The iPhone is currently one of the most expensive smartphones in China, and its price may be about to rise even higher.
Potential price rises may be driven by China’s devaluation of its currency this Tuesday, and it is thought that Apple’s sales figures may suffer in dollar terms because of the company’s large exposure to the Chinese market, writes Lorraine Luk for The Wall Street Journal.
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Chinese currency devaluation could hit Apple (AAPL)
An Apple spokesman did not immediately comment on the currency devaluation, but analysts believe the company may raise the prices of its products to pass the extra costs of a weaker yuan to Chinese buyers.
“China’s sudden devaluation confirmed market concerns over China’s economic growth. We expect weaker consumer demand for iPhones in China and Apple may raise its product prices later if China continues to devalue its currency,” said Fubon analyst Arthur Liao.
In last year’s annual report Apple did discuss the possible negative effects on sales and gross margins due to the strengthening U.S. dollar.
“There is a risk that the company will have to adjust local currency product pricing due to competitive pressures when there have been significant volatility in foreign currency exchange rates, “ Apple said in the report.
Foxconn profit margins could benefit
Greater China, defined as the mainland, Taiwan and Hong Kong, is the second largest market for Apple by revenue after the Americas. There are 19 Apple stores in China, and the company has been expanding quickly thanks to strong demand for the iPhone.
According to CEO Tim Cook, China is set to become Apple’s biggest market in the future. In the 3 months ending June 27, revenue from Greater China totaled $13.2 billion, compared to $20.2 billion in the Americas.
Foxconn, the company that assembles iPhones, is expected to benefit from a devalued yuan due to the fact that it pays operating costs in the Chinese currency. The company employs over 1 million staff in China, but the effect is not expected to be so important because over 90% of revenue is denominated in U.S. dollars.
“Foxconn has yuan-denominated loans and deposits but it doesn’t have significant foreign exchange risk as the company has hedged against potential drops,” said Daiwa analyst Kylie Huang.
Huang said a 2% drop in the yuan against the dollar could expand Foxconn’s operating profit margin by 1-2%, a significant improvement from the thin margin of 3.81% reported in Q1.