The shockwaves of President Donald Trump’s placing Chinese smartphone manufacturer Huawei on the Entitiy List - preventing US companies conducting business with it - continue to be felt in the industry. Apple’s financial performance and the success of the iPhone could be next.
From chip manufacturer ARM suspending business ties, to the loss of access to Google’s Android services, Huawei is facing major disruptions throughout its business. While there are no direct connections to Apple (even if Huawei offered Tim Cook and his team access to 5G technology earlier this year), an economic cold war could see China take steps to retaliate against America for the Huawei ban.
Which is where Apple comes into play. The Chinese market, although proving problematic over the last few quarters, is still regarded as an area of growth for the iPhone. Hardware sales, especially of the iPhone, need to be leveraged in the short- and medium-term as Apple looks to move to a services first business model.
If China were to take action, restricting Apple’s access to the Chinese market in a similar manner to Huawei in America would see Tim Cook facing a significant cut in profits and sales, according to a Goldman Sachs note reported by Marketwatch:
Goldman analysts led by Rod Hall wrote in a note that they have no view on a ban or any other potential restrictions on the iPhone maker but that they have received questions from investors on Apple’s exposure to China. The 29% estimate is equal to $3.35, that Goldman expects would be shaved off Apple’s full-year EPS consensus estimate of $11.47.
“This represents 100% of estimated Apple earnings exposure to mainland China and Hong Kong combined with some offset assumed for sales & marketing cost savings.”
It should be noted that this remains a potential scenario and it is one that is at the edge of expectations, but adding Huawei to the Entity List was also seen as something at the edge of expectations just a few weeks ago.
The idea that Apple could be facing a reciprocal ban in China should not be dismissed. And if that were to happen, not only would Apple take a significant financial hit, but other US companies with a significant foothold in the Chinese market - including manufacturing and supply contracts as well as retail sales - could be caught up in a punishing and debilitating trade war.
Now read more on why owning the iPhone in China is seen as an embarrassment by some…
