Devalued Chinese yuan to hit Apple iPhone6S profit margin

Apple CEO Tim Cook introduces the iPhone 6s in San Francisco on Wednesday. Source: AFP

Inquiring minds have noticed that Apple’s new iPhone 6S, launched on Wednesday, carries the same price tag in China as the previous iPhone 6.

That makes it a prime test subject for gauging the effect of the yuan’s devaluation.
The plunging yuan is expected to weigh on Apple in China, its largest market outside the Americas. Apple’s Chinese customers pay in yuan, which has declined in value. But the company still pays its suppliers in dollars, according to supply chain sources. There was speculation before the launch that Apple may raise prices in China to pass along the costs to consumers, but this turned out to be unfounded.
We did a very rough calculation that suggests the weakened yuan probably will take at least a few hundred million dollars off Apple’s China revenue in the next quarter. (Caveat: This might not hit Apple’s bottom line if they’ve hedged against currency risk or passed along some of the cost to its suppliers. Apple declined to comment.)
The iPhone 6S 16GB version costs 5288 yuan ($1175) in China, the same price as the iPhone 6. In the US it is priced at $US649 without a contract.
When Apple launched the iPhone 6 a year ago, 5288 yuan translated to around $US861. Today, it’s only $US829.
The August 11 devaluation knocked $US16 off the US dollar value of iPhones in China. Let’s use $US16 as our assumption for average exchange rate loss for this year.
Apple sold 13.2 million phones in China in the calendar fourth quarter of 2014, the first quarter after the iPhone 6 launch, according to market research firm IDC.
The company’s China sales in the next quarter are likely to be within the same ballpark, as China’s overall smartphone market has nearly stopped growing, analysts say.
IDC China head Kitty Fok said she doesn’t expect a huge jump in Apple China iPhone sales this year, as many of the country’s high-end smartphone buyers already sprung for an iPhone 6 last year and likely aren’t ready to change phones again quite yet.
If Apple sells 13.2 million phones again in the next quarter — and each is worth at least $US16 less — that’s at least a $US210 million difference. It’s a relatively small number compared to Apple’s total revenue, but still more than 1 per cent of its China sales for the same quarter last year. The number would also grow if the yuan continues to weaken this year.
Someone will have to take that loss, but it’s not clear whether it’s Apple. Tech companies often hedge against currency risk, so Apple may be covered, although the company declined to comment. Apple could also try to pass on some costs to its suppliers. Several people at suppliers, who declined to be named, said Apple so far hasn’t demanded a renegotiation of their contracts.