Apple's (NASDAQ:AAPL) Apple Pay will start operating in China this week for customers of the Industrial and Commercial Bank of China, the country's biggest lender. Besides ICBC, 19 other Chinese lenders are expected to become Apple Pay partners. Given that Greater China is AAPL's second largest market by revenue, rolling out Apple Pay is designed to retain AAPL's ecosystem in the country amid growing competition among local incumbents.
In my view, Apple Pay will be dead on arrival given that China's mobile payment market is dominated by Alibaba (NYSE:BABA) and Tencent (OTCPK:TCEHY) that collectively control over 80% of the market. Baidu (NASDAQ:BIDU), which recently rolled out its BIDU Wallet, also has seen positive traction as it leverages its O2O platform, so this leaves little room for Apple Pay to gain meaningful traction in the country. Looking at the recent mobile payment data from Tencent, it is evident that Apple Pay will face an uphill battle in China, and I'm highly skeptical of AAPL to attract a material amount of users given the high switching cost and lack of functions in Apple Pay. As such, I remain bearish on AAPL. To be clear, I'm positive on AAPL's ecosystem and product quality, but I'm cautious on Apple's iPhone-centric business model.
My bearish view on Apple Pay is driven by the existing competitive dynamic of China's payment market. On a macro level, BABA and Tencent dominate the market. I note that Alipay currently has close to 350-400m registered users while Tencent's WePay has over 200m users, but the potential upside lies in its 650m users given that the other 450m or so users can simply connect their bank accounts to WePay through a two-minute process. Both Ailpay and WePay have deeply penetrated the lives of most Chinese consumers. It will be a challenge for Apple Pay to succeed in China, in my view.
To use WePay as an example and to give readers a sense of its scale, a typical WePay user can use the mobile payment function (mostly via QR code) in 300k locations across China. Some of the locations include over 30,000 supermarkets, 1,500 department stores, 50,000 convenient stores and 500 shopping malls for typical retail spending. There are an additional 80,000 restaurants, cafes and QSRs, 400,000 parking lots, 3,000 gas stations, 440,000 automated air ticketing machine, 1,000 transit ticket sellers, hospitals, 20,000 pharmacies and 26 postal carriers where WePay is accepted. Given the level of penetration WePay has developed, its users are unlikely to switch to another competing platform due to the high switching cost. This, coupled with lack of built-in services in entertainment, travel booking, ride-hailing and bill payment in AAPL, I do not see AAPL gaining meaningful traction post arrival. As such, this is a dead on arrival application so investors are better off to keep their expectations in check.
Besides the internet companies, payment process incumbent UnionPay is another threat to Apple Pay's growth in China. It's worth recalling that AAPL initially established a partnership with UnionPay to drive Apple Pay penetration but UnionPay recently developed its own mobile payment app, making it a direct competitor to AAPL. Some of the unique characters of UnionPay's Quick Pass is that it is based on the NFC standard and does not require an app or wireless connectivity. Setting up the platform takes less than 30 seconds and payment takes two seconds. Given that all Chinese consumers use UnionPay for credit and bank cards, gaining penetration should not be an issue for UnionPay in that users would want to keep a consistent platform. If there is one payment platform that a user may want in addition to WePay or Alipay, that would be Quick Pay, in my view.
On a final point, the incumbents could wage a costly price war against AAPL by not charging any payment-related fees to drive penetration. AAPL historically has avoided price wars to protect its brand and market share, but China operates in another dimension where competitors are willing to sacrifice multiple quarters of losses for market share gain. If AAPL wants to gain traction among consumers and merchants, subsidies must be used in areas such as ride booking, travel booking, restaurant/entertainment discounts and so forth. In addition, the transaction fee of 50 bps must be waived because no merchants in China will be willing to pay AAPL for such a high transaction cost (10 bps or lower is a more reasonable ballpark given that Tencent charges 10 bps for transfers out of a user's account).
Luckily for AAPL, the company has the cash, but the question is whether 1) management is willing to commit a significant dollar amount in China, and 2) whether shareholders will have confidence in such strategy. Having observed AAPL for the past 20 years, my guess is that AAPL will not pursue aggressive expansion in China and this will certainly cap the potential of Apple Pay in the country.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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