Source: Barrons.
Author: Ben Rose.
U.S. President Trump stated on Friday that he hopes Apple will produce iPhones in the United States, "rather than in India or anywhere else."
$Apple (AAPL.US)$ The response of CEO Tim Cook to Trump's "Make in America" initiative is reminiscent of a scene from the movie "My Cousin Vinny." Vincent Gambini (played by Joe Pesci), a novice defense attorney, is reprimanded by Judge Chamberlain Haller (played by Fred Gwynne) for appearing in an Alabama courtroom without a suit and tie, particularly displeased with Gambini's long leather jacket. The next time Gambini appears in court, he is still wearing the same outfit, and this time the judge punishes him for contempt of court. Gambini incredulously asks the judge, "Are you serious?"
During Trump's first term, Apple was nearly—some would even say miraculously—unaffected by tariffs, but the president has vowed that this time, "no one is getting away with it," not even the most valuable company in the U.S. by Market Cap. This time, he is serious. Apple will have to shift some production back to the United States.
During Trump's first term, many American companies producing products in China faced a 25% tariff. To avoid tariff penalties, some companies opted to shift production to other countries with lower labor costs in the region, such as Vietnam, Malaysia, and India. Although Apple received an exemption, it has started to move some iPhone production to India, clearly due to concerns over the escalating tensions between China and the U.S., in order to diversify its supply chain and manufacturing processes.
At the beginning of Trump's second term, the business community was uncertain about whether its policy goals were to negotiate more favorable trade agreements, reduce dependence on China, or encourage the return of manufacturing to the U.S. This time, Apple does not intend to take any risks. Just 35 days after Trump took office on January 20, Apple announced it would invest $500 billion in the U.S. over the next four years for building new manufacturing facilities, artificial intelligence data centers, creating 200,000 new jobs, and establishing a manufacturing academy focused on workforce training.
Apple has taken public measures to meet the president's wishes. When U.S. Commerce Secretary Howard Lutnick announced on April 13 that computers and semiconductors would receive a 90-day exemption from the high tariffs of up to 145% imposed on Chinese Commodities, Apple's executives may have breathed a sigh of relief. Apple and other companies will be subject to a set of tariffs yet to be determined in the future. Perhaps considering that Trump’s ultimate goal is simply to move manufacturing out of China, Apple announced a significant expansion of its production Operation in India, based on the assumption that the president does not care where the iPhone is produced, as long as it is not made in China.
But like Vincent Gambini, Tim Cook is painfully realizing that the president is serious about requiring Apple to produce products in the United States – and is looking for it to happen quickly – rather than letting Apple drag its feet by further expanding production in India.
Apple and other companies argue that labor costs in the U.S. would make their products uncompetitive in the domestic market, with some even suggesting that if the iPhone were produced in the U.S., it could cost as much as $3,500.
Apple's claim is at least partly correct, as labor costs in China and other parts of Asia Pacific are only a fraction of those in the U.S. Furthermore, Apple has already invested billions in China to establish and maintain a reliable supply chain that meets its strict quality standards. Moving production to India or the U.S. would not only increase costs, but product quality may also decline. In fact, not all of the components for Apple products are manufactured in the U.S. So what is a practical solution in the face of such a deadlock?
Returning to the topics of Vincent Gambini and Judge Hal. Following the judge's request, Gambini spent money to buy a brand new suit and tie to meet the judge's order to have a "lawyerly appearance" while defending the client in court. Apple's response may be to spend money building or leasing final assembly factories in the U.S. while using at least a certain proportion of domestic components and contract manufacturers. Apple could also outsource prototyping, production, and transitional manufacturing to local companies willing to take on these jobs. This way, Apple could significantly reduce transportation costs in the Asia Pacific region while demonstrating its willingness to accelerate the increase of manufacturing and high-tech jobs in the U.S. Otherwise, like Gambini and the judge, Apple will ultimately understand how serious Trump really was.
Editor/Rocky
