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BREAKING NEWS

It's not just iPhones. More tariffs could be a 'gut punch' to U.S. tech sector

Image: An Apple Store employee uses an iPhone during the grand opening and
An Apple employee with an iPhone during the opening of the Apple Carnegie Library store in Washington on May 9. -
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Clodagh Kilcoyne Reuters
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President Donald Trump has yet to decide if he will raise tariffs on $325 billion in Chinese goods, but the possibility has already spooked the technology industry — and would deliver a "gut punch" to American consumers, tech experts say.

"We have the right to another $325 billion at 25 percent in additional tariffs" on Chinese goods, Trump told reporters at the White House on Monday, adding, "I have not made that decision yet."

Last week, Trump made good on his threat to slap a 25 percent tax rate on $200 billion of Chinese imports in an attempt to force the Chinese to buckle to his demands over trade. China responded by raising tariffs on $60 billion of American-made imports. On Tuesday, Trumpdismissed the ongoing standoff, which has embroiled markets across the globe and wiped billions off company valuations, as "a little squabble."

But tech analysts say that if Trump's newest threat were to become a reality, the additional tariffs could affect the supply chain for products such as Apple's iPhone, since the company relies heavily on its flagship Foxconn factory in Shenzen, China.

In that case, Apple could choose to pass on the increased cost of production to consumers, charging them as much as $160 more for a new iPhone, according to analyst estimates.

"Where this becomes a game-changer, not just for Apple, but for consumers, is if the Trump administration decides to go after the $325 billion of other goods. That's where the gut punch is," said Daniel Ives, managing director of equity research at Wedbush Securities.

With the new tariff potentially levied on $30 billion in circuit boards, computer parts and telecommunications devices, semiconductor companies such as Intel, Nvidia and Micron could also experience a disruption in their Chinese supply chains, pushing up the cost of components and making production more expensive.

Many semiconductor companies are heavily exposed in China, where they both sell their products and manufacture them to be sent to the United States.Qualcomm and Broadcomgenerate more than half of their revenue in China. Texas Instruments, which makes everything from semiconductors to graphing calculators used in American high school and college math classes, has 44 percent exposure in China.

For Apple, the threatened increase in tariffs could make way for the most "draconian" scenario, which could increase the cost of iPhone production, according to Ives.

"They'd have to pass on $100-plus price increase to the consumer," he said. "Otherwise, if they didn't, it would be about a 10 percent cut to their bottom line."

Katy Huberty, a managing director and equity research analyst at Morgan Stanley, said under that scenario, Apple could charge customers as much as $160 more per iPhone XS. That would likely soften demand for upgrades, and would result in "considerable ramifications across Apple's supply chain," Huberty said.

In that event, Apple would likely take the hit, she said, which would wipe 23 percent off its 2020 earnings.

Another option is for companies to move their operations outside of China, but that could take several years and involve increased risk.

While investors are "banking on the $325 billion hitting," Ives said there could be some good news.

"We continue to believe that Apple and many others will stay on the exempt list and not see the wrath of that tariff, which is why we remain steadfastly bullish on the stock," he said.