"Swallowing tariffs" is stronger than "Made in America," Morgan Stanley advises Apple: How to appease Trump

Trump threatens to impose a 25% import tariff on iPhones. Morgan Stanley believes that "absorbing the tariff" is better than "Made in America" and offers advice to Cook on how to appease Trump.

On May 28, according to news from the Chasing Wind Trading Desk, Morgan Stanley's latest research report shows that even with a 25% import tariff, Apple is still unlikely to move iPhone production back to the United States.

The report states that data shows the cost of producing iPhones in the U.S. will be 35% higher than in China or India, far exceeding the cost of offsetting the 25% tariff by raising prices by 4-6%.

Morgan Stanley also pointed out that if the expected tariffs are implemented, it could lead to a decline of about 11 cents in Apple's earnings per share for the fiscal year 2026.

To meet Trump's demands, Morgan Stanley suggests that Cook consider relocating some small-batch Apple product production back to the U.S. and commit to producing other Apple products domestically in the future.

Production Costs in the U.S. Significantly Higher than Tariffs

According to estimates from Morgan Stanley's Greater China Technology Hardware team, the cost of manufacturing iPhones in the U.S. is at least 35% higher than in China or India, primarily due to:

• About 25% of iPhone components are sourced only from China, which currently faces a 30% import tariff;
• The hourly labor cost in the U.S. is 4.5 times that of China and 17 times that of India.

Morgan Stanley stated that if Apple wants to maintain similar gross margins, the U.S.-made iPhone 16 Pro would need to be priced at $1,350 instead of the current $999.

In contrast, if Apple faces a 25% import tariff on iPhones, it would only need to raise global iPhone prices by 4-6%, as higher profit margins outside the U.S. can help offset the lower profit margins from selling iPhones in the U.S.

Morgan Stanley also specifically mentioned the time cost issue of relocating factories back to the U.S.

The report states that, based on communications with Apple's contract manufacturers, it takes at least 2 years from the construction of an assembly plant to production. Considering that Apple sells over 65 million iPhones in the U.S., more than one factory would be needed, and over 100,000 skilled workers would be required during peak production periods.

Taking TSMC as an example, its Arizona wafer plant investment announced in 2020 will not begin mass production until the end of 2024. Morgan Stanley stated that if Apple follows the same timeline, the first U.S.-made iPhones may not reach consumers until after Trump leaves office.

Financial Impact of Tariffs on Apple

The report states that based on model calculations, Morgan Stanley assumes that iPhones will be subject to a 25% tariff (from China and India), resulting in the following financial impacts for Apple:

• A 25% tariff on iPhones will increase tariff costs by approximately $300 million in the fourth quarter of fiscal year 2025;
• Based on total revenue of $96 billion, this equates to a negative impact of 1 cent per share;
• The annualized impact is an additional cost of $2 billion, equivalent to a 50 basis point decline in gross margin and an 11 cent decrease in earnings per share Wall Street Journal previously mentioned that UBS analyst David Vogt wrote in his research report:

"If a uniform tariff of 25% is imposed on the approximately 70 million iPhones imported to the United States from China and India each year, we estimate that Apple's annual earnings per share (EPS) will decrease by $0.51."

Wall Street currently expects Apple's EPS for the fiscal year 2025 to be $7.18. Based on this calculation, UBS estimates that a reduction of $0.51 would mean that the EPS would decline by more than 7% solely due to tariffs on iPhones imported from China and India.

Potential Response Strategies for Apple

The report states that Morgan Stanley suggests that Apple CEO Tim Cook should consider announcing the relocation of some small-batch Apple product production back to the United States, such as:

Certain Mac models, AI servers, HomePod, AirTags, etc., and commit to producing other Apple products domestically in the future.

Morgan Stanley indicated that while this is not as symbolic as the iPhone, it would create a win-win situation: the government receives a public commitment from the world's largest electronics company for new U.S. production, and Apple faces reduced geopolitical threats