Source | Bohu Finance (bohuFN)

As tariffs loom, Apple is hastily repatriating iPhones to the United States.

According to Reuters, Apple has chartered cargo flights to urgently transport 600 tons of iPhones (approximately 1.5 million units) from India to the U.S. Caixin also reported that several shipping companies operating U.S. routes frantically contacted the Shanghai International Port Group days ago, seeking priority berthing for their container ships bound for the U.S.

Currently, Apple's U.S. warehouses hold over $15 billion worth of iPhone inventory, equivalent to three times the projected fourth-quarter 2024 sales volume in the U.S. market.

In an internal meeting, Apple's supply chain director bluntly stated, "This is a race against time. Every day of delay costs the U.S. warehouse $8 million."

Apple's urgency in repatriating overseas production capacity stems from its need to stabilize iPhone prices through stockpiling before President Trump's tariff policy takes effect.

Minimizing supply chain costs is Apple's forte, enabling it to maintain a remarkable gross profit margin of 40% throughout the year. However, President Trump's executive order on "reciprocal tariffs" signed on April 2 directly impacted Apple's bottom line: within four days of the tariff war's commencement, Apple's market value plummeted by nearly $780 billion.

Yet, tariffs are not the sole challenge confronting the company.

Prior to Apple CEO Tim Cook's visit to mainland China, Bloomberg exposed internal meeting minutes revealing significant delays in the previously announced Siri-related Apple Intelligence features. Additionally, Apple encountered setbacks in its car and headset projects.

Unlike his predecessor Steve Jobs, who was known for his paranoia and unconventionality, Tim Cook embodies more of a businessman's role.

Although Apple no longer holds the same iconic status in the hearts of tech enthusiasts and global consumers, its aura is slowly fading. In the first quarter of this year, Apple's market share in China dropped from third to fifth compared to the previous year.

Cook navigates the corridors of power, maintaining good relations with governments, and has built a supply system that has transformed Apple into the most profitable company on the planet, while also maintaining its edge in areas such as chips.

Amid this new crisis, can he still steer Apple out of its predicament?

01 Changes in the Apple Supply Chain

Bohu Finance has previously discussed numerous challenges facing Apple, but the tariff shock is undoubtedly the most significant.

While mobile phone components are not as intricate as those of automobiles, they still number in the thousands. Under Cook's leadership, Apple has established a sophisticated global supply chain. Taking a Chinese-made iPhone as an example, its chips originate from Taiwan, China, its camera modules from Japan, and its acoustic components and batteries from mainland China. These components are ultimately assembled in China and distributed worldwide.

China's supply chain occupies a pivotal position in this setup.

Apple has previously disclosed its list of global suppliers. In fiscal year 2023, 98% of Apple's direct spending on global product materials, manufacturing, and assembly went to 187 suppliers and 470 main production sites. Notably, 84% of these 187 suppliers have production facilities in China.

According to recent news, U.S. tariffs on China have risen to 145%. Any changes in these tariffs will initially lead to an increase in the prices of end products.

American media estimates suggest that the official price of the 256GB iPhone 16 Pro in the U.S. is $1,100, with a total hardware cost of approximately $568. If an additional 54% (note, not the current 145%) tariff is imposed, the cost of this phone will soar to $876.79, marking an increase of over 50%.

Morgan Stanley estimates that additional tariffs on China will add approximately $8.5 billion in costs to Apple annually. For comparison, Apple's net profit in the fourth quarter of last year was $36.33 billion.

Rising product prices will invariably lead to a decrease in demand. The Americas region is Apple's largest source of revenue, accounting for 42.7% of fiscal year 2024 revenue. It is imperative that the U.S. remains a fundamental market for Apple. Therefore, the company is desperately repatriating overseas production capacity to its home country before the tariff policy takes effect, aiming to stabilize short-term pricing through stockpiling.

Will Apple maintain pricing by passing costs onto suppliers?

According to Bohu Finance, major Apple supply chain companies such as Luxshare Precision and GoerTek have stated that the "reciprocal tariffs" have a limited impact on their operations. Suppliers and Apple predominantly adopt the FOB model (Free On Board), where supply chain enterprises do not bear tariffs, which are instead borne by the importer (customer). Companies including Lens Technology and Luxshare Precision also have overseas production bases.

Furthermore, due to Apple's market position, many supply chain links, particularly assembly, have relatively low profit margins. Profits in the assembly segment are particularly thin, and profitability relies heavily on scale, leaving little room for price reductions. Compared to factories in other regions like India, China's supply chain generally excels in efficiency, quality, and other aspects, providing some negotiation leverage to Apple's supply chain partners.

During a visit to GoerTek's factory in Weifang, Shandong, Apple COO Jeff Williams remarked, "The biggest characteristic of Chinese suppliers is 'can do.' They are capable and willing, which is difficult for other suppliers to match."

While Apple is also responding to President Trump's manufacturing repatriation plan, establishing a factory in the U.S. to assemble iPhones will take at least five years to commence production. Dan Ives, a senior analyst at Wedbush Securities in the U.S., noted that if Apple detaches from its original supply chain system and produces iPhones in the U.S., the selling price would be more than three times the original.

If the tariff policy does not improve in the short term, Apple may need to expand the scale of supply chain transfers and build capacity in low-tariff regions. However, the impact on Apple is destined to be significant.

02 Can Apple Wait for AI?

Beyond tariffs, another concern is Apple's progress in AI.

Historically, Apple has not been absent from investing in innovative ventures. In public reports, Apple has two of the most notable new projects: a fully autonomous driving car and a headset device.

Since 2014, Apple has been laying out its plans to build cars, recruiting over a thousand engineers to develop electric vehicles in California under the name "Project Titan." In 2019, Apple acquired the autonomous driving startup Drive.ai. According to related media reports, Apple spends over $1 billion annually on car manufacturing.

However, this venture ultimately ended with Apple officially announcing its abandonment, prompting Xiaomi CEO Lei Jun to exclaim, "I don't know why Apple didn't make it."

Apple did manage to produce a headset device and introduced new terms like "spatial computing." Nevertheless, this new product failed to deliver a revolutionary experience akin to the iPhone 4, and its price of $3,499 made it unattainable for many consumers. A report from market research firm Counterpoint Research shows that Apple Vision Pro shipments fell by 43% quarter-on-quarter in the fourth quarter of 2024, with market share also declining accordingly. By the end of 2024, Vision Pro sales were less than 500,000 units.

In the face of the AI era opportunity, Apple is encountering difficulties. At last year's WWDC, Apple dedicated half of its time to its own AI, Apple Intelligence. However, recently, Bloomberg revealed that Robby Walker, the senior director of Apple's Siri team, bluntly stated in an all-hands meeting that the company prematurely promoted Siri's AI upgrades before they were ready. Moreover, these features may not even be released in iOS 19.

More concerning than Apple's slow progress is the rapid advancement of its peers. Google, Microsoft, and Meta, all members of the so-called "FAANG+M" group of leading tech stocks, have made significant strides in large models. For instance, Google's Gemini AI has been integrated into Android devices.

Currently, Apple must confront the collapse of the old order – the tariff war has largely eroded the cost advantage that forms the bedrock of its profitability, while the lag in AI casts a shadow over Apple's future prospects. At least based on current consensus, it is widely believed that AI will drive innovation in hardware.

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