Trump blocks WeChat, affecting Apple's foundation

An iPhone without WeChat is just an extremely expensive "electronic brick".

Google has not returned since it withdrew from China in 2010. Facebook's CEO and former "China's good son-in-law" Mark Zuckerberg has finally torn off his hypocritical mask. Amazon has been working in China for more than a decade but still announced its withdrawal from the Chinese e-commerce market last year.

Among the four tech giants with the highest market value in the world, only Apple still maintains a huge market share in China. However, Apple's position in the Chinese market seems to be in jeopardy.

1. iPhone without WeChat

US President Trump has been using all kinds of tricks recently. First, he took action against TikTok, and then signed an executive order: starting from September 20, it is forbidden for US companies to have business dealings with Tencent's WeChat application.

In the future, WeChat is likely to be removed from Apple or Google's app stores.

WeChat has more than 1.2 billion monthly active users worldwide. It is not only an important tool for Chinese Americans to communicate with their relatives in China, but also a key tool for most Silicon Valley companies and investors to maintain business relations in China. In China, WeChat is ubiquitous. In addition to the most basic communication functions, people also use it to kill time, check Moments, read the news, take Didi taxis, order takeout, shop, visit the government for consultation, and so on.

WeChat has built a large and mature ecosystem. Especially in China, WeChat has long become a part of people's daily life. A smartphone without WeChat can hardly be considered a smartphone.

"An iPhone without WeChat is just an extremely expensive 'electronic brick'," said Mr. Ou, a user in Hong Kong, China. In Mr. Ou's opinion, WeChat is one of the most important apps on his phone.

2. “Old Friend of China”

Unlike the hypocritical "good son-in-law of China" Zuckerberg, Apple CEO Tim Cook can be described as a more honest "old friend of China."

Apple's trillion-dollar market value under Cook's management is inseparable from the company's development in China. As Cook visited China again and again, more and more iPhones were not only produced in China, but also delivered to Chinese consumers. Retail stores were opened one after another, and research centers were also set up in major cities such as Beijing, Shenzhen, Shanghai and Suzhou.

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Figure 2: Apple retail store in Pudong, Shanghai

More than three years ago, Apple spent more than $500 million to build two more R&D centers in Shanghai and Suzhou, China. Apple said that the company had good reasons to make this investment: "Apple's R&D centers in China are designed to train technical experts in Apple's supply chain, as well as graduates from Peking University, Tsinghua University and other universities. Apple will continue to develop and invest in China, and we will continue to cooperate with various universities to launch internship programs to train the next generation of entrepreneurs..."

Apple also said that through this and other partnerships, the company not only directly employed 12,000 employees in China, but also "created and supported" 4.8 million jobs, including 1.8 million iOS app developers.

Cook's gesture of goodwill towards China is not limited to spending money, but more importantly, cooperation.

In 2017, after Apple removed a series of apps from its App Store in China, Cook explained: “We don’t want to remove these apps either… but we have to comply with local laws and regulations. We firmly believe that it is in the best interest of local consumers to participate in market activities legally and bring benefits to local consumers. This is true not only in China, but also in other countries.”

In the same year, in response to the requirement of local data storage, Apple announced a partnership with Guizhou Cloud to operate Apple's iCloud service in China. Despite opposition, Apple did not walk away like Google did many years ago. Cook said: "Even if there are sometimes disagreements, cooperation with local governments is very important."

3. iPhone Manufacturing Center

Cook's efforts were not in vain.

Most iPhones are made in China. According to Apple, Foxconn's factories in China alone expanded from 19 in 2015 to 29 in 2019. As Apple has added product lines such as smart watches, smart speakers and wireless headphones, these production plants have continued to increase. Apple does have some contract manufacturers outside of China. But these overseas factories are relatively small, mainly to cope with local import taxes and meet local market needs.

Figure 3: Number of Apple's assembly plants around the world

China, known as the "world's factory", is crucial for Apple to reduce inventory and increase potential profits.

Before taking over from Jobs, Cook was the chief operating officer. He pushed for just-in-time manufacturing, shut down factories and warehouses around the world, and established solid partnerships with contract manufacturers, most of which were in China, such as Foxconn, Pegatron, and others.

In 2012, The Atlantic Monthly was amazed at Apple's ability to turn over inventory every five days. Relying on a small amount of inventory, Apple was able to release, manufacture and deliver millions of iPhones in an orderly manner around the world, creating a myth of just-in-time manufacturing with practical actions.

