Investing.com -- A potential escalation in trade tariffs by Donald Trump, should he win the upcoming U.S. Presidential election, could pose a significant risk to Apple's (NASDAQ: NASDAQ:AAPL) iPhone shipments, UBS noted in a recent report.
Trump's proposed tariffs include a substantial 60% levy on Chinese exports to the U.S., which would directly impact the tech sector.
“For tech products, we see higher risks for discretionary consumer products, including PCs and smartphones (more so for Apple's supply chain) with over 75% of production still in China,” than for servers, networking, and routers.
Compared to other suppliers, Apple’s supply chain is “more exposed,” UBS notes, with 32% of its smartphones and 47% of its PCs currently destined for the U.S. market. This is significantly higher than the company’s goal of moving 20% of its production out of China by 2026, with much of the shift aimed at India.
However, this production also must cover the Indian market for the iPhone maker, the bank points out.
“So even if Apple steers production from India to the US market, it would not cover all of it in that timeframe with over 30% of its units destined for the US market,” UBS analysts explain.
“This would then likely lead to further production re-balancing outside of China over time. Associated with this would be negative costs effects related to de-clustering.”
Therefore, UBS believes that a potential tariff hike would “disproportionately impact Apple and its supply chain.” Among the most exposed suppliers to the iPhone are LG Innotek, Hon Hai, Largan, Genius, Taiyo Yuden (OTC:TYOYY), and Murata, the investment bank highlights, although suppliers that can diversify faster can gain relative share.
Analysts also point out that when Apple attempted to raise prices in Europe around the launch of the iPhone 14 to counter inflation, it led to a significant decline in demand, with iPhone volumes dropping by more than 20%.
Based on this, they believe that a price increase is unlikely to be Apple's strategy moving forward. Instead, they suggest that Apple might absorb the tariff costs or incur expenses to shift production sites, which could impact profitability across the supply chain.
Overall, UBS indicates that tariffs on major tech products would mainly hit companies heavily exposed to the U.S., while also affecting Chinese firms due to reduced GDP from lower production and wages, along with a shift towards import substitution.
In the smartphone sector, Apple “stands out with 20% of its shipments into China,” and already witnessing declining sales due to intensifying competition and some restrictions from state-owned enterprise (SOE) usage of iPhone for business.
In contrast, the Android supply chain is less vulnerable. For instance, Samsung (KS:005930) holds a 15% share of the U.S. smartphone market, but the majority of its production is based in Vietnam.