US-China trade war won't affect smartphones immediately. Unless ...

Biju Nair / HYLA Mobile

As promised, the Trump administration published its list of Chinese imports that could face a potential 25% increase in import duty. Critically, this list of some 1,300 imports includes products used for communication technology. Many feared that these new tariffs would heavily impact the US and Chinese smartphone market. Given the aspirations and market shares of the likes of Apple and Huawei, this could have had significant financial consequences for both countries.

Both countries are acting in their respective national interests. The US is also trying to balance out a wider perception that international trade rules are biased towards Chinese rules of engagement. Having said that, the escalating rhetoric and threat to implement tariffs and bans on certain products, if left unchecked, could move in a direction so as to risk what has been a largely harmonious, and massively lucrative smartphone trading relationship.

I am of course referring to the successful collaboration between Apple and Foxconn. Though technically a Taiwanese company, according to Wikipedia, Foxconn is the world's largest contract electronics manufacturer and the fourth-largest information technology company by revenue. It is also the largest private employer in China and one of the largest employers worldwide. It has 12 factories in China, the largest in Shenzhen. It does not just manufacture the iPhone either. It also makes iPad’s, Amazon Kindles, BlackBerry and Nokia devices. Despite this, Apple is undoubtedly the jewel in the Foxconn crown, and a significant contributor to the Chinese economy.

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Clearly the US Government knows it, too. When US Trade Representative Robert Lighthizer announced the initial list of Chinese imports that could be affected by the new 25% tariff, he clearly pointed out that the list was decided based on what would have the lowest impact on US consumers. Given the raging popularity of Apple devices in the US, and around the world, they were always likely to be spared.

When you consider the vast scale and wealth tied up in Apple and Foxconn combined, it is highly unlikely that they’ll stand back and do nothing as these tariffs are being threatened. Both organisations will be exhorting their influence on their respective governments to ensure ongoing prosperity – and have clear warnings for both the US and Chinese administrations as they look to preserve it.

On the flip side, the US Government recently announced further action taken against ZTE and Huawei, two of the leading manufacturers of handsets and communication infrastructure in China. This has triggered patriotic rhetoric with the Chinese. This could adversely impact Apple sales in China.  Even before these escalations, overall Chinese smartphone sales were slowing down.

Sales were being impacted by locally manufactured devices entering the Chinese market that were competitive in terms of functionality and cheaper for the consumer. Chinese operators were also cutting subsidies for handsets because of a perceived high level of penetration in the market.

China represents roughly 20% of Apple’s revenue and is expected to be big area of future growth for the OEM this year.  We have seen companies like Samsung fall from having a 20% market share down to 2% over a five-year period, stemming from political backlash due to tensions between Seoul and Beijing.

As of now, Apple is the only dominant non-Chinese brand in the Smartphone market, this 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. This was driven by the launch of the iPhone 6 model. This suggests that there are a large number of Chinese users that are ready for an upgrade cycle. 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 also. The residual values of the iPhone have contributed to a significant global success story. 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 into an upgrade process every 18-24 months.

Any further increases to new smartphone prices, due to tariffs or otherwise, will lead to existing upgrade cycles (which our own data reveals is around 2.66 years in the US) lengthening further. The secondary device market is now a multi-billion-dollar business for its stakeholders, which also generates significant tax income for national governments. Apple’s iPhone and its strong residual values underpins the economics of this market – in fact, 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.

Biju Nair is CEO of HYLA Mobile

 

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