But Cook knows that China's manufacturing center helped him create such a myth.

But just-in-time manufacturing cannot withstand the challenge. Without Chinese factories, Cook's legend would not be written.

The epidemic at the beginning of this year is proof of this.

Foxconn is one of Apple's largest contract manufacturers. During the epidemic at the beginning of the year, Foxconn's Chinese factories had to stop operating. This shutdown disrupted Apple's entire supply chain, and Apple may even have to postpone the release of the iPhone 12 series this fall.

In the past, Apple's new iPhones were shipped in late September. This year, according to people familiar with the matter, the new iPhones may be shipped a few weeks later than in previous years.

In fact, since 2018, under the farce of Trump's repeated demands to "move Apple's manufacturing plants back to the United States" and "impose tariffs", Apple has tried to disperse its manufacturing plants, such as producing iPhones in India. But the results were not ideal.

As Dave Evans, CEO of San Francisco supply chain company Fictiv, said, after all, outside of China, "no country in the world has the infrastructure to produce 600,000 phones in a single day."

Cook, who understands the situation, also admitted in an interview this year: "The supply chain problem is only temporary. Apple will not leave China. There may be some adjustments, but it does not involve fundamental changes."

4. $44 billion market

China is Apple's second largest overseas market, second only to Europe, as it is a manufacturing center for the iPhone. Chinese consumers' enthusiasm for the iPhone and other Apple products has been evident in the past few years.

The much-anticipated annual product launch, late-night queues to buy new iPhones, etc…

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Figure 4: iPhone 4S launch in Beijing and Shanghai delayed due to crowds

According to IDC data, Apple has sold a total of 210 million iPhones in China over the past five years. In addition, data from QuestMobile shows that as of June, one in five smartphone users in China uses an iPhone, second only to Huawei (26%).

In the last fiscal year, Apple's sales in Greater China were close to $44 billion, accounting for 17% of total revenue. At its peak, sales in Greater China once accounted for 25% of the company's total revenue. In the third quarter financial report released at the end of July, revenue from Greater China also accounted for 15% of the company's total revenue.

Although Apple ranks behind the European and American markets, it still has huge room for development in the Chinese market - its smartphone market share is only about 9%, lagging behind Huawei, Vivo, Oppo and Xiaomi. In contrast, the growth of Apple's iPhone and Mac series in Europe and the United States has basically stagnated.

When the golden age of the hardware market has passed and software has become the new battlefield, software services have gradually become Apple's future development strategy. The Chinese market still has considerable potential: in April alone, Chinese consumers spent as much as $1.53 billion on the App Store, not including other Apple software consumption, such as iCloud or Apple Music subscriptions.

However, the supply chain problem can be said to be only temporary, but the real problem is that Apple's iPhone sales growth in the Chinese market has been much slower than before, which cannot be ignored. Apple fans are no longer as enthusiastic about the annual new product launch conference as before, and more and more users prefer to choose domestic mobile phone brands such as Huawei.

The epidemic has made matters worse. Due to the interruption of iPhone production and the forced closure of retail stores in China, Apple rarely lowered its second-quarter revenue forecast in January to reflect "uncertainty in demand for Apple products in the Chinese market due to the epidemic" - this is also the first time Apple has lowered its revenue forecast in 16 years, indicating the importance of the Chinese market to Apple's overall profitability. (The second quarter of 2020 financial report did show that revenue in Greater China fell year-on-year, from US$10.218 billion to US$9.455 billion.)

This is not the worst. As the growth of European and American markets has stagnated, the growth potential of the Chinese market has increasingly become the focus of investors.

As the release date of iPhone 12 is getting closer, Apple is particularly looking forward to the new flagship product to reignite the consumer enthusiasm in the market, especially in China. The iPhone 12, which is expected to be released in October, will also be Apple's first smartphone to support 5G functions, which is expected to help Apple attract more potential consumers in the Chinese market. For example, Mr. Han, a businessman from Shanghai, said that he has been planning to buy an iPhone to replace his Huawei phone that he has been using for a long time.

But after hearing about the WeChat ban, Mr. Han began to change his mind.

"I'm worried that I won't be able to use WeChat on my iPhone in the future. This will seriously affect my work because 90% of my clients and colleagues communicate through WeChat," he said.

If the Chinese market is really lost in the future, Cook will have a hard time sleeping.

5. If WeChat really removes the App Store…

So far, the Chinese market has been defendable.

