SMARTPHONES: Apple Tries Stores, E-Payments to Counter Slowing China

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Bottom line: Apple’s accelerated China store openings and February roll-out of its Apple Pay service represent efforts to boost its local profile, as the broader China smartphone market shows signs of saturation and is likely to contract this year.

Apple Pay coming to China in February

Global smartphone leader Apple (Nasdaq: AAPL) is kicking off the New Year by accelerating its efforts in China on two fronts, opening more of its trademark Apple Stores as it also prepares a February launch for a local version of its Apple Pay electronic payments service. Both campaigns have been in the headlines in recent days, extending a broader campaign by CEO Tim Cook to pay more attention to a market that could soon surpass the US to become Apple’s biggest.

At the same time, these latest campaigns come amid a growing chorus of predictions that sales of Apple’s iPhones could soon start to slow sharply. A primary factor behind that slowdown could be China, where the smartphone market has become saturated and is expected to contract in 2016 after 3 years of explosive growth.

Both the acceleration of new store openings and imminent arrival of Apple Pay have been in headlines for the last few months, but the latest reports are providing more details of what’s ahead. The stores are mostly for branding and probably won’t have a major impact on actual sales, since Apple only has 31 stores now in Greater China, which also includes Hong Kong and Taiwan.

A Chinese Apple Pay is also unlikely to generate any major revenues in the short term, but could become a big business over the next few years as Beijing opens the financial services market to foreign companies. But that said, Apple will still face stiff competition from incumbent giants UnionPay and Alipay, even as that pair have shown early signs that they may be willing to work together with Apple Pay.

Let’s begin with the latest electronic payments headlines, which cite an internal document from Shanghai-based Minsheng Bank (HKEx: 1988; Shanghai: 600016) saying that Apple is set to launch Apple Pay in China early next month. (Chinese article) Previous reports have said that Apple was aiming to launch the service early this year, though no specific time frames were ever given. (previous post)

In December Apple announced a tie-up with leading electronic payments operator UnionPay to help support Apple Pay, and previous reports had indicated that Apple had also signed agreements with 15 banks as part of the initiative. Thus this latest news is really just incremental, though it does hint that a formal launch of the service could before the Lunar New Year that is now just 2 weeks away.

Tapping Smaller Cities

Next there’s the acceleration in store openings, which comes in a report citing Apple executive Phil Schiller on a trip to China this month. (Chinese article) Schiller is following the lead of Tim Cook, whose numerous trips to China over the last 2 years have become occasions to raise the company’s profile locally by offering media interviews that demonstrate the company’s commitment to the market.

In the interview Schiller says Apple will open 5 new China stores in January alone, which does indeed look like an acceleration compared with previous rates. Equally important, the new openings will broaden Apple’s reach outside of top cities like Beijing and Shanghai, with stores opening this month in the smaller cities of Shenyang, Xiamen and Nanjing. More stores are planned later this year for other smaller cities like Qingdao and Dalian.

The new store openings and Apple Pay roll-out are two of the more high-profile moves by Apple in China, and reflect its growing realization that it needs to work more actively to promote its brand in the large but fiercely competitive market. Those efforts appear to be producing positive results, though I do expect that a China sales slowdown is almost inevitable for Apple and everyone else this year, as the national smartphone market cools and starts to contract.

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