Apple’s Texas Plant Is Crucial to Avoid Chinese Tariffs

Apple (AAPL) has a China problem and it’s starting to show. For years, Apple benefited from cheap labor and a growing consumer market in China. However, with President at the helm, the model isn’t sustainable. President Trump made it clear that all production must take place in the US. The production change treatens a key Apple product. Initially, the Mac Pro desktop was produced at Apple’s Texas plant. Now, the Mac Pro desktop is at the center of a bitter standoff between President Trump and Apple.

Apple’s Texas plant and tariffs

Apple’s calls for waivers on potential trade tariffs on goods produced in China have fallen on deaf ears. The company might have to hike the prices of the next Mac Pro to counter the effects of trade tariffs. Hiking prices on a product that’s struggling on unit sales is the last thing that the company needs. The Mac Pro’s unit sales fell after hitting peak levels in 2015, according to data by Statista.

Apple’s Texas Plant Is Crucial to Avoid Chinese Tariffs

The Mac Pro is one of Apple’s lowest-volume computers. The sales could take a significant hit if Apple has to hike prices to counter any tariffs on Chinese production. A price hike would take the product beyond even the most loyal customers’ reach.

Apple’s Chinese risk

Apple received a lot of praise early in the decade when it started manufacturing the Mac Pro in the US. However, after struggling for years, the company decided to shift the Mac Pro’s production to China. With the US embroiled in a fierce trade war with China, the company might have to rethink its production strategy.

Full production of the Mac Pro at Apple’s Texas plant appears to be the only way out of the proposed 25% tariff on Chinese goods. A continued bet on Chinese manufacturing might hurt the company. President Trump continues to push for US production.

Apple is very vulnerable to a standoff between the US and China. The company produces most of its products in China. Also, China is the company’s biggest market for goods and services, according to Business Insider.

Apple’s dependence on China for production and sales faces its biggest test. President Trump threatened to impose tariffs on $300 billion worth of Chinese goods. The threat could have serious ramifications. First, Apple warned that the tariffs could impact most of its major products. Similarly, the tariffs could harm the company’s economic contribution.

Chinese production exodus

Apple can’t ignore the tariff risk anymore even though it wants to clamp down on spiraling production costs. However, Apple isn’t the only company facing trade tariff risks. GoPro (GPRO) had to shift the production of its US-bound cameras out of China. Amazon (AMZN) and Google (GOOGL) might move their smart speaker manufacturing out of China.

Just like Apple, Microsoft (MSFT) might shift its production out of China. The company’s surface tablets and video game consoles would be subject to US tariffs. According to a report in Nikkei, Sony (SNE) and Nintendo (NTDOF) might move video game console production out of China.

Apple faces the greatest risks if the tariffs on Chinese goods come into play. Most of the company’s products are premium priced, which doesn’t leave any room for more hikes to shrug off the impacts of a tariff. For example, the launch of a $1,000 iPhone in 2017 didn’t bode well with consumers. While the unit sales held up at the beginning, they fell as consumers switched to cheaper alternatives.

Apple can’t hike prices to shield itself from tariffs without experiencing a decline in unit sales. As a result, Mac Pro production at Apple’s Texas plant appears to be the only way out if the company wants to offer the next product for less than $6,000.