The President’s iPhone does it again, taking the market down 2.6% and Apple down 4.6%.
From a note to clients by analyst Daniel Ives that landed on my desktop Friday afternoon:
Trump’s comments/tweets around China today specifically around “ordering US companies to immediately start looking for an alternative to China” is a clear shot across the bow at Apple and the semi space with stocks down heavily in light of this latest news.
For Apple, as we have discussed at length the company in a best case scenario would be able to move away 5%-7% of iPhone production out of China and it would take at least 3 years to move 20% of iPhone production outside of its core Foxconn/China footprint based on our analysis with 50% of iPhone production moving out of China taking more than 5 years in our opinion.
On the supply chain, we believe Apple is aggressively looking at alternative options within the supply chain in light of this US/China UFC trade battle around moving 5%-7% of iPhone production to India and/or Vietnam, away from China, which would in a best case scenario be ready to roll 18 months from now in our opinion…
We believe the China tariff situation is a $20-$25 stock overhang on shares of Apple as this remains the nightmare that will not go away for investors (as well as Cupertino now clearly caught in the crossfire).
Maintains Outperform rating and $245 price target.
My take: If history is any guide, we’ll get a counter-tweet before too long. If only we knew when…
UPDATE: At 5 pm Friday, Trump doubled down, tweeting this…
China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30%… Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!
Apple lost another $1.09 (0.54%) in after-hours trading.
Whatever … all I know is Trump keeps tweeting post consumer Big Macs into my bowl of Corn Flakes. Ⅎµ©ǩ!
Glad to hear all these jobs are coming back. /s Sounds like I’ll be needing one of them if he keeps it.
Who knows with Trump. What difference does it make if a product is made in China, Vietnam or South Korea, etc? The only difference is the country of company selling the product, i.e. sending the profits to our economy. And companies like Sony and Samsung trade on our exchanges. So we can own them, fractionally. No company will make long term investments in tooling up a new factory based on a tweet du jour. Moving manufacturing to one of China’s neighbors does make sense and is already happening. It’s happening anyway because of rising labor costs in China.
All the above is obvious. The big uncertainty is China’s reaction.
Japan, Korea, and Taiwan have the capital intensive plants and foundries to make displays, chips, cpu’s etc. Apple designs them and provides the schematics and code. They are basically just 3D printers. The environmental aspect of those plants is not good. Not good at all. We don’t want those plants in the US. The current system works great as it is. The ironic part is that there are some components made in the US that get shipped to China which get taxed when imported back to the US.
I think it’s an ego thing for the president. Like he once said, he asked TC to build a factory in the US bigger than those in China, even if it’s just a foot bigger.
Companies have been moving production out of China, but lately they have been running into capacity issues. And quality issues in those other countries, I just read in the WSJ. So some are staying put for now.
“The big uncertainty is China’s reaction.”
I think China has made it pretty clear where they stand: They’ve called the Trump Admin’s bet. Now we get to see if the Trump Admin is willing to let this slow motion wreck continue or back off on the throttle.
Here’s the thing: I can’t imagine that the Trump Admin started this process expecting China to react in the way they did.
Then they slept through Tariffs 101 or never showed up for class because China’s responses have been pretty textbook so far.
China hasn’t even begun to get creative yet … and its government doesn’t have to worry about getting re-elected.
The Yuan keeps going lower. Not good for Apple.
The labor is very small portion, single digit percentage of iPhone product costs, so the margin benefit is not large, but certainly appreciated. China is devaluing its currency effectively giving US importers a discount which defrays the added costs from tariffs- but it doesn’t help Apple much because such a small amount of COGS is China-based, yet the tariff applies to the full value. (which includes parts from US, Euro, Japan, Korea, etc) What really sucks is that it appears US components are going to be hit with Chinese tariffs on their way to be assembled, and then of course are slated to be hit again by the US coming back as a finished good.
Typically Apple hedges against short-term FX fluctuations when/where possible. Eventually those hedges roll off (expire) leading Apple to raise prices. That’s what Apple did at the start of this FY, but TC said they reversed course and decided to eat the FX impact since sales were slow. That probably won’t change in the near-term. The Y/Y compare (USD/CNY) for 9M FY19 was pretty significant. But, for Q4, the Yuan is not too terribly weaker, except for the last week.
