By David S. Yin
The Chinese government recently raised a “tit for tat” challenge to new U.S. President-Elect Donald J. Trump over a potential trade war against China, in an editorial published on China’s international state news outlet Global Times. The op-ed states that “[a] batch of Boeing orders will be replaced by Airbus. U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted…” if Trump decides to impose a proposed 45% trade tariff.
To overstate the significance of the U.S.-China trade partnership is quite difficult. In 2015, the two accounted for $659.4 billion in bilateral trade, of which $161.6 billion were Chinese imports of U.S.-produced goods. As the largest, and yet still one of the fastest-growing consumer markets in the world, China is vital to the strength and prosperity of America’s export economy. Most notably, of the American-made products included in the Global Times statement, agricultural products ($20 billion), aircraft ($15 billion), and vehicles ($11 billion) are amongst the highest value U.S. export categories, and are therefore critical to the success of American companies operating in these industries. From China’s perspective, it is no longer the emerging market economy of decades past, and can instead rely on its own considerable production capabilities rather than sit by the wayside as the U.S. attempts to push a trade agenda through its considerable economic muscle.
Amongst the multi-billion-dollar trade categories, the iPhone may seem like a curious inclusion. However, one must consider that despite FY2016 sales of nearly $50 billion in the Chinese market, Apple’s revenues in China are still projected to grow. Beyond the obvious consequences of an iPhone sales freeze or a 45% trade tariff on Apple’s top line, there are also significant economic implications behind China’s statement from a supply chain perspective and, in particular, from the viewpoint of a procurement specialist.
As the most valuable company in the world, Apple’s tremendous growth in recent years has primarily been driven by sales of the iPhone, which made up over 63% of Apple’s FY 2016 revenues. Analyst estimates of the iPhone’s profit margins have put it at over 70% of retail value, making it by far the most lucrative amongst Apple’s product lines, and likely across the complete spectrum of consumer technology products. According to a recent report by BMO Capital Markets, the iPhone took an astonishing 103.6% of smartphone industry profits in Q3 2016. What enables the iPhone to reap such staggering margins is largely due to Apple’s global supply chain, which entails near end-to-end cost minimization and an integrated procurement strategy from its hundreds-strong global supplier network.
Apple’s value chain, from its inbound logistics and manufacturing through outbound logistics and marketing, all go through China in one way or another. Throughout the chain of activities, procurement plays a central role in providing each activity with the necessary resources to operate efficiently and at low cost. A proposed 45% Chinese trade tariff would fundamentally alter how, and from where, Apple procures the majority of these resources, and significantly drive up costs and logistical complexities throughout the whole of its global supply chain.
It is important to note that very few companies possess the in-depth supply chain practices of Apple; therefore, integrating a centralized procurement structure into such companies’ supply chains becomes even more critical. The prevalence of global supplier and distribution networks like Apple’s across modern manufacturing companies relays the important role of procurement specialists in the development of integrated strategies which not only generate value, but also mitigate the multitude of risks associated with maintaining an international supply chain. In the event of significant geo-political and economic shocks such as a potential U.S.-China trade war, procurement can work closely with companies to ensure that their manufacturing processes are harmed in as few ways as possible, so that across affected countries, companies can rest assured that their sourcing, manufacturing, distribution and sales activities can be substituted quickly and cost-effectively through alternative sources while maintaining similar levels of cost and operational efficiency.
Ultimately, no one can say for sure whether President-elect Trump will initiate a trade war with China, or to what extent Apple and companies like it will be affected. However, companies with an established supply chain and sound procurement practices can sleep in comfort knowing that they will be prepared to face similar challenges that may come their way.
David S. Yin is an Associate Consultant with GEP, based in Clark, N.J. He has worked with Fortune 100 clients on procurement engagements including category and project management. He holds a B.S. in Business (cum laude) with concentrations in Finance and Operations from New York University’s Stern School of Business.
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