Why Apple is in significant trouble if keeps attacking China in the trade war

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If President Donald ’s trade war with China heats up further, Apple’s already weak stock price could fall through a trap door.

And it would be justified.

Apple’s (AAPL) stock has tanked about 12% over the past month, according to Yahoo Finance data as trade war fears hammer scores of corporate giants overly reliant on China for their business. The tech giant’s stock has plunged below the 50-day, 100-day and 200-day moving averages — a clear sign that traders think Apple’s financial prospects will soon take a turn for the worst right along with global trade conditions.

“I think Apple is in significant trouble in China. And this explains why they are trying to diversify their Asian footprint,” China expert and author Parag Khanna said on Yahoo Finance The First Trade. “Unless Apple could diversify beyond its dependence on China and Asia, it’s going to be a downhill story for them.”

Apple’s out-sized dependence on China should be obvious to anyone that could read an annual report. The Tim Cook-led tech company relies on hundreds of suppliers in China to produce its iPhone, iPad, Apple Watch, and other tech gadgets. The Apple production model has for years been centered on making products for as cheap as possible mostly in China, and then profiting from big markups on U.S. consumers.

But with an unpredictable president in appearing ready to enact stiffer tariffs on China, Apple will likely be forced to shift portions of its production outside of the country.

That will come at a sizable cost for Apple in two ways. First, production costs will go up as Apple moves to higher cost regions like India. And two, Apple would have to implement price increases on its products to offset its higher costs, which could wallop demand by consumers.

In the meantime, souring relations between the two economic superpowers may dent demand for Apple products in China. Why should the Chinese buy Apple products and digest their associated American stigma when a cheaper alternative from their own country could be had?

Apple sales in China

Keep in mind Apple derived $51 billion in sales from its “Greater China” segment in the fiscal year ended September 29, 2018. The segment represents Apple’s third-biggest region, behind the Americas and Europe.

An argument could be made that Apple’s sales in China have already been hit by nationalism.

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“We believe the economic environment in China has been further impacted by rising trade tensions with the United States. As the climate of mounting uncertainty weighed on financial markets, the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed. And market data has shown that the contraction in Greater China’s smartphone market has been particularly sharp,” Cook wrote in a letter to investors in early January.

Apple’s sales in greater China for the six-months ended March 30 plunged 25% to $23.4 billion.

“I pity the chief operating officer of Apple who has to really re-engineer a supply chain,” said Weeden & Co. Global Chief Strategist Michael Purves,

The Apple investor will be in need of some pity, too, if the trade situation gets ratcheted even higher.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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