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What's At Stake For Apple In China

NOEL KING, HOST:

Apple's share price jumped yesterday after the company reported record earnings for the quarter. On an investor call, CEO Tim Cook gave credit to strong sales. He also took questions about the chilly relationship between the U.S. and China. Apple is heavily invested in China, and China is responsible for about a fifth of Apple's revenue. Reporter Ryan Kailath has the story.

RYAN KAILATH, BYLINE: To get a sense of just how entrenched Apple is in China, I talked to Scotty Allen. He lives in Shenzhen, the country's electronics capital, and hosts a popular YouTube show called "Strange Parts." Allen first went viral when he assembled his own iPhone out of parts he bought off the street. And the streets in Shenzhen, he says, are littered with iPhone parts.

SCOTTY ALLEN: Literally outside the apartment building that I live in, there are women sitting on small stools shucking cellphones like you would shuck oysters, cracking them open to recycle, like, the silicon keypad, the plastic case.

KAILATH: The Shenzhen markets stretch on for blocks. One whole area is devoted to cellphones of all kinds, but mostly iPhone stuff.

ALLEN: There are entire buildings that sell nothing but like iPhone cases, headphones and chargers.

KAILATH: And keep in mind, this is the informal Apple economy. Apple's official footprint in China is enormous. Every iPhone is assembled there, most at the gigantic Foxconn plant. That's the world's largest contract electronics maker.

ALLEN: Like, there is an exit on the freeway called Foxconn, and they're essentially like a walled city.

KAILATH: That plant, which was heavily subsidized by the government, has over 350,000 employees. Chinese labor allows Apple to keep costs and prices low. And this is where the trade war comes in.

DAVID DOLLAR: If the trade war really gets serious, the stakes are very big.

KAILATH: David Dollar is a senior fellow at the Brookings Institution's China Center.

DOLLAR: These companies like Apple have invested a huge amount in developing this production network. And if you start coming in with major taxes, you're disrupting the whole supply chain, all of which is going to be expensive and then add costs that get passed on to the consumer.

KAILATH: Research group IHS Markit estimates tariffs on consumer electronics would add about 37 bucks to iPhone import costs. Now, those don't exist yet, but the White House has signaled it wants to tax every single thing we import from China - half a trillion dollars' worth of imports. Tim Cook took a question on this yesterday.

(SOUNDBITE OF ARCHIVED RECORDING)

TIM COOK: Our view on tariffs is that they show up as a tax on the consumer and wind up resulting in lower economic growth.

KAILATH: David Dollar says China doesn't import enough from the U.S. to match our tariffs tit for tat. Instead, they might try more sideways tactics in a trade war.

DOLLAR: Probably China's best move is to encourage a consumer boycott of American products.

KAILATH: Chinese state media have actually been criticizing Apple heavily this past week over the way prohibited content is shared on its iMessage app. It's a potentially dangerous signal for the company. Tariffs are easy enough to change along with political winds, but if Chinese propaganda turns Apple into an enemy of the state, that damage may not be so easy to undo.

For NPR News, I'm Ryan Kailath.

(SOUNDBITE OF MARCUS D'S "THIRD PERSON") Transcript provided by NPR, Copyright NPR.