In the third quarter just past, revenue in Greater China showed a slight growth of 2%. Cook answered analysts' questions in the subsequent earnings call, saying: "Based on the current exchange rate, our growth should be able to reach 6%. iPhone 11 is the best-selling mobile phone product in Greater China and the best-selling product in Chinese cities... The iPad business in the Chinese market, like other regions, has benefited from remote work and online learning; the Mac business has also achieved strong double-digit growth; and the service sector has set a new sales record... Specifically, among Mac buyers in the Chinese market, three-quarters are new users; among iPad buyers, two-thirds are new users."

The Chinese market was about to rebound strongly, but Trump's executive order made happiness disappear so quickly. After the news came out, Apple's stock price immediately fell by 2.5%. In just a few hours, the market value of the world's most valuable company evaporated by tens of billions of dollars.

Although the wording of Trump's executive order is currently vague and the US Department of Commerce will have 45 days to explain the scope and implementation of the ban, the impact has already occurred and unrest has spread.

Executives at WeChat's parent company Tencent said they believed the ban would only apply to the overseas version of WeChat in the United States and was unlikely to affect WeChat in China, but added that they were also waiting for more specific regulations.

Even though the future fate of WeChat on the iPhone remains unknown, many Chinese iPhone users have already made their choice.

Mr. Chen, a user in Chongqing, is a loyal Apple user. He has replaced his iPhone every year since he bought his first iPhone in 2008. But he also said: "If Apple removes WeChat from the Chinese app store, I will choose Huawei."

“WeChat is indispensable in China and an important part of people’s daily lives,” he said, adding that the quality of domestic smartphones is not bad at all now, and it is not difficult to give up the iPhone.

Mr. Chen is not the only one. According to an online poll initiated by Sina Weibo, "If WeChat is no longer available on your iPhone, would you choose to change your phone or uninstall WeChat?" By the end of the survey on August 14, a total of 1.31 million Weibo users participated in the survey, of which 1.23 million chose to "change their phone."

Of course, Google, like Apple, is an American company and will be subject to the ban. However, Google Play itself is not available in China. Android users in China can download and update WeChat from other channels anyway. "But iPhone users are not so lucky," said Liu Shifang, a senior smartphone analyst in Taiwan. "If Apple is forced to remove WeChat from the App Store, iPhone sales will be affected, especially in the Chinese market."

Given that the WeChat ban will take effect in September, "this may affect the sales of Apple's new 5G-enabled iPhone in the Chinese market," Liu Shifang added.

Not only in the Chinese market, but also in the global market, Apple's popularity will be damaged by the WeChat ban. Any business with operations in China will have to use other methods to maintain communication with WeChat users.

Mr. Liao, a product manager in Taipei, said they may choose to buy other brands of mobile phones, such as Xiaomi, Oppo, etc. He said they rely on WeChat to communicate with suppliers in the mainland, and it would be troublesome if WeChat was not available on the iPhone.

Well-known analyst Ming-Chi Kuo said that if Apple is forced to remove WeChat from its global app stores, the company's annual iPhone shipments in China will drop by 25% to 30%. Shipments of other Apple-related hardware (Apple Watch, iPad, AirPods, Mac notebooks, etc.) will also drop by 15% to 25% accordingly.

Horrible!

6. Download WeChat before it’s too late

Will WeChat really be removed from Apple's global app store? Different experts have different opinions.

"Trump's executive order against Tencent focuses primarily on WeChat used by U.S. users," said Wendy Weishaupt, a U.S. sanctions expert.

But Harry Clark, another lawyer who focuses on export control, disagrees. He said that since American companies such as Apple are also classified as "American legal persons", unless the executive order is revoked or modified, Apple may be forced to remove WeChat from its global app stores.

Ironically, as soon as the executive order was signed, the share price of the American company Apple fell sharply, and its market value evaporated by tens of billions; while the number of downloads of the banned app WeChat increased significantly.

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According to data from market research firm Sensor Tower, after US President Trump threatened to ban WeChat, more and more users in the United States chose to download WeChat and other alternatives, hoping to install them before the app was removed from major app stores.

Statistics from Sensor Tower show that the average number of WeChat downloads in the United States in the past six days was 41% higher than the week before the ban was announced last Thursday.

Some WeChat users have also chosen QQ, another instant messaging app owned by Tencent, because the ban does not explicitly cover the latter. QQ app downloads in the United States have also tripled in the past week.

Thanks to Trump, QQ, which has not been the leader for many years, has returned to the stage.