Tim Cook’s pitch to Trump that Apple will lose the edge to Samsung because of tariffs makes no sense

President Donald Trump met with Apple CEO Tim Cook on Friday for dinner.
Trump told reporters from Bloomberg, Fox, and CNBC that Cook had made a "compelling argument" that tariffs on China would hamper Apple’s ability to compete with main smartphone rival Samsung.
If Cook did make this argument, it doesn’t make a lot of sense. Apple is already behind Samsung on smartphone sales, and it doesn’t have anything to do with tariffs.
An increase in iPhone prices might mean existing iPhone customers are even slower to upgrade than usual, but that has nothing to do with Samsung.

President Donald Trump met with Apple CEO Tim Cook on Friday over dinner, and subsequently told reporters that the pair discussed upcoming US tariffs on China.

Trump told reporters from Bloomberg and other outlets on Sunday that Cook had made a "good case" about tariffs making it tougher for Apple to compete with Samsung, its key rival in smartphones.

"Tim was talking to me about tariffs and one of the things, he made a very good case, is that Samsung is their number one competitor and is not paying tariffs because they’re based in South Korea and it’s tough for Apple if they’re competing with a very good company that’s not," he said.

Trump said Cook had described Samsung as a "very good competitor."

He added: "I thought he made a very compelling argument, and I’m thinking about it."

Apple is due to be slammed with 10% tariffs in the next few months, because it makes the bulk of its devices in China and then imports them to the US and globally.

Tariffs will affect the iPhone, iPad, and laptops from December 15, while levies on the Apple Watch and AirPods will come into effect from September 1. Apple could raise prices as a result, making its pricey devices even pricier.

It’s true that a price hike will make Apple less competitive than its rivals. But Cook’s purported argument that Apple will lose out to Samsung specifically because of the tariffs doesn’t make a lot of sense — the firm is seeing a massive decline in iPhone sales for a number of factors unrelated to tariffs.

A caveat: This is Trump’s version of Cook’s remarks. We haven’t heard directly from Cook or Apple.

Apple has chosen to remain a luxury brand, which is why it lags Samsung on market share

Tomohiro Ohsumi/Getty Images

Apple has been struggling to beat Samsung on market share for years, because it’s never really offered an affordable iPhone.

Its "affordable" iPhone 5C was widely considered to be the worst model it ever released, while the supposedly cheap iPhone XR was still out of reach for the really budget-conscious consumer, with a starting price of $749.

Meanwhile Samsung and Huawei have managed to increase their market share over the last few quarters, IDC data shows, while Apple has seen quarterly declines.

IDC

This is largely down to Apple’s decision to remain a luxury brand, pricing the iPhone higher than competing devices.

This has been a good model while there was a loyal cabal of users willing to regularly fork out for expensive devices. Apple didn’t need to worry too much about market share dominance while it had the margins.

But the approach has meant it’s missing out on the millions of consumers in emerging markets who are buying their first internet-connected device. These consumers, in places like India, China, and Latin America, are skipping buying PCs or laptops, and turning to cheap entry-level Android devices as their first internet device.

Samsung, meanwhile, is eyeing up the mass market. The firm said it saw "weak sales" of its flagship device and iPhone rival the Galaxy S10 in the second quarter, but said its solution would be to produce more of its budget A-series of phones.

This tells us that Samsung is, in fact, struggling in the one area where it really competes with Apple — high-end smartphones. It’s having to turn to budget phones to get new consumers on board. Given this situation, Cook’s yoking of tariffs to Samsung doesn’t make a lot of sense.

Of course, what Apple is really worried about is declining margins. Should Apple have to pay tariffs, that will absolutely dent its hardware margins and it isn’t yet clear whether Apple will absorb the additional costs, or pass them onto the consumer.

The real trouble is that pricier iPhones will mean a further slowdown in upgrades

The issue for Apple is, perhaps, that an iPhone made pricier by tariffs will accelerate an existing trend: loyal Apple customers aren’t upgrading their iPhones so frequently. It’s why iPhone sales have been in decline for months.

Surveys show not that iPhone users are switching to Samsung or other Android devices, at least not in bulk, but that they aren’t upgrading to new iPhones. CEO Tim Cook said in January that people were taking longer to upgrade.

"We do design our products to last as long as possible," he told analysts during an earnings call. "Some people hang on to those for the life of the product and some people trade them in and then that phone is redistributed to someone else. The upgrade cycle has extended, there’s no doubt about that."

So anyone who bought a $1,000 iPhone X is unlikely to upgrade to a new-generation iPhone if their existing device is working fine, and if the price increase is prohibitive.

In other words, tariffs might exacerbate Apple’s competition with itself — which has nothing to do with Samsung.

NOW WATCH: Why Apple’s Mac Pro ‘trash can’ was a colossal failure