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Apple Is Shifting Production of One of Its Hottest Products

By Evan Niu, CFA - Jul 17, 2019 at 2:21PM

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AirPods take a trip to Vietnam.

Amid reports that Apple ( AAPL -1.85% ) is looking to move 15% to 30% of iPhone production out of China due to President Trump's ongoing trade war, the company is already starting to shift production of other products out of the Middle Kingdom. While Trump's tariffs are impacting the Chinese economy -- the country just posted its lowest GDP growth in nearly three decades -- it was always clear that many jobs that might move out of China wouldn't be coming back to the U.S.

Instead, that work is going to other nearby countries.

Woman using AirPods, Apple Watch, and an iPhone

Apple released its second-generation AirPods in March. Image source: Apple.

Shifting to Vietnam

The Nikkei Asian Review is reporting that Apple is preparing to commence trial production of AirPods -- the company's wildly popular wireless earphones that were updated in March -- in neighboring Vietnam. Contract manufacturer Goertek will start testing its production processes at a factory in Vietnam, according to the report. AirPods have historically been assembled in China by Goertek, Inventec, and Luxshare-ICT. The wired EarPods that Apple includes with iPhones have long been produced in Vietnam.

Apple has asked its suppliers to maintain pricing during the trial run, but costs could potentially change once production ramps. Labor costs have been on the rise in China, reducing one of the appeals of manufacturing there. Vietnam offers even lower labor costs than in China, but an influx of production could lead to labor shortages that would drive up those costs.

AirPods have created an entire new category of wearable device -- one that Apple has dominated. The wireless earphones grabbed an estimated 60% of the wireless earphone market in the fourth quarter of 2018 and maintained that market share in Q1 of 2019, according to Counterpoint Research. No competing product even comes close to Apple's volumes.

Vietnam has trade and tariff risks, too

It's worth noting that Trump has also been threatening to impose tariffs on Vietnam over the past month, again citing his preferred gauge of trade relations. The U.S. had a trade deficit of $39.5 billion worth of goods with Vietnam in 2018, according to the Office of the U.S. Trade Representative. Through May 2019, the U.S. had a trade deficit of $21.6 billion worth of goods with Vietnam, according to the U.S. Census Bureau.

Investors hate uncertainty, and it's extremely challenging for major multinational corporations to navigate Trump's unpredictability. Shifting production and diversifying supply chains is an incredibly complicated task that requires immense amounts of work, and all of that work could be for naught if the president arbitrarily decides to slap tariffs on other countries in the region.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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