Trump’s WeChat ban threatens Apple’s smartphone sales in China

Washington’s decision to ban popular Chinese messaging app WeChat threatens Apple’s hard-won position in China’s smartphone market as users in the country could soon be forced to choose between their iPhones and their favorite app.

U.S. President Donald Trump signed an executive order on Friday banning U.S. transactions with WeChat from Sept. 20, describing the Tencent Holdings-owned app as a threat to national security. A separate order issued the same day targeted TikTok, the viral streaming app owned by ByteDance.

Apple is the only Western smartphone maker with a notable presence in the Chinese market and relies on the country for nearly 20% of its revenue.

While the specific scope of the WeChat ban remains to be seen, some iPhone users in China have already made up their minds as to which side they will choose, if forced.

“If Apple removes WeChat from its China App Store, I will switch to Huawei,” said Chen Xixiang, an iPhone user from Chongqing city who has bought a new Apple handset every year since 2008.

“Having WeChat is a must in China,” Chen told the Nikkei Asian Review in an interview conducted over the app. WeChat is used by 1.1 billion people — mostly in China — and its functions go far beyond chatting. The app offers services ranging from paying bills to hailing a taxi and even swapping secondhand goods.

“WeChat is a crucial part of Chinese life,” Chen said, adding that the rapidly improving quality of domestic smartphones would make it easier for him to give up iPhone.

Chen is hardly alone. Local media outlet Phoenix Weekly has posted an online poll that asks: “If one day Weixin [the Chinese name for WeChat] can no longer be installed in iPhones, would you change your phone or not use Weixin?” Among 88,000 participants surveyed as of Tuesday, nearly 80,000 of them said they would choose the messaging app, while fewer than 6,000 said they would stick with their iPhones.

The executive order issued on Friday did not specify whether the ban would cover WeChat-related services offered by American firms outside the U.S., but its wording is open to different interpretations.

“In terms of what [Trump] is trying to ban, the language of the Executive Order for Tencent is focused on the use of WeChat by U.S. users,” said Wendy Wysong, a U.S. sanctions expert at Washington, D.C.-based law firm Steptoe and Johnson.

However, Harry Clark, another lawyer specializing in export controls at U.S. law firm Orrick, thinks otherwise. As companies like Apple fall under the classification of “U.S. persons,” Clark said, the smartphone giant will be forced to drop WeChat from its App Stores worldwide unless the order is revoked or adjusted in some way.

The U.S. Commerce Department has 45 days to explain the scope of the ban and how it will be enforced, but the possibility of losing WeChat as a sales and marketing channel capable of reaching more than a billion Chinese customers has already cast a shadow over American companies. Among affected will be sportswear maker Nike, which operates digital stores on WeChat, membership-only grocery chain Costco which recruits new users via the app, as well as consumer goods heavyweight Procter & Gamble, which hands out e-coupons through the WeChat platform.

“Given 17% of Apple’s revenue in 2019 came from China, this could have a material impact on Apple’s revenue,” Chelsey Tam, an analyst with global financial service firm Morningstar, warned investors in a research note on Monday. Shares of Nasdaq-listed Apple slid about 2.5% on Friday following the announcement, wiping out tens of billions of dollars in market value in a matter of hours. Its share price gradually recovered on Monday.

While Apple’s great rival Google and its Google Play store are not immune to Trump’s WeChat ban, analysts say Chinese smartphone users have learned to live without Google’s offerings since Beijing forced the Silicon Valley search engine provider out of the country a decade ago.

“Google Play is not available in China, but Chinese Android smartphone users could always download and update WeChat from other channels. … But that is not the case for iPhone users,” said Chiu Shih-fang, a veteran smartphone analyst at Taiwan Institute of Economic Research.

“If Apple has to remove WeChat from its App Store, it would have a negative impact on its iPhone sales, particularly in the Chinese market,” Chiu said.

China is the second-largest overseas market for Apple after Europe, which means any decline there could significantly hurt the American giant’s bottom line. The company already had to lower its revenue guidance at the beginning of 2019 — the first time in 16 years — due in part to weaker demand in China.

The ban on WeChat could also hit Apple’s ambitions to regain its position in the global market. In China, Apple already fell to fifth place with an 8.5% market share in the second quarter of this year, according to global consultancy Canalys.

Apple, which has trailed Huawei Technologies in handset shipments since 2019, is betting big on its upcoming 5G iPhones to fend off competition and regain lost ground.

But with the U.S. ban on WeChat set to take effect in September, “it might affect Apple’s sales in China for its new 5G iPhone due to be unveiled that same month,” Chiu said. The California-based smartphone heavyweight already faces sales uncertainties due to production delays amid the COVID-19 pandemic.

Losing access to WeChat could also dent Apple’s popularity globally, as anyone doing business with China would have to figure out another way to maintain communications with WeChat users. For Jim Liao, a product manager at a startup in Taipei, that would likely mean buying handsets from Apple’s competitors.

Liao described the WeChat ban as a “headache” for his team as they rely on the messaging app to talk with suppliers in mainland China.

“That’s the most commonly used tool for them,” Liao said, referring China-based businesses. While the U.S. has yet to unveil its definition of the WeChat ban, Liao said his company has already considered buying smartphones from Chinese vendors such as Xiaomi and Oppo to avoid potential disruptions.

“I think these Chinese smartphone makers will help their overseas consumers figure out how to download or update WeChat,” he said. Nikkei Asian Review