US-China trade tensions could spark changes to Apple’s production (AAPL)

US and China trade tensions are boiling and have already spilled over to the smartphone market. Last month, when the US more than doubled tariffs on $200 billion of Chinese goods, China retaliated by taking $60 billion worth of US goods that previously had tariffs of 5-10% and placing those items into four new tariff groups: 25%, 20%, 10%, and 5%, according to The New York Times. Companies involved in the smartphone market are not immune from the effects of this retaliation.

Here’s what it means: The escalating trade war could lead major phone brands like Apple to shift their centers of production.

Foxconn, Apple’s biggest iPhone manufacturer, said it could move all production of US-bound iPhones out of China if needed. Apple is getting caught in the crossfire of the escalating trade war with China — like other companies, it faces a possible 25% tariff on all its goods shipped from China to the US.

The US is a particularly important market for Apple, as the Americas, which includes the US, accounted for 44% of Apple’s $58 billion in revenue in fiscal Q2 2019 (ended March 30, 2019) — the largest share of any geography. As tensions continue to mount, Foxconn is reassuring the tech giant that it can meet Apple’s needs by shifting US iPhone production out of China to help the company avoid possible tariffs. In fact, Foxconn says that 25% of its manufacturing capacity is outside of China already.

The bigger picture: As rising US-China tensions compel brands to look outside of China for manufacturing, the geographic concentration of the smartphone industry could be rebalanced.

Moves like Foxconn’s potential shifting of manufacturing of US-bound iPhones away from China would mean changes for its supply chains and likely require new facilities. However, moving operations to a new location isn’t cheap, as it entails new machinery, facilities, and training a new workforce. These additional costs would likely be passed on to consumers through raised smartphone prices, in turn hurting the company’s ability to sell new phones.

That’s an issue Apple doesn’t need right now — the company’s iPhone revenue fell 15% year-over-year (YoY) to around $52 billion in fiscal Q1 2019 (ended December 29, 2018). Moreover, additional iPhone production could follow US iPhones out of China as it would likely be more economical to make the phones at scale.

This exodus of iPhone production to new plants could establish a new location — such as India, where Foxconn is already invested in building high-end iPhones — as the new major hub for smartphone production.