Determining what will happen with Apple’s China tariffs is tricky given the mixed messages from the White House about how companies like Apple will be treated.

Here’s what we know: On April 9, the White House raised the total tariff rate on Chinese imports to 145%, combining the existing 20% “fentanyl tax” with a new 125% “reciprocal” surcharge. On April 12, U.S. Customs & Border Protection issued a notice temporarily excluding electronics, including iPhones, Apple Watches, and AirPods, from the 125% surcharge, effectively lowering the rate for Apple products back down to 20%. On April 14, Trump clarified via Truth Social that the carve-out was procedural, adding that electronics would still face tariffs, with new sector-specific duties potentially arriving within one to two months.

As of today (April 30), it remains unclear what tariff rate Apple will ultimately face. For now, their products continue to be subject to the 20% duty, with the higher surcharge on hold. My view is that the final rate will likely be modest, around 10–20%, based on Trump’s past praise of Apple as a symbol of American tech strength and his longstanding relationship with CEO Tim Cook. While these factors may shape the eventual outcome, any estimate remains speculative until the administration releases its semiconductor-focused tariff policy

If Apple were to face a 20% tariff, I believe the company would pass 5% of that cost on to consumers, with the remaining 15% impacting gross margin. Last quarter, gross margin was 46.9%. If tariffs increase the cost of U.S. sales by 15%, that suggests U.S. gross margins (including Products and Services) would decline to 40%, resulting in overall margins falling to 45%.

Bottom line: A 20% tariff would reduce overall margins by about 2%, assuming Apple increases prices by 5% (with demand remaining unchanged) and absorbs 15% of the cost increase.

At Deepwater, we estimate that 40–45% of Apple’s overall revenue is linked to products manufactured in China. As of March 2025, approximately 80% of iPhones are still manufactured there, along with 50% of Macs and 75% of iPads. Services revenue, which represents just over 20% of total sales, is of course not dependent on Chinese manufacturing.

Apple has made progress diversifying its supply chain. Production in India now accounts for 20% of global iPhone assembly, up from 15% in 2024, with plans to reach 25% this year. Vietnam and Malaysia are also emerging as manufacturing hubs for wearables and Macs, respectively.

If you’re wondering about Apple’s $500 billion U.S. investment commitment over the next four years, which was announced in February, that initiative focuses on R&D, data centers, and AI infrastructure. These investments likely do not include large-scale manufacturing, given the high cost of labor in the U.S.

Bottom Line: It will take 3-5 years for Apple to reduce their manufacturing exposure to China to below 25%. How they navigate the next 10 years is likely keeping Cook up at night.

China accounts for about 16–17% of Apple’s total revenue. In December 2024, the region was down 11%, despite an easy comparison to December 2023, which was down 13%. China has not seen revenue growth since June 2023, when it was up 8%. The underperformance is partly due to macroeconomic conditions in China and partly due to a shift among Chinese consumers toward domestic smartphone brands.

Third-party data from Canalys, Counterpoint Research, and IDC forecast continued pressure in the March 2025 quarter. Apple’s smartphone market share in China dropped to 17%, down from 21% a year ago. Analysts cite rising nationalist sentiment and government restrictions, such as bans on iPhones in government facilities, as factors impacting demand.

My sense is Apple’s China business ended Mar-25 down 5%. 

Bottom line: Over the next year, Apple can likely absorb some declines in China (likely down 3% for FY25) and still grow overall revenue in FY25 in line with the Street’s 4% expectation. For Apple to accelerate growth to meet the Street’s 7% outlook for FY26, China would need to be flat. If China were to decline by 5% in FY26, it would reduce overall revenue growth by about 1%.

Many investors see AI as the central question facing Apple. I agree it’s a key issue, but Apple likely has a few years to get it right. Apple consumers are loyal, locked into the ecosystem with multiple devices (an average of 1.3 devices per customer), and experienced users. In other words, for an Apple user to switch phones, the competing device would need to be 10x better.

As for the day-to-day progress, internal development of Apple Intelligence appears mixed. Bloomberg’s Mark Gurman has reported that Apple’s in-house generative AI technology is more than two years behind industry leaders like Google and OpenAI. He also noted organizational challenges, including Apple splitting its AI and machine learning teams, with some being moved to hardware divisions. My sense is that his reporting is mostly accurate, and the back-and-forth between departments owning AI deliverables suggests this effort will take time.

Bottom Line: I agree with Mark, Apple Intelligence still needs a lot of work. That said, Apple’s leadership is world-class, and it’s only a matter of time before they deliver a “wow” AI experience. As long as that arrives within the next three years, the company will be fine.

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