There is a "very real risk of increased costs of importing and / or destroying the demand by the United States depending on whether Apple decides to spend some of the tariff cost," wrote Krish Sankar, an analyst at Cowen, in a note to investors.
"Given that most Apple hardware products that include iPhone, iPad, Watch and Mac systems are assembled and imported from China, the risk of gains could be quite substantial."
iPhone the main concern
China took revenge on Monday with plans to raise tariffs on US imports to 25% from 10%. This would apply to components for iPad and iPhone.
Therefore, when parts made in the United States, including glass covers and facial recognition sensors are shipped to China to be assembled on iPhones and iPads, they will also be more expensive.
The main concern is the iPhone, though. It accounted for 63% of sales in 2018 and serves as a hub for additional revenue from related services and devices such as Apple Watch. The new iPhones cost between $ 1229 and $ 2199, so any price increase could take devices beyond the budgets of more consumers.
Apple's stock plummeted last week as trade war exploded. The stock rose 1.1% on Wednesday.
Increased commercial tensions are a test for Cook and for the global supply chain that helped build and manage. Last year, the CEO showed political prowess by meeting President Donald Trump to discuss rates.
A little over a year ago, Cook met Trump in the Oval Office. The CEO stated that he opposed the president's approach and focused on how co-operation between countries could boost the economy more than nations act on their own. After the meeting, the administration told Cook that it would not place tariffs on iPhones, according to the New York Times.
Apple also wrote to Robert Lighthizer, the United States representative, in September, asking him to reconsider tariffs and instead take other measures to support the US economy and American consumers. Later that month, the White House spared Apple & # 39; s Watch and AirPods.
By the end of 2018, Apple's strategy had become less effective. At the end of November Trump told the Wall Street Journal that he could impose tariffs on mobile phones and laptops and stated that consumers "could bear" a 10% increase in prices "very easily".
The next day, Cook toured schools in Idaho with Ivanka Trump, the president's daughter and senior consultant.
At the beginning of 2019, the real cost of trade warfare for Apple began to emerge. The company cut revenue projections and Cook said the Trump Administration's trade policies indirectly damaged consumer demand for iPhone in China.
More recently, the company has raised prices when it has updated products that have already been affected by the tariffs. The updated Apple Pencil, launched in October, costs $ US30 ($ 43) more than the previous version. The fastest Mac mini costs $ US300 more than its predecessor.
This suggests that the company could take a similar approach with the iPhone. In its September letter to Lighthizer, Apple said the tariffs would increase product prices.
The 25% rate on iPhones would probably apply to the wholesale price of the devices when they are imported from China. Apple does not disclose wholesale prices, but research companies often estimate the bill of materials.
An iPhone XS Max of $ US1,249 (sold in Australia for $ 1879) with 256 gigabytes of storage space has $ US453 of parts, according to TechInsights. A 25% withdrawal on that would be $ US113, increasing the purchase price by around 9%.
The other Apple models, the iPhone XS and the iPhone XR could face a similar increase, according to estimates. In a recent note to investors, Morgan Stanley estimated that an iPhone XS $ US999 would cost $ US160 more. JPMorgan analysts expect a price increase of 14%.
This can only apply to sales in the United States, limiting the damage. About a third of iPhone's revenue comes from the United States, according to Shannon Cross of Cross Research.
However, this will not solve the problem of even more expensive iPhones. A series of price increases in recent years has already coincided with the decline in sales.
If Apple were to pass the full cost price to US consumers, demand could fall by 10% to 40%, according to an estimate by Cowen & # 39; s Sankar on Tuesday. This, in turn, could cut earnings per share from 1% to 4% in fiscal year 2020, according to the analyst.
Since the iPhone, iPad, Watch and Mac (…) systems are assembled and imported from China, the risk of gains could be quite substantial.
Cowen analyst Krish Sankar
Alternatively, Apple could eat the cost and leave the iPhone prices intact. This equates to 6 percent earnings per share to 7 percent, based on an import cost of US $ 450 per device and annual sales of US units of 40 million, according to Sankar.
However, Apple has experience in absorbing additional costs. "When currencies fluctuate, the company manages to protect its gross profit margins," said Cross.
Apple could circumvent the tariff problem. C & # 39; s the possibility that Apple will re-run its supply chain to build more products outside China.
Apple is increasing production in India to avoid local taxes and has done a similar job with Foxconn in Brazil.