The Goal of Tariffs
Markets don’t like uncertainty, which in part explains why Monday’s trading session eliminated $1.4 trillion of the market cap, about 3x more than the combined proposed US ($325B) and China ($60B) increases in tariffs. We see a gross misunderstanding regarding the mechanics of these tariffs. The goal of levying tariffs on China is to penalize China-based companies selling competing products in the US. For example, a steel supplier in China is at a high risk of increased tariffs because they are competing with US-based steel producers. Similarly, a phone manufacturer like Huawei is at high risk of increased tariffs, given its products compete with the iPhone.
Indications Suggest Apple Has Little Risk
Despite the widespread speculation related to which products and companies will be impacted, the truth is no one knows how this will play out. Even after we hear details from the Office of the United States Trade Representative (USTR), the impact will still be in question, given the uncertainty about how consumers will react. In the case of Apple, there are similar unknowns, but we do have 3 indications that the company is at little risk. First, US policymakers aim to protect US companies, and Apple is the most successful US company in China. Second, Apple has historically avoided tariffs. Third, it is unlikely that China would impose import tariffs on US goods manufactured in China as that would discourage US companies from manufacturing there. Keep in mind, Apple indirectly employs about 1m Chinese workers to assemble its products.
That said, we view Apple’s biggest risk coming from Chinese consumers boycotting Apple products to damage what is a symbol of US success in China. In the Dec-18 quarter, there were calls on China social media to boycott Apple products due to growing trade disputes with the US along with the arrest of Huawei CFO Sabrina Man in Canada (which triggered a boycott of Canada Goose Holdings). This may have played a role in China iPhone units declining 40% y/y in Dec-18 after being up nearly 20% yy in Sep-18 (Loup estimates).
Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio.