Dive Brief:

• As trade uncertainty with China continues, Apple has stepped up its plan to potentially shift production out of China after the Trump administration announced the latest round of proposed tariffs, which are expected to have a significant impact on technology imports. According to the Nikkei Asian Review, Apple has asked its suppliers to model the impact of shifting 15-30% of their capacity outside Chinese borders.
• This move comes as Apple prepares for the September launch of its latest batch of iPhones, with production in its Chinese factories already ramping up to meet demand. "We are totally capable of dealing with Apple’s needs to move production lines if they have any," Young-Way Liu, the head of Foxconn Technology Group’s semiconductor business group, said during an investor meeting. Foxconn, one of Apple's main manufacturers in China, has made investments in factories in India and Vietnam that could become more prominent alternatives if Apple goes through with the move.
• Apple testified Thursday in U.S. Trade Representative (USTR) hearings, saying the list four tariffs would "tilt the playing field in favor of our global competitors" who aren't as heavily impacted by U.S. import duties."I'm hoping that doesn't happen," Apple CEO Tim Cook said, referring to tariff escalation in an interview with CBS News. "The truth is, the iPhone is made everywhere ... And so, a tariff on the iPhone would hurt all of those countries, but the one that would be hurt the most is this one."

Dive Insight:

"There is some flexibility to move Mac and other products, but it won’t be easy,” Mehdi Hosseini, an analyst with Susquehanna International Group, told The Wall Street Journal. "You have to have relatively skilled labor. You have to create an inventory hub. It would take time." Furthermore, the bulk of the Apple's components, including lithium batteries, are sourced from China.

Given this reality, moving procurement and production capacity outside the country will be no small feat for the technology giant.

To compensate, Apple has already rushed the production and shipment of some key components for stockpiling, persons familiar with the matter told The Wall Street Journal, in case the fourth tranche of tariffs go into effect, and/or President Trump and Chinese President Xi Jinping cannot reach an agreement at the G20 summit later this month.

The cheap price of labor and components in specialized Chinese manufacturing hubs is a key profit driver for technology companies. Megacities like Shenzhen and Zhengzhou, where well over half of Apple's iPhones are made, have been built around closely integrated procurement and manufacturing supply chains suited for a global range of customers. Thus, shifting supply chains to other Southeast Asian countries like Indonesia, India and Vietnam would require significant time, investment and worker training to get operations up and running.

Apple is not the only firm considering its options if the list four tariffs take effect. Dell, HP, Microsoft and Intel presented a joint statement to the USTR on Wednesday saying the tariffs would require them to raise prices by at least 19%, resulting in a $120 increase in the average retail price of a laptop.

While these companies have not announced plans to leave China just yet, they did state increased prices would have a cascading impact not just on their internal R&D functions and employment capability, but on the small to medium enterprises like local businesses and schools that depend on access to affordable laptops and tablets.