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Apple’s iPhone Could Cost 3% More to Produce Due to China Tariffs

May 14, 2019, 6:45 PM UTC

Apple’s iPhone production costs will rise as much as 3% because of new tariffs imposed by China, an analyst report said on Tuesday.

Tariffs on the device’s Chinese-made batteries and other components would increase its manufacturing cost by 2% to 3%, Wedbush analyst Dan Ives told investors.

To recoup the same profit on each iPhone sold as before, Apple would need to increase iPhone prices by a similar amount. The price of an iPhone XS, for example, would rise from $999 to as much as $1,029.

But Ives suggested that Apple’s costs could soar higher if the Trump administration follows through with a plan to add an additional $325 billion in tariffs to Chinese goods. If that happens, iPhones would cost an extra $120 each to produce, Ives said.

Ives’ estimates are just the latest by analysts about the impact of the U.S.-China trade war. Last week, that fight entered a new phase when the Trump administration announced $200 billion in new tariffs on Chinese imports. On Monday, China retaliated by announcing $60 billion in tariffs on U.S.-produced batteries, coffee, and other products. Those tariffs will take effect on June 1.

Apple, which does most of its manufacturing in China in addition to sourcing most of its components from there, is especially vulnerable to the U.S.-China trade war. It’s why Apple CEO Tim Cook has encouraged the two countries to negotiate a truce before more damage is done to international trade.

Last year, Cook personally lobbied President Donald Trump to exempt the company’s products from tariffs, according to reports at the time. It appeared to work: Trump’s tariffs, announced shortly thereafter, exempted laptops and smartphones. However, under Trump’s newly proposals, the devices would be subject to the tariffs.

Ives worries that a 3% increase in iPhone manufacturing costs would significantly impact Apple’s profits. If Apple increases prices, fewer consumers would buy the phone and the company’s profits would therefore fall 50 cents per share this year. However, if the company keeps iPhone prices unchanged, and absorbs the extra cost, its earnings could drop by as much as $1.30 per share.

On Monday, investor worries about declining Apple profits helped to send the company’s stock tumbling nearly 6% to $185.72. On Tuesday, Apple’s shares rebounded nearly 2% in mind-day trading to $189.18.

Ives cautioned that investor worries may be overblown. Even with increased production costs, Apple’s shares are “attractively priced,” he said.

“We remain firmly bullish on [Apple] shares, despite many yelling fire into a crowded theater,” Ives told Fortune.

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