This week, the Chinese government made a bold move and devalued its currency -- the yuan -- twice in two days. The move, although not completely unexpected, could have substantial repercussions for both Chinese and non-Chinese businesses, including Apple (NASDAQ:AAPL). China is Apple's second-largest revenue market after the U.S., which means any major changes to the country's currency could directly impact the Mac maker's results.
So what exactly is China doing? Back in February, The Economist predicted that a devaluation of the yuan may be coming, saying, "Devaluation would, all else being equal, let Chinese exporters regain some lost competitiveness. By raising the cost of imports, it would also help China stave off deflation."
Over the long term, a strong economy in China is good for all business in the country -- but in the short term, it might end up hurting Apple. A recent Wall Street Journal article noted, after the first currency drop, that more currency devaluation may force Apple to raise prices in China.
Raising iPhone prices
When the value of the yuan goes down, that ends up hurting Apple's revenue in the country when sales are converted back to U.S. dollars. To offset the potential impact, Apple could increase the prices of its iPhones in China in order to maintain prices.
As noted by WSJ, Apple talked about this possibility in its 2014 annual report, saying, "There is a risk that the company will have to adjust local currency product pricing due to competitive pressures when there have been significant volatility in foreign currency exchange rates."
OK, so let's say Apple bumps up iPhone prices in China. What does that mean? Well, the average selling price for the iPhone was $687 in Q1 2015. Meanwhile, the average selling price of all smartphones in China is just $263. So increasing the Phone's already high price tag could push down demand for the devices there.
Apple clearly doesn't want that to happen, but it doesn't want its sales to get squeezed, either. To keep either from happening, Apple may be best served by doing nothing, at least for now.
Companies can typically handle some fluctuation in currencies without having to change course. As a BBC News article noted this week, "Although the devaluation shocked the international markets, a total move of more than 3% is not significant for most companies. But further falls could start to change the fortunes of some businesses in and out of China." So far, China's devalued its currency around that 3% mark.
I've written before that current concerns over China's stock market shouldn't be a big concern for Apple investors, but if China continues to devalue its currency, then investors should expect some changes from Apple.
The company probably won't raise iPhone prices just yet, but investors would be wise to watch if China devalues the currency again and by how much.
For right now, it's certainly not worth panicking over and I don't think any change (whether taking a hit on margins temporarily or raising prices in the short term) will impact Apple's long-term opportunities in China. Certainly, the next few quarters might be negatively affected, but keep in mind that China is still the world's largest smartphone market and Apple will continually have to adjust its strategy in the country to keep demand strong -- whether the Chinese government makes changes to its currency or not.