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US-China trade war could force Apple to raise iPhone prices, shift production

As the U.S. and China continue to exchange jabs amid an escalating trade battle, analysts say the spat between the two countries could force Apple Inc. to move production away from China a key production spot for the tech giant or pass along the burden to consumers.

The trade situation could raise the cost for Apple to manufacture iPhones by 2% or 3%, with the potential to increase by as much as 10% over time in a worst-case scenario, said Wedbush Securities analyst Daniel Ives in a research note this week.

"While many U.S. companies are impacted by this latest trade tension, the 'poster child' for the US/China battle continues to be Apple in the eyes of the Street," Ives wrote.

The analyst added that China represents a "growth linchpin region" for Apple, representing 20% of all iPhone upgrades over the next year and beyond, and growing trade fears creates added uncertainty for Apple's supply and demand in the area.

Greater China remains Apple's third-largest market, behind the Americas and Europe. However, the company's net sales in China saw the biggest decline for the March quarter, totaling $10.22 billion compared to $13.02 billion in the year-ago period amid growing trade tensions and a China-led softening in demand for iPhones.

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Speaking on an earnings call in April, Apple CEO Tim Cook said iPhone sales began to stabilize in China during the last few weeks of the March quarter, adding that the company believes "strongly in our long-term opportunity in China."

Some of Apple's core suppliers have already shifted production out of China due to the tariff war. For instance, Foxconn Technology Co. Ltd., one of the companies that assembles Apple's iPhones and other products, recently said it is unable to manufacture some equipment on mainland China and will move production of some of its telecom equipment and servers to Taiwan and India.

J.P. Morgan analyst Samik Chatterjee in a May 14 research note estimated that Apple would need to raise iPhone prices by 14% to offset the higher cost of components if the U.S. ever expands the scope of its tariffs to include all imports from China.

The analyst used the iPhone XS model, which retails for $999, as an example, to show what the device would cost with no tariffs versus what it would cost if a 25% tariff was applied to all China-made components. That would raise the iPhone's retail price up to $1,142, the firm calculated.

Bob O'Donnell, president and chief analyst at TECHnalysis Research, agreed that any cost increases Apple faces in China will "inevitably" be passed along to consumers. He also said Apple might need to further diversify its production centers beyond China but doesn't think the tech company will be shifting production of the iconic iPhone to the U.S. anytime soon.

"It's a very, very complicated process to try and bring manufacturing on all of the major components that go into an iPhone back to the U.S.," O'Donnell said in an interview. "A lot of people think 'Oh, just build the phones here.' Well, the problem is that to realistically build the phones here, you need to have all of those other pieces here too."

President Donald Trump has repeatedly called for Apple to shift more of its production to the U.S., saying in a May 11 tweet: "Such an easy way to avoid Tariffs? Make or produce your goods and products in the good old USA. It's very simple!"

O'Donnell added that growing tensions between the U.S. and China creates more uncertainty for the entire smartphone market, which has matured as consumers hold onto their phones for longer.

"It's obviously a concern when you have high-priced products and they're expected to go higher because of tariffs," O'Donnell said.

Shares in Apple have lost about 4% since the U.S. on May 10 raised tariffs on $250 billion of Chinese imports to 25%. Beijing responded on May 13, imposing levies of up to 25% on a $60 billion of U.S. imports from June 1. The U.S. Trade Representative's Office also released on May 14 an expanded list of Chinese products worth approximately $300 billion it plans to target with 25% tariffs.