Apple’s Workaround Takes Bite Out of Tariffs

U.S. tech giant Apple has reportedly asked its major suppliers, mainly China-based manufacturers from Taiwan, to consider moving 15 to 30% of their production outside of China to avoid higher tariffs imposed on U.S.-bound exports.The production migration, which analysts say is already ongoing, will hurt the tech giant’s profit margin, but also lead to massive job losses in China.They add that such shifts have also occurred over the past year among other China-based tech suppliers and the trend will continue if the trade war between the world’s two biggest economies keeps escalating.“Over the past year, to my understanding, manufacturers in the information [technology] sector, for example, [China-based Taiwanese] suppliers of personal computers or consumer electronics have moved faster than handset makers and relocated [part of] their assembly lines outside China,” says Sean Kao, senior research manager at IDC Taiwan on worldwide hardware assembly research.Caught in the CrossfireTech companies such as Apple are caught in the crossfire of U.S.-China trade frictions and face the threat of heavy punitive taxes on their China-made, U.S.-bound products.Earlier this month, U.S. President Trump said he would decide whether to slap Beijing with further tariffs on another US $300 billion worth of Chinese goods after he meets with Chinese President Xi Jinping at G-20 later this week.Citing anonymous sources, the Nikkei Asian Review reported last week that Apple is planning on production shifts to avert the threat. According to the report, Apple has asked its major iPhone assemblers including Foxconn Technology, Pegatron and Wistron to evaluate the cost of moving their assembly lines, which manufacture U.S.-bound iPhones in China, to other southeastern Asian countries.A woman uses her smartphone as she walks past a display for the Apple iPhone XR at a supermarket in Beijing, Tuesday, May 14, 2019. Sending Wall Street into a slide, China announced higher tariffs Monday on $60 billion worth of American goods.Apple has not commented publicly on the report.Wistron and Foxconn have already made some headway, setting up factories respectively in Bangalore and Chennai, India. But Kao says those moves are more about tapping the Indian market.Foxconn chairman Terry Guo has also said that should the need arise to adjust production lines, his company already has enough capacity outside of China to meet Apple’s demand in the U.S. market.Pegatron is also readying itself to set up assembly lines in Indonesia, Kao added.Production DiversificationSuch diversification of production sites will give manufacturers the flexibility to assemble U.S.-bound iPhones outside China when necessary, says Liu Meng-chun, director of the Chung-Hua Institution of Economic Research’s (CIER) mainland China division in Taipei.Neighboring countries such as India, Vietnam, Indonesia, and Taiwan are reaping benefits, he said.In the first five months of this year, for example, Taiwan’s U.S.-bound exports posted a 15% year-on-year growth. U.S. Census Bureau statistics showed that imports from Vietnam jumped 40.2% year-on-year in the first quarter of 2019.China, on the other hand, is being hurt by the shift, he added.“The biggest and most significant impact is on China’s employment. There have been massive job losses and China is facing a problem of growing unemployment, even though authorities are not spelling it out clearly,” Liu said.China last week said its employment rate remains stable with the service sector contributing a larger share of the job market last year.According to government data, the urban jobless rate stayed steady at 5% in May, still below the annual target of around 5.5% set for 2019.Job losses?But fewer jobs and lower pay are already being felt by China’s export industries as factories are reportedly downsizing, cutting overtime hours and relocating overseas.That is expected to hurt China’s long-term goal to count on domestic consumption to boost the economy as the spending power of the nation’s 280 million migrant workers will feel the pinch.  In addition, the loss of American clients, who demand better-quality products, could mean that China’s export industries may be less motivated to move up the value chain as their local consumers are more price sensitive, Liu said.Kao says it’s still too early to tell.So far, only low-end assembly lines are being relocated overseas, he notes, adding that only when higher value-added production lines move will China see a bigger impact.Both analysts say that even if the cost of manufacturing has risen significantly, suppliers will only relocate overseas to places where problems of labor training, logistics issues and the clustering of supportive industries in that location have been addressed.  Even if the worst happens, China may still find opportunities. Top talent that may be laid off by U.S. companies that relocate, may jump ship to work for local companies and help boost local rivals’ innovation capability, Kao says. 
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