A couple of weeks ago, my wife gave me an iPhone 14 Plus for my birthday. This was to replace the iPhone 8 I had been using since December 2017. You read that right. The smartphone I had been using was over seven years old. Talk about a dinosaur, huh? Both the phone and its user.
Interestingly, I have found my new phone doesn’t really do anything terribly different than my old one. I text and email the same way. My apps all seem to be doing the same things. Due to my relative disinterest in photography, the camera isn’t a big bonus either.
When push comes to shove and where the rubber meets the road, based on how I use my smartphone, I am not sure what the real differences between the two are. I mean, other than the fact my previous one was so old, by industry standards, the earpiece didn’t work properly. In fact, the earpiece didn’t really work at all.
Still, as for MY day-to-day usage, the functionality seems to be about the same. Someone else might have a completely different experience.
Don’t get me wrong. It was a very sweet gift, as I absolutely loathe, and I mean loathe, going to the phone store. I have always felt the sole purpose of these places is to pick me off. You know, sell me a product or service I don’t really need or even understand. In truth, I would rather have an eye exam or my teeth cleaned. Seriously.
It is as though the whole smartphone industry is based around buffaloing the client. If you want any proof, consider how I used the same smartphone for almost eight years, and couldn’t tell you why my new phone is in any way superior to my old one.
Well, except for the earpiece, of course.
Now, this morning, the administration announced it was going to slap Apple Inc. with a 25% levy on the iPhones it imports into the United States. That is essentially to say all of them. President Trump doesn’t just want Apple to move production from China to, say, India. No. He wants Apple to make the things here.
Fair enough, and I am sure there are plenty of folks who think this is a swell idea. That all Apple needs to do is “flip” a proverbial switch somewhere, and voila! Made in America, baby. USA USA! However, it really isn’t as simple as all of that. If for no other reason, Apple truly is a multinational company.
Sure, Apple is American in that it is domiciled and headquartered here, but its target market is global. After all, there are over 8 billion in the world, and only 340 million live in the United States. That means over 95% of the potential global market for smart/cellphones is someplace other than here. In fact, the United States accounts for less than 50% of Apple’s revenue.
In fiscal year 2024, Apple generated 42.7% of its revenue in the “Americas.” This would include North, Central and South America. The old Western Hemisphere if you will. The U.S., Canada, Mexico, Brazil, Argentina, Chile, the Caribbean and the rest of the lot. Combined, these countries accounted for, again, just under 43% of total revenue.
Europe represented 25.9% of the company’s gross revenue. Japan was around 6.4%. China, the much-feared dragon, accounted for 17.1% of the company’s sales. Finally, the nebulous “rest of Asia Pacific” brought it home with 7.8%.
Again, that is how the company reports its geographic segments. Other than what I have presented, as Sgt. Schultz might have said: “I know nothing.”
The reason why this is important is because investors would rather the company focus on increasing its roughly 15% market share in places like China and South America. Spending an untold amount of capital moving its production facilities and industrial supply chain to the United States should be the last thing on Apple’s mind. It doesn’t make good business sense for the company, as in at all.
Conversely, Commerce Secretary Howard Lutkin has been on national television debating Margaret Brennan about how Apple onshoring its manufacturing would be a huge GDP boost for the United States. Maybe, but, then again, maybe not. After all, building redundant capacity doesn’t make Apple any more efficient or profitable. Far from it. The opposite is actually true.
Obviously, the less profitable the company is, the less valuable its stock will be. This isn’t overwhelming insight.
For instance, let’s assume the company moves one-third of its production to the U.S. to meet domestic demand and avoid President Trump’s tariffs. A certain Dan Ives, the global head of technology research at Wedbush Securities, estimates it would cost Apple $30 billion and take three years to move 10% of its production to the U.S. So, 33% would be what? $99 billion?
Further, Ives estimates an American-made iPhone could be as much as three times more expensive than one made in China due, essentially, to less mature and more inefficient industrial supply chains.
So, it would cost $100 billion to make phones which are three times more expensive? Any guess as to what that would do to the stock price?
If we assume domestic demand remains constant for iPhones which cost 2–3X more than they currently do (which it wouldn’t), and focus solely on the $100 billion relocation costs, the following math is a decent estimate. However, it should NOT be considered either exhaustive or 100% accurate. It is only an estimate:
By a lot, I mean the market capitalization equivalent of 7.05 Southern Companies or, get this, 36.25 Regions Financial Corporations. Again, that math uses only one-third of the estimated relocation expenses.
Now, what IF demand in the United States falls, say, 25% due to the higher costs of American-made iPhones? That would be a decrease in net income of around $20 billion (my math was actually closer to $23 billion). IF we assume this, a stock price of $110–115 would be very possible, and could even be somewhat optimistic.
At $110/share, that would be a $1.370 trillion drop in market capitalization from yesterday’s closing value. That works out to be a little over $4,029 per American.
This begs the question: just how important is it to make these phones in the United States? Could we perhaps quantify the benefits so we might come to a better understanding?
That is the sort of thing I would like to know before the administration starts threatening individual companies with tariffs. It is much easier to take a stab at what would happen to Apple’s bottom line than it is to guess at our future trade balance with, say, Hungary.
Don’t we need to be supporting U.S. companies and businesses? Whew.
Let me leave you with this. I can’t really tell a dramatic difference in functionality between my new iPhone and my old one, and I doubt I am alone in feeling this way. This would make it a relatively elastic product. Now, what happens to the demand for elastic products when their price goes up?
Trust me, Apple knows this, and certainly doesn’t have any intention of “locking in” higher production costs by moving production to the United States just because President Trump wants it to do so. It will sit on Foxconn, its primary contract manufacturer, who will sit on its subcontractors, etc. It will reduce redundancies, cut non-necessary expenditures and increase prices where it can. Finally, there is another national election in less than 18 months, and the company will slow roll it until then.
As it should, because this too shall pass.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.