Middle-Class Chinese Say A $1,000 iPhone Is "Too Expensive"

Apple Inc. had hoped that its iPhone eight might demolish the company’s sales records in China as the country’s burgeoning middle class embraced the phone, thanks in part to its name: Eight is considered a lucky number in Chinese culture, signifying wealth and fortune.

Unfortunately for the world’s most valuable company, this calculus isn’t playing out as well as its massive marketing operation had hoped for one simple reason: The price of the phone is simply too high for most members of the company"s target demographic.

However, Apple investors reacted positively to news Monday that the company"s iPhone 8 would be priced at $1,000 a unit. AAPL was up nearly 2% in early trade.

Two versions of the iPhone 8, along with a third premium model known as the iPhone X, will be officially unveiled at its product launch in Cupertino tomorrow. Details on price points of the new devices and their availability dates are still unknown, though even the cheapest of the latest top-of-the-line model is expected to cost about $1,000.

Unfortunately, the bulls could be a little short-sighted, especially considering that signs of slowing sales in some of Apple’s key growth markets have weighed on its share price in the past.

To wit, Reuters reporters spoke to regular Chinese citizens about the new iPhone – specifically, whether they intended to buy one. For Apple, their response was discouraging.

Here’s Reuters:

“Chinese shoppers, however, are already counting the cost, with the latest model tipped to have a price tag upward of $1,000 - roughly double the average Chinese monthly salary.

…

“I’ll wait for a drop in price, it’s too expensive,” said Angie Chen, 23, a project manager in Nanjing and iPhone 6 owner.

Chen said she might even wait for the new phone’s successor, when prices will fall. “It’s a nice number to hear, but there’s no rush.”

As Reuters points out, Greater China, which (according to Apple’s definition) includes Taiwan and Hong Kong, accounted for roughly 18 percent of iPhone sales in the quarter ended in July, making it the company’s third-largest market after the US and Europe. Meanwhile, the iPhone’s share of China’s smartphone shipments fell to 9% between January and June, down from 14% in 2015, according to data from Counterpoint Research.

Compounding the problem for the company is the fact that some analysts expect China to be a key driver of sales growth. Morgan Stanley analyst Katy Huberty told Bloomberg that she is watching for especially strong growth in China after the upgradeable, 2-year old iPhone base grew 56% this year, meaning more consumers are choosing to buy successive iPhone models.

Yet sales in China are down 10 percent from a year earlier, extending a nearly three-year series of declines. That contrasts with growth in all other regions. And although the Chinese currency has risen sharply against the dollar in 2017, a dramatic reversal of those gains could be imminent after Chinese authorities eliminated a requirement that sales desks set aside 20% of their revenues from sales of FX derivatives. The policy was intended to make it too costly to short the yuan, helping the PBOC fend of speculators as it sought to slow the currency’s depreciation against the dollar last year. But now, the central bank has ostensible switched off the “no” in the “no vacancy” sign at the yuan short-seller’s motel. And predictably, the yuan saw its largest drop in eight months overnight as the bears piled back in.

All of this means the phone will be more expensive for consumers, further suppressing sales as Chinese consumers stick with popular domestic brands like Xiaomi. But even with the company’s shares trading near all-time highs, despite reports of production problems that could limit supplies of the new models, whether or not another slowdown in China will actually impact the company’s shares remains to be seen.

* * *

In a preview of tomorrow"s product launch, several Apple analysts told Bloomberg what they felt would be the biggest reveals during CEO Tim Cook"s highly anticipated presentation. In terms of new features, while investors will certainly pay close attention to the iPhone"s hardware, the change that has the most significance with long-term implications is the addition of 3D-sensing capabilities that enable augmented reality applications, Gene Munster said.

While AR applications will be backward compatible to the 2015 iPhone 6S, the addition of designated 3D and computer vision hardware on the premium iPhone would be a “big step toward putting AR in the hands of everyday users” and a big step toward the “next generation of computing - beyond the smartphone," according to Munster via Bloomberg.

Performance of facial recognition on the OLED iPhone will be widely scrutinized, as the device probably won’t have a fingerprint sensor for login and Apple Pay usage, according to KeyBanc analyst Andy Hargreaves.

According to RBC analyst Amit Daryananianother, recent surveys suggest “sizable pent up demand” and excitement around the iPhone launch. With more of the hundreds of millions of iPhone users around the world expected to upgrade their devices this year, Daryananianother said the company could experience a "sales supercycle."

Visa Begins Bribing Merchants To Stop Taking Cash

Authored by Yves Smith via Naked Capitalism blog,

The war on cash is escalating. A big driver isn’t central banks who want to be able to inflict negative interest rates on savers, or Treasuries who see cash transactions as hiding revenues from their tax collectors, but the payment networks that want to kill cash (and checks!) as competitors to their oh so terrific (and fee-gouging) credit and debit cards.

