Apple might be 'collateral damage' in US and China trade dust-up

Apple could be the “collateral damage” in the escalating trade war between Donald Trump’s US administration and China's government, a Wall Street analyst has warned.

Ahead of Apple reporting Q4 fiscal ’19 financial results on 1 November, Bernstein briefed investors on what to expect for the trading period and beyond into the next - but more on that later.

The Mac maker is an “important staple” for the US and China economies: in its homeland it is the largest business by market cap, employs 80k staff and claims to “support” 450k jobs through its American supply chain.

Mainland China - which accounts for 13 per cent of Apple’s annual sales - is the base of Foxconn, the contract manufacturer that produces Apple’s iPhones. Bernstein estimated Apple “indirectly supports” 2 million to 3 million locals via Foxconn and the wider supplier ecosystem.

Getting squeezed by the grip of a trade war between the US and China governments isn't a place that Apple or the broader US-based tech industry relishes. The US slapped a tariff on $50bn of goods - including tech - imported from China in June and then 10 per cent on $200bn last month. China retaliated by adding tariffs to $60bn worth of products imported from US.

“We believe that only the Mac Mini, Airport routers, tech accessories like Magic Mouse and various chargers, and leader accessories are thus far impacted by the tariff,” said Bernstein analyst Daniel Chen.

That means collectively, just 1 per cent of Apple’s revenues were so far “hit” by a 10 per cent duty. The impact isn’t so bad, at least not yet. However, more shots yet may be fired by the US and China.

“While neither side wants to hurt Apple, it is possible that if the trade war escalates, Apple could be the collateral damage,” Chen added.

Apple isn’t the only unfortunate casualty of the tit for tat trade squabbles between two giant nations. The huge proportion of tech made in China means many vendors are feeling the burn, notably Cisco. HP Inc’s CEO said he is watching with interest if Trump follows through with his latest threat to turn up the tariff on $200bn worth of imports from 10 to 25 per cent.

Lobbyists will play an important role as the US and China trade dispute runs and runs, Steve Brazier, CEO at channel analyst Canalys, said at his lively Channels Forum in Barcelona this month.

Apple Air pods - the earphones - were on the initial list of products imported to the US from China but "magically when it [the 10 per cent tariff] went live (in June) they had been taken off the list," he said at the event.

"Their lobbyists I suspect did a very good job of avoiding the tariffs," Brazier added. There is likely going to be impact if future tariffs and it will be "very difficult for vendors to manage this. It's so uncertain and it keeps changing".

Greater China accounted for a fifth of Apple’s revenue in each of the past four quarters, so the general health of the local economy is obviously important to the company.

The iPhone and related services - licensing; iCloud; Music; App Store; and Apple Care - have been the primary draws for customers in the Middle Kingdom. However local demand for handsets made by non-Chinese brands has “decelerated”, Bernstein pointed out. This was good news for Huawei in calendar Q2, not so much so for Apple. We await calendar Q3 numbers.

Bernstein said the weak spot of smartphone gaming in Tencent’s Q2 financial results could “portent weak [Apple] App Store sales in China. We estimate that China might account for one third of Apple App Store Services revenues or 9 per cent of total services revenue.”

“Prolonged weakness in gaming could be a material headwind to Apple’s all-important services revenue growth.”

Expectations for this quarter are for a rise in iPhone units and average sales prices (to $800 from $741 a year ago) due to the more expensive mix of handsets released recently. Bernstein said it estimates total company revenues of $63.3bn for Q4 which Apple reports on 1 November.

Bernstein said it expects “flattish” iPhone unit sales and gross margins for fiscal ’19 but higher ASPS that will beef up products revenues. ®