It’s been quite the rollercoaster ride for US and China on talks of trade and tariffs. I am of course referring to the Trump administration who proposed a 25% tariff on some 1,300 Chinese imports, then agreeing to suspend the $150 billion in tariffs, but soon after said the US would move forward with tariffs on $50 billion of Chinese imports.
Many fear these new tariffs will heavily impact the US and Chinese smartphone market. That’s because the tariffs will hike up the price of devices made in China.
Putting the trade war aside, China also faces uncertainty over the fate of ZTE. The Chinese manufacturer is still unsure how the violation of its trade agreement will manifest—and how this could inhibit the production or sales of its devices in the US. Major US carriers like T-Mobile already announced that they will stop the distribution of ZTE devices to its subscriber base.
In light of this, it’s no surprise that the smartphone market is concerned over the triggered patriotic rhetoric with the Chinese. Apple is naturally fearful of how tensions could adversely impact sales in China. Especially when we have seen companies like Samsung fall from having a 20% market share to 2% over a five-year period, stemming from political backlash due to tensions between Seoul and Beijing.
How Will Trumps Tariffs affect the Apple Smartphone Market in China?
But even before these escalations, Apple’s overall Chinese smartphone sales were slowing down—sales were being impacted by the cost of Apple devices as well as locally manufactured devices entering the Chinese market that were competitive in terms of functionality, and cheaper for the consumer. China represents roughly 20% of Apple’s revenue and is expected to be a big area of future growth for the OEM this year. A tariff or other kind of trade-war could end up with one or multiple downsides for Apple: (a) A tariff resulting in a price increase on an already historically high-prices device; (b) As many of Apple products are manufactured in China, this could cause a disruption in supply chain or boycotts or (c) Costs associated with such disruptions being passed onto customers.
Apple has already hinted at a lower sales volume by announcing a 20% reduction in parts ordered from its key suppliers; too early to say if this is in anticipation of tariffs arising from a trade-dispute or not.
As of now, Apple is the only dominant non-Chinese brand in the China smartphone market. And that’s despite the average selling price of an iPhone being almost $500 more than the local brands. The height of Apple iPhone sales was in 2015, driven by the launch of the iPhone 6. Given that this was a few years ago, it seems that there is a large number of Chinese users ready for an upgrade cycle. Which mean barring any politically motivated setbacks, Apple should have a great year in China.
We must also consider the future plight of the secondary renewed device market. The residual values of the iPhone have contributed to a significant global success story. In fact, it has created a circular economy where all of its stakeholders, OEMs, operators, retailers, insurance companies and the environment all benefit. But its ability to return value is impacted by the price points of new devices and consumer willingness to enter an upgrade process every 18-24 months.
Any further increases to new smartphone prices, due to tariffs, will lead to existing upgrade cycles lengthening further. HYLA Mobile’s own data reveals that the average cycle is currently around 2.66 years in the US. The secondary device market is now a multi-billion-dollar business for its stakeholders, which also generates significant income tax for national governments. Apple’s iPhone and its strong residual value underpins the economics of this market—again, from our own data we know the top five traded smartphones in Q1 of this year were all iPhones. Any impact on prices for new devices will affect them at trade-in and create a frustrating stalemate where nobody wins. Certainly not the US economy in any case.