Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

How Apple Is Reacting to Trump's Tariffs

By Stephen Lovely - Oct 5, 2019 at 5:06PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Mac Pro is being made in Texas, but Apple still has tariff issues.

President Donald Trump has made trade one of his signature issues since early in his 2016 campaign. In office, he has pushed back on trade relationships that he views as imbalanced -- with China, in particular, in his crosshairs.

Of course, trade isn't just about countries. It's also about corporations, many of which are de facto international "citizens." What the United States imports from China includes things made by American companies -- including Apple ( AAPL -0.61% ), which relies heavily on Chinese manufacturing. Since President Trump's trade talks with China began to fall apart in late 2017 and early 2018, Apple has been scrambling to develop new strategies in the face of imminent new tariffs in a larger trade war with China.

A person in a red sweater holding a smartphone

Image source: Getty Images.

A bite out of Apple

More than a few companies stand to lose big from the Trump administration's tariffs. But some are considerably better off than others: Samsung (OTC: SSNLF), for instance, makes products in China, but it manufactures a smaller portion of its offerings in China than Apple does. Samsung's more geographically diverse manufacturing, which includes manufacturing centers in Vietnam and South Korea, exposes fewer products to the tariffs and could make it easier for Samsung to shift its manufacturing around to avoid paying up.

By contrast, Apple's manufacturing is heavily concentrated in China. And the many products that Apple makes in China include a staggering number that are slated to be hit by tariffs by the end of the year: A full 92% of Apple's Chinese-made products will incur tariffs, according to analysis from Reuters.

And it goes without saying that Apple suffers more in a trade war with China than, for instance, Alphabet's Google or even, because tech hardware forms a larger part of Apple's business than it does for either of those other two tech companies.

In other words, tariffs aren't great for any company with a foothold in China, but Apple is particularly vulnerable to the new tariffs because of its concentration of manufacturing in the country.

Apple has added factories in other countries, notably India and Brazil, in recent years. But those are largely used to meet domestic demand within those countries, and Apple has grown its presence in China over the same period.

The Mac Pro stays at home

Apple's manufacturing outside of China may form a relatively small portion of its overall production, but the company is clearly looking for ways to ease its reliance on Chinese factories. With tariffs looming, Apple made an announcement on Monday, Sept. 23: The company will manufacture its new line of Mac Pros in Austin, Texas.

This is not the first time that Apple has made Mac Pros domestically, but it was still a surprising announcement -- a seeming contradiction that helps illustrate the complexities of tariffs. Apple claimed that it needed tariff exemptions on the components it uses to manufacture its Mac Pros in order to justify staying in the U.S. If Apple had to pay tariffs on the components, it would just make the whole computer in China and pay tariffs to import it instead -- or, at least, that was the threat. Eventually, Apple got its waivers.

The fact that tariffs could actually keep manufacturing out of the U.S. shows how complicated they can be, and also drives home Apple's reliance on China for more than just the final assembly of its products.

Far from over

Making computers in Texas is a good way to avoid tariffs, but it's also not new, and isn't a good reason to believe that Apple is any less dependent on China than it was before. And it's particularly telling that Apple felt it needed tariff exemptions on a product it is making domestically: It is not just Apple's manufacturing plants but its suppliers that are disproportionately located in China. In 2015, 44.9% of Apple's suppliers were based in China; by 2019, it was 47.6%. That may make it tough for Apple to make things domestically without tariff exemptions of the sort that it just won.

Apple investors can be happy with this latest development, but the company's overall position in relation to the tariffs on Chinese goods remains pretty unfortunate. It will take more than keeping a Texas manufacturing center open to beat the tax.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
$163.76 (-0.61%) $-1.01
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,859.32 (1.36%) $38.29, Inc. Stock Quote, Inc.
$3,437.36 (-0.18%) $-6.36
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,875.53 (1.52%) $43.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/03/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.