Now, let's go across to Parikshit Luthra, who will take us through iPhone maker Apple's strategy amidst the rebalancing of world trade.
Our focus today is on iPhone maker Apple's strategy amidst the rebalancing of world trade. US President Donald Trump recently threatened to impose a tariff of 25% on Apple if the company does not make iPhones in the US. But there's a chance that the company may choose to continue to make the phones outside of America and pay the tariff. Let's break down the math that could support this rationale. Currently, most parts are made in or near China. Chips are made in Taiwan. iPhone screens and memory chips come from South Korea. Japan provides camera systems and the batteries are made in China. About $550 is the bill that Apple foots for the components of an iPhone 16 Pro as per TechInsights. In a pre-tariff scenario, Apple would be left with a profit margin of around $450 if the iPhone costs around $1,000. Even if you remove the cost incurred for the assembly and testing, advertising, and services like iCloud, Apple will still be left with a good margin. Now, in case a 25% tariff is applicable, the profit goes down by $100. That's still a better price to pay than the heavy investment and time required to shift manufacturing of iPhones to the US as Wedbush Securities estimates that a $30 billion investment will be needed over 3 years just to make 10% of iPhones in the US. It also won't be easy to replicate the complicated production systems that have existed in Asia for years. The Wedbush analyst expects that the cost of an iPhone in US will be much more than the current price, almost triple. Not just that, cost of assembling an iPhone in China or India is a mere $30 when compared to an estimated $390 in the US. Also, Apple will still have to import many components, which will likely face tariffs. In 2017, Tim Cook had said that companies manufacturing in China because of the skill and the quantity of skill in one location and the type of skill it is. But that's not to say that Apple hasn't been shifting its reliance away from China. Apple currently produces nearly 15% of all iPhones in India and is looking to increase that number over the next few quarters. As per data from Canalys, US iPhones shipped from India in April surged 76% year-on-year while shipments from China slumped. While many signs point out that it might not make business sense for Apple to make iPhones in US, a book named Apple in China by Patrick McGee throws the spotlight on the tech giant. McGee reported on Apple from 2019 to 2023 for the Financial Times. In his book, he talks about how for years Apple was allowed to exploit China. And then, we saw China exploiting Apple in turn, almost making it impossible for the tech giant to extract itself from the country. The book says that Apple having invested billions of dollars on infrastructure and training to make Chinese factories unparalleled has little choice but to comply with Beijing. Patrick McGee is joining us on the show to discuss this.
Patrick, thank you very much for taking out time here for CNBC TV18, our new show Global Lens. Apple has been in focus. Give us a sense of when you believe there was a turning point in Apple's China story. Did it all boil down to the consumer day in 2013?
Yeah, my book begins the prologue begins with March 2013, really significant time even if you're not an Apple watcher because you'll know that's when Xi Jinping ascended to the presidency. Apple was attacked within 36 hours of Xi ascending to the presidency and they're attacked for warranty differences of all things. And this is later in my book, the political awakening for Apple because at the time they had been the most successful operator in China and the most successful retail business in China with more than 20 billion dollars of revenue at the time. And so, the book really like the thesis is that Apple sort of hires or names key people to live in the country for the first time and really get to know the provincial officials, the federal officials, the culture of China, and really come up with a strategy to tell China, "We're not exploiting"
All the smartphone giants that we see out of China and Jing coming out now. Do you feel Apple has had a hand in building China as an innovation powerhouse today?
Yeah, I mean, let me just say that this is a 400-page book and that is the wild conclusion. It's difficult to sort of make the case in 15-second sound bites, right? But let's just say that Huawei's founder has referred to Apple as the teacher. And the smartphone industry in China would not exist the way it is without literal plane loads of Apple engineers for the last quarter century flying into China essentially on a daily basis. I mean, United Airlines actually leaked this in 2019, 50 first-class seats every day coming from San Francisco where these engineers would go across the country. So, they play an absolutely instrumental role. But they're not single-handedly doing this, right? The Taiwanese entrepreneurs, people like Terry Gou from Foxconn, they were in China since the late 1980s, really helping build up the country. My point is that if you look at the investment dollars Apple was putting in or if you understand that Apple is the largest client of TSMC, of a Foxconn, then you begin to see that the influence of Apple on China has been huge.
How do you think things started changing for Apple after Xi Jinping took over? You've written and observed and there's a whole chapter in your book as to how things started changing in the Chinese media about the how the Chinese media started talking about the arrogance of Apple as a company, how it's a time to pay back as well. Do you feel that Xi Jinping was upset with Apple in a way and that somehow changed the relationship between Apple and China?
Yeah, absolutely. I mean, it wasn't necessarily the case that a strongman was going to lead China. And in the decade prior, which is really when Apple consolidates production, I mean, China's kind of a multinational playground where they can sort of skirt around rules and do everything that's needed. So, what really happens when Xi Jinping comes into office is he advocates in China for China policies and companies are threatened with antitrust investigations and directly told, quote, "If you put up a fight, we will double or triple your fines." I talk about things getting so bad for Qualcomm, the California chip designer, that their chief negotiator sleeps on the plane at the airport rather than staying in a hotel. And nobody else from the company will go to China because they worry about being kidnapped. I mean, the climate in the first year first term of Xi Jinping being in office is really threatening for Western companies and nobody is more vulnerable than Apple because nobody was as successful as Apple.
Right. Could you give us a sense of how closely connected is Apple with China currently? And do you feel that when it comes to Xi Jinping, considering that Xi Jinping has met tech giants, top tech CEOs over the past few months such as the CEOs of Nvidia, also Apple, also Tesla, does it mean somehow that Xi Jinping's outlook towards companies like Apple has now changed? He wants them to continue investing in the China story or do you feel that the relationship is still very much the same, tense?
