Trump and Apple Manufacturing: Let's Try a Carrot Instead

By Markets Fool.com

Mac Pro is one of the few Apple products manufactured in the U.S. Image source: Apple.

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A big part of Donald Trump's election victory was predicated on the idea that Trump could reinvigorate U.S. manufacturing and the related jobs. While that's far easier said than done, Apple (NASDAQ: AAPL) is no stranger to being targeted over its long-standing use of contract manufacturers in Asia. The president-elect has broadly mentioned the possibility of implementing import tariffs as a way to discourage domestic companies from making products abroad and shipping them home to sell, even though that risks a potentially disastrous trade war.

However, instead of using punitive measures, Trump is now considering offering incentives to encourage domestic production. Can a carrot work better than a stick?

It better be a huge carrot

Last week, Trump sat down with The New York Times for a wide-ranging interview covering many topics. Trump noted that Apple CEO Tim Cook gave him a call:

I was honored yesterday, I got a call from Bill Gates, great call, we had a great conversation, I got a call from Tim Cook at Apple, and I said, 'Tim, you know one of the things that will be a real achievement for me is when I get Apple to build a big plant in the United States, or many big plants in the United States, where instead of going to China, and going to Vietnam, and going to the places that you go to, you're making your product right here.' He said, 'I understand that.' I said: 'I think we'll create the incentives for you, and I think you're going to do it. We're going for a very large tax cut for corporations, which you'll be happy about.' But we're going for big tax cuts, we have to get rid of regulations, regulations are making it impossible. Whether you're liberal or conservative, I mean I could sit down and show you regulations that anybody would agree are ridiculous. It's gotten to be a free-for-all. And companies can't, they can't even start up, they can't expand, they're choking.

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Trump has a tendency to view everything as a financial transaction that can be negotiated, so it's perfectly expected that his go-to tool would be a tax incentive. But money is not Apple's primary motivation in setting up its supply chain in this way (more on this later), nor would money likely appeal all that much to the world's richest company. Apple has long argued for comprehensive corporate tax reform, even if it meant a notable increase in the Mac maker's tax bill, and Trump is already planning on widespread tax cuts for corporations as well as potentially pursuing deemed repatriation, whichwould incentivize Apple to repatriate more rather than less (after paying a massive one-time tax bill). It's not clear what specific incentives Trump could offer Apple beyond what's already on the table.

Trump is characteristically confident that he'll be able to succeed, despite very real operational challenges associated with Apple actually bringing any meaningful number of manufacturing jobs back to the U.S. Beyond labor costs, it would be extremely difficult for Apple to build up a large work force of manufacturing employees with the right skill sets (in Tim Cook's words, "vocational kind of skills"). Additionally, most of Apple's component suppliers are located in Asia as well, so U.S. manufacturing would also result in substantially higher logistics costs. Short of the world's biggest carrot, Trump will likely fail at convincing Cook and Co. to expand Apple's domestic manufacturing operations in any significant way.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.