23 Sep

Tariff Exemptions for Apple: Will Mac Sales Increase?

WRITTEN BY Namrata Sen Chanda

Apple (AAPL) sees some streaks of hope. US officials partially accepted the company’s request for tariff exemptions on September 20. The USTR (US Trade Representative) and a Federal Register approved ten out of Apple’s 15 tariff exemption requests. The MacBook Pro’s critical internal components and a few Apple accessories will receive exemptions.

US tariff exemption

Previously, President Trump said that he wouldn’t approve the requests. However, the USTR didn’t reject the requests. Apple’s application for exemption from the 25% duties made it to the final review. However, the approval is subject to the Customs and Border Protection’s declaration that it can govern the exclusion of the duties when the goods enter the US.

President Trump ordered a levy of these duties on about $300 billion worth of Chinese imports beginning in September. However, he postponed the tariffs on some consumer products until December.

All of Apple’s products, like iPhones, iPads, AirPods, Apple Watches, and MacBooks, would have been impacted by the tariff. Sensing the trouble, Apple stated in June that it would move its MacBook Pro production from Texas to China. As a result, President Trump softened his stance.

In the earnings call in July, Apple clarified that it wants to keep manufacturing MacBook Pros in Texas. The company has already invested $1 billion to set up an iPhone production base in India. The tariffs on iPhones were delayed until December.

How will the tariff exemption impact Mac’s pricing strategy?

Several companies requested US tariff exemptions. There were more than 1,100 exclusion requests. Most of the electronic products have expensive chips from Intel (INTC), Nvidia (NVDA), and Advanced Micro Devices (AMD). Levying a tariff on the companies would have escalated the input costs and resulted in pricing pressure. The move will result in lower import costs for Apple and other technology companies. The exemptions will also help the companies assemble their devices in the US. The exemptions will expire after a year.

In Apple’s results for the third quarter of fiscal 2018, the company stated that it’s bullish about the 16-inch MacBook and $6,000 MacBook Pro. Currently, Mac contributes 10% of Apple’s revenues. Mac sales rose 11% annually to $5,820 million in the June quarter. Apple said that higher MacBook Air shares drove the Mac segment during that period. In the second quarter of fiscal 2018, Mac reported a 4.6% YoY (year-over-year) drop in sales.

Investors have been concerned about the pricing of MacBook and other Apple products amid the tariff war. In July, Apple slashed MacBook Air and MacBook Pro prices to boost its sales in the back-to-school season. Apple wants to maintain the growth in Mac sales. The previous price cut was a step in that direction. With the tariff exemptions granted, the cost of production won’t increase. Passing on higher prices to customers might be the last thing on Apple’s mind amid the competitive environment. The company will likely absorb the costs if a tariff is levied. A price increase would create pressure on the company’s profit margin.

Apple analyst Ming-Chi Kuo stated that any tariffs levied by the US wouldn’t impact Apple’s pricing in the midterm due to the supply chain moves planned by CEO Tim Cook.

US-China trade war intensifies

On September 20, significant stocks fell amid the trade-war tension with China. A Chinese delegation, which was supposed to visit US farms in Montana, canceled the visit and headed back to China. Earlier, President Trump stated that China would buy more US agricultural products according to a bilateral trade deal. However, the canceled visit made investors nervous.

Trade war puts a focus on tech and chip stocks

Apple stock gained about 40% YTD (year-to-date). On September 20, the stock closed at $217.73. Analysts recommend a “buy” rating on the stock at a target price of $224.74. The target price has a 3.2% upside from the current market price.

Intel stock was trading at a 10% YTD rise, while Nvidia rose 30%. Meanwhile, Advanced Micro Devices posted a 62% YTD return. Despite ongoing trade war tension, Goldman Sachs is bullish on semiconductor stocks. Analyst Toshiya Hari expects that the semiconductor sector’s downtrend is near an end. Most companies will likely stabilize in the future.

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