Why Apple, Tesla, and Intel Are Helpless in the U.S.-China Trade War

A "gut punch" tech companies can't retaliate against.

U.S. tech giants shed hundreds of billions of dollars in market value on Monday after the U.S. and China escalated their ongoing trade war. And tech companies can do little about it.

On Friday, the Trump Administration announced $200 billion in new tariffs on Chinese imports after accusing China of backing away from a possible trade deal. On Monday, China president Xi Jinping’s government countered by raising tariffs on $60 billion in U.S.-produced batteries, coffee, and other products starting June 1.

Worried about the trade war’s impact on the U.S. economy, investors have been unloading their shares, including those of tech companies, in recent days. On Monday. Apple shares tumbled more than 5% in mid-day trading on Monday to $186.61 while Tesla’s stock dropped nearly 6% to $225.70.

Investor concerns are well-founded, Wedbush analyst Dan Ives said in an interview on Monday, because Silicon Valley is a major target in this trade war. And even tech companies as powerful as Apple and Intel can’t do much to avoid being hit.

“China represents the hearts and lungs of the tech food chain for U.S. semiconductor companies, as well as tech bellwethers like Apple,” Ives said. “U.S. tech players (and investors) are caught in the crossfire with minimal leverage.”

Apple is arguably one of the biggest losers in the U.S.-China trade war. The company relies on Chinese manufacturing for most products, including its iPhone and Macs. China is also a critical market for Apple, accounting for billions of dollars in quarterly sales.

It’s hard to put a figure on the impact a China trade war would have on Apple. But in a note to investors last week, Morgan Stanley analyst Katy Hubert said tariffs could cut Apple’s earnings per share--a measure of the company’s profit on each outstanding share--by as much as 24%.

Since 2015, Apple has worked with manufacturing partners like Foxconn to move some production to India, partly to reduce some of China’s government control over its product pipeline. But since the U.S. and China ramped up their trade rhetoric, Apple has reportedly accelerated its move to India, including switching production of the iPhone SE, the company’s $249 budget-friendly iPhone, to there from China.

Ives cautioned that a full shift to India-based Apple hardware manufacturing is unlikely. India’s still onerous regulatory climate, coupled with easier access to a skilled workforce in China, means that Apple would only be able to move up to 10% of its total hardware production to India, Ives said.

Semiconductor companies like Qualcomm, Intel, and Nvidia are also feeling the trade war’s effects. Higher tariffs mean higher component costs that may ultimately push prices higher on smartphones, tablets, and computers. As a result, consumers may buy fewer tech products, hurting the semiconductor industry.

Companies haven’t said how much component cost increases would affect their bottom lines, but Huberty told investors last week that a 25% tariff on Apple’s goods would force Apple to increase its iPhone XS price by $160 to maintain its current per-unit profit margin. The iPhone XS currently starts at $999, and such an increase would push its starting price to $1,159.

How Tech Companies Respond

Apple CEO Tim Cook and other executives have cautioned that the U.S.-China trade war could hurt their businesses. In a letter to shareholders in January, Cook said that “trade tensions between the United States and China put additional pressure” on the Chinese economy and ultimately affect Apple’s sales.

Last year, Apple sent a letter to U.S. Trade Representative Robert Lighthizer pushing the Trump Administration to reconsider its tariffs. “It is difficult to see how tariffs that hurt U.S. companies and U.S. consumers will advance the Government's objectives with respect to China's technology policies,” Apple wrote.

At a conference last year, NVIDIA CEO Jensen Huang put a finer point on the importance to U.S. tech companies of avoiding a trade war. He said in no uncertain terms that “there cannot be a war.”

“It is definitely better, it is actually vitally important, that the world continues to have a collaborative trading and open business relationship,” Huang said. Nvidia has “a few thousand” China-based employees, he added, and like it or not, the “United States needs China.”

Nvidia shares fell 5.34% to $159.80 in mid-day trading Monday.

Not surprisingly, companies across several industries, including tech, oil, and retail have ramped up their lobbying in Washington to push lawmakers on ending the trade war. Earlier this year, the Chicago Tribune reported that more than 100 business executives would lobby lawmakers on ending the trade war.

Trump Responds

But those lobbying efforts, along with words of caution by tech CEOs and leaders in other industries, have done little to change the Trump Administration’s policies. In a series of tweets on Monday, President Trump suggested he wouldn’t reverse course.

“The tariffs can be completely avoided if you buy from a non-tariffed country, or you buy the product inside the USA (the best idea),” Trump said. “That’s Zero Tariffs.”

He then turned his attention to China, which he said, would ultimately lose this war.

“There will be nobody left in China to do business with. Very bad for China, very good for USA!” he said. “But China has taken so advantage of the U.S. for so many years, that they are way ahead (Our Presidents did not do the job). Therefore, China should not retaliate--will only get worse!”

Contrary to Trump’s claim, Ives told Fortune that investors believe “no one wins in a trade war.” And regardless of whether Trump acknowledges it, U.S. companies--and especially tech companies--will lose.

“The victims are up and down Silicon Valley,” Ives said. They’re “getting gut punched by the trade wars.”

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