“Now we get to see if the Trump Admin is willing to let this slow motion wreck continue or back off on the throttle.”
Per the update from PED, no backing off. Instead, the throttle got advanced.
Raise your hand if you think China will now kowtow to the Trump Admin. (crickets)
You know what this reminds me of?
(From West Side Story)
“BERNARDO
…Sticks.
RIFF
…Rocks.
BERNARDO
…Poles.
RIFF
…Cans.
BERNARDO
…Bricks.
RIFF
…Bats.
BERNARDO
…Clubs.
TONY
Bottles, knives, guns!”
And this is just about as juvenile.
The problem is that, in this “trade” war, as in all wars, it’s the little people who will end up paying the major price. The oligarchs and the wealthy will, at most, be inconvenienced.
Trump seemed to go off the rails faster and farther on Friday. He’s beginning to smack of desperation for pursuing a flawed, failing policy.
China is between a rock and a hard spot in Hong Kong. Severy-five percent of the total Hong Kong population turned out for the latest demonstration. That had to have an impact on GDP, especially if this continues.
China’s dilemma is that Hong Kong is highly visible to the international traveler. A Tiananmen Square scenario would be disastrous to international relations with the Chinese government.
Absolutely. China has its hands full. It’s certainly crushing HK GDP since tourism is a significant portion. HK isn’t included in China’s GDP. It’s included in Apple’s Greater China segment. TC often mentions Mainland China because HK can have a large impact on the GC segment. Even though HK is separate, it has to drag down China’s GDP from weaker cross-border economic activity.
I’m skeptical there will be more tariffs. Trump already capitulated and postponed them till December. Primary voting starts soon after. Hard to imagine he will want to further damage his re-election chances entering the election season.
I think you nailed it a couple of articles back when you said: “The problem now is that the stock price is caught up in politics and the madness of Trump rather than being based on fundamentals.”
And yet – Apple’s fundamentals are still there under all this froth. That’s the dynamic that interests me. I just don’t see Apple getting any fundamental damage out of all this. If the fundamentals don’t change, Apple gets an opportunity to buy back their stock at a bargain-basement price. Same with the smart investor; they get a chance to buy a fundamentally sound stock at a discount.
China will wait him out and take their far better chances with a new, rational, and pragmatic administration.
I completely disagree with his tactics. Picking up megaphone and telling that person they are ugly in public doesn’t accomplish anything.
China is a merely an excuse to indulge his ego and narcissism. If he really cared about returning jobs to the USA, why the F are his hats, ties and other ego props made in China, Mexico, Indonesia, et al. Wake the F up. I’m so tired of Trump apologists.
The core tactic, Tariffs, are a blunt force. Their damage is uncontrolled and it is broad.
Most of the world agrees that the PRC steals IP and mandates egregious foreign investment policies. Sanction them for IP theft. Remove them from the WTO. Shame them on the world stage for cheating and stealing. Don’t be the unilateral tariff cop around the world and alienate multilateral pressure. The PRC does not want to be called out. When the US does it alone, we make it easy for them to retaliate against us. If we do it in conjunction, with allies suffeting from their policies, they have little choice but to change.
Now China rulers can position the US, to their people, as capricious and dangerous. They can blame any economic impact on our administration. This gives them a freer hand.
The first 15 years of China’s existence in the WTO saw a continuance of almost *every* major violation. IP theft, foreign film distribution, state-owned enterprise purchases, foreign bank equality, telecommunications inclusion to foreign producers, following the Technical Barriers to Trade Agreement and the elimination of industrial subsidies.
Love it or hate it, but the current administration’s focus is on results over ineffective international legal processes. China has shown complete disregard for international rules of market-based competition, with all of their policies violating the spirit of the World Trade Organization’s laws. It’s a one step forward, two steps back approach, and it’s unacceptable. Even then, virtually every “concession” has been booby trapped with non-tariff barriers that more than offset their concessions. Enough is enough. A domestic ring of thieves taking in hundreds of billions annually would be met with fury, yet we hand China a hall pass.