A China Ban Could See Apple Earnings Fall By Almost 30%: Goldman Sachs

There is no truce in sight for the acrimonious trade war between the United States and China. In the latest escalation to that trade war, the US Commerce Department blacklisted the Chinese telecom equipment making giant Huawei after US president Donald Trump issued an executive order banning US telecom companies from selling or purchasing goods or technology from those foreign entities that are deemed to be a national threat.

And if China now follows up that action of the US with a retaliatory ban on US companies – Apple for example, it would significantly impact the bottom of the iPhone maker, believes an analyst at Goldman Sachs. There can be a drop of at least 29 per cent in Apple’s earnings if the Chinese government banned its products and technology in China, said analyst Rod Hall of Goldman Sachs in a note to the bank’s clients.

In its fiscal second quarter, more than 17 per cent of the total sale revenue was accounted for by its sale in China which was at $10.22 billion. Every year, iPhones worth billions of dollars are sold by Apple to customers in China.

“Should China restrict iPhone production in any way we do not believe the company would be able to shift much iPhone volume outside of China on short notice,” Hall said. “We believe that Apple is near its annual rapid ramp of new iPhone production to prepare for new device launches in the Fall so even a short term action affecting production could have longer term consequences for the company.”

The banning of Apple’s products in China could also result in a significant impact to the country’s “tech ecosystem” and local employment, Hall also said in the client note. A large portion of the supply chain of the iPhone maker is based in mainland China and includes the facility where Apple’s iPhones are finally assembled and that facility is run by Foxconn.

Fears among Apple investors about an escalation of the trade tensions between the US and China resulted in a 7 per cent drop in its share prices for the month through Tuesday’s close. Earlier in May, US president Donald Trump increased import tariffs on Chinese goods worth $200 billion from 10 per cent to 25 per cent. That move was retaliated by China soon after, by raising the tariffs on import of US made products worth $60 billion.

The big exposure that Apple’s business has to China has been a cause of concern for a number of analysts including Hall. For example, the price target on the tech giant Apple was cut to $174 per share from $180 by HSBC analyst Erwan Rambourg on Monday. On the other hand, prediction that for every 5 per cent fall in Apple’s sale in Greater China, there would be a fall of about 15 cents a share for Apple’s earnings per share, said Credit Suisse analyst Matthew Cabral on Tuesday.

(Adapted from CNBC.com)

Categories: Geopolitics, HR & Organization, Regulations & Legal, Strategy, Sustainability, Uncategorized

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