Apple Inc. will likely absorb losses resulting from the threatened 25 percent tariffs on its iPhones rather than raising the prices of a product that accounts for most of its revenue. The earliest the new Trump tariffs will take effect will be June 24.
Analysts expect around a 14 percent increase in the prices of the next iPhones should the Trump administration go ahead with its threat to slap 25 percent tariffs on the remaining $300 billion worth of goods imported from China. This batch includes the electronic components needed to assemble iPhones. Apple AirPods and Apple Watches are not covered by the additional tariffs, however.
Analysts concur Apple will need to raise iPhone prices substantially to offset the higher costs of parts. J.P. Morgan estimates a price increase of 14 percent will be required to absorb the impact of a 25 percent tariff hike, "keeping margin dollars for all players in the supply chain constant."
It said the costs of making and selling the iPhone XS with no tariffs comes to about $1,000. This selling price will spike to at least $1,142 with the 25 percent tariff on China-made parts.
J.P. Morgan believes Apple is more likely to absorb the cost of tariffs and take a hit to its earnings rather than raise iPhone prices. It estimates a total iPhone gross margin decrease of 4 percent if Apple doesn't pass the tariff costs on to customers.
In the second quarter of fiscal year 2019, Apple generated 53.5 percent of its revenue from iPhone sales.
"It's (wrong) to think the cost of the iPhone will simply rise 25 percent," said Tim Bajarin at Creative Strategies, a tech industry analysis firm. "Certain pieces indicate a cost but schedule doesn't directly go after the phones. We don't know what the cost of those components are, and we won't unless Apple clarifies that."
Moving iPhone production to the U.S. is an even worse option. Bank of America Merrill Lynch estimates a 20 percent price increase if 100 percent of the iPhone is manufactured in the U.S.
"We estimate the incremental cost of manufacturing iPhones in the U.S. could be 15-25 percent, and, if passed on to consumers could lead to demand destruction, in our view," said Bank of America in a note to investors.
The Office of the U.S. Trade Representative formally began the process of approving these new tariffs on Monday.