactured there, as well. As such, it isn’t just Apple’s stock price that’s dropping right now. In fact, this blow to the tech sector has reverberated through the entire US stock market.
Knowing Apple’s typical focus on profit margins, you would think that they would just pass this 10% increase on to their customers with higher prices. When you consider that their iPhone revenue has been falling for a year and that sales this year are expected to be flat at best, I certainly expected them to. However, Ming-Chi Kuo reported today that Apple may take a different course. He believes that Apple will NOT be passing the additional costs on, but will absorb most of them.
“In the mid-short term, if Apple absorbs most of the additional costs due to tariffs, there will be a negative impact on its profits from its hardware business, but the company will reap benefits in its brand image and relationships with suppliers. We also believe that the negative impact on Apple are limited and temporary because the profit from service business is growing, and non-Chinese production locations will gradually increase.”
This doesn’t sound like the Apple we’ve come to know under Tim Cook, but it could end up being the best move for the company. Whatever Apple would be giving up in margin and revenue, they would definitely make back in customer goodwill. Their vendors will also be pleased if device sales are steady. You can bet a move like this wouldn’t go unnoticed, as it would likely keep iPhones sales and revenue numbers stable. Despite all of this, I still can’t help but feel it’s out of left field for Apple.
I came across another article today at Seeking Alpha that could potentially tie into this situation. It talks about how Apple has used its cash reserves when needed to defray losses and “build a bridge” past the iPhone’s big downturn in sales to the next release and the rollout of their new services. I couldn’t help but wonder if Apple may end up using some of their still plentiful cash reserves to offset losses brought on by additional tariffs. It certainly seems plausible for a company to use the ultimate rainy day fund as a potentially difficult storm rolls through.
This report is no guarantee that Apple will pick up the tab for Trump’s latest round of tariffs. Ming-Chi Kuo is a supply chain expert, but this kind of decision reaches far beyond his normal territory. The report could just be educated speculation on his part. However, I guess it is also possible that Apple is assuring their parts vendors that they are doing what they can to keep device sales stable. That is a reasonable way for a supply chain expert to get word of a story like this one.
With the new iPhone a little over a month away, it won’t be long before we find out if Kuo is right or wrong. If this report is true, it is also likely to be repeated by other Apple experts with sources inside the company, such at Bloomberg’s Mark Gurman, so this won’t be the last we hear about how Apple will handle these new tariffs.