However, one bit of good news is there doesn’t appear to be much enthusiasm on the buyer, as in merchant, end.

First, the overview from the Wall Street Journal:

Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash.

The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”

There are good reasons to think this initiative won’t get far.

Customer resistance. Food vendors, and in particular restaurants, are low margin businesses with fickle customers who have little to no loyalty. Why risk driving business away?

Aside from the fact that some customers prefer cash, a related issue is that using cards and smartphones often seem to be a tax on time. I really hate using chip cards. Mag cards were often faster than cash, since you swiped and could stuff the card back in your wallet while the transaction was being approved. Chip cards, by contrast, require you to keep the card in the machine while it is being approved, so one is very much aware of the wait. And when I’ve seen people using phones (often to buy small stuff like coffee, which really amazes me), I find that they are slower with it that they would probably be with cash, in that they seem to have to fumble with the phone to get the right app readied and then the payment doesn’t always go right through either.

And that’s before you get to the fact that ApplePay and other smartphone payments time stamp exactly when you paid, adding to the information the surveillance state is gathering about you. By contrast, even if you use a credit card at a store, Clive informs us that the card network typically retains only the date of transaction.

Higher merchant charges. I take credit and debit cards through PayPal, and also checks. And even though I am often slow to deposit checks because I find it hard to get to the bank, I’d still rather have checks despite the somewhat greater hassle because I save the 3% cut the card networks take. Visa makes the argument that handling cash has costs too, but they are the ones that have ginned up the numbers, and in my case, they don’t wash. As the Journal points out:

Indeed, many merchants prefer cash because they don’t have to share the revenue with card companies. Credit-card interchange fees, which networks like Visa set and that merchants pay to the banks that issue their cards, are on average around 2% of the transaction amount, according to the National Retail Federation, the largest trade group that represents merchants in the U.S.

“The idea that merchants don’t want to accept cash is a myth,” said Mallory Duncan, senior vice president and general counsel at the National Retail Federation.

Negative impact on employees who get tips. As one of my tax attorney buddies drily remarks, “Some people have this odd idea that cash payments aren’t taxable.” Restaurant workers who have tips as the major source of their income almost assuredly prefer getting them in cash, rather than facing the delay of having their employer receive them through the payment network which creates delay as well as the not-trivial odds that the boss might cheat them either informally or declare that he’s entitled to a processing cut. And that’s before getting to the fact that restaurant pay levels probably pre-suppose a fair bit of tax evasion, so the business owner might risk losing his better employees to competitors who hadn’t gone the no-cash route.

Enforcement. How is Visa going to police establishments that say they aren’t going to take cash? Will Visa have spies? Will Visa have audit rights?

Risk of legal challenge. As a surprisingly large number of Wall Street Journal readers pointed out, cash is a legally sanctioned means of payment. For instance:

Richard Tavis

Merchants who will no longer accept cash won’t get my business, period. Call me a Luddite, but U.S. currency pretty clearly states that “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE”. It seems to me this will go to court eventually. Merchants must accept notes issued by the Fed. Sorry, that’s the way it is.

Richard Tauchar

@Richard Tavis
That’s my take as well.
And, as someone else mentioned, what happens if you refuse to pay with a Visa, or don’t have one, after having completed the meal? Will they take cash then, or is the meal free?

So I’d be surprised if Visa had a legal leg to stand on, when trying to make these deals.

The Treasury does support the position that private business can refuse to take cash as payment for goods and services, as opposed to settlement of debts.

However, as writers following David Graeber’s Debt: The First 5000 Years, like to point out, we incur and settle debts all the time. And a bar tab or restaurant bill is a debt. The vendor provides the service<strong> without being paid, then expects you to settle the debt you incurred.

Thus the market segment Visa is targeting for this move (the Wall Street Journal headline says, Visa Takes War on Cash to Restaurants) would seem to be one where Visa is on a particularly weak legal footing. I can easily see someone with a penchant for mixing things up go to a restaurant, either not have a card or bring a card he knows will be declined (just to look like he didn’t intend to stage a stunt) and then video putting down more than enough cash to settle the bill and leave. The merchant will have no legal out. He’s been paid. And at least in any decent-sized city, no way will the cops intervene. They’ll regard this as a private dispute not worth their time. If the restaurant staff try to restrain the exiting customer, they could wind up with a very costly suit on their hands.

Taking cash may be the real point of the merchant. A savvy New York City colleague regularly points out how many New York City businesses, like pizzerias and cheap jewelry stories that never seem busy, or nail salons that have economics that don’t seem to make sense, are probably partly if not mainly in the money laundering business.

Visa has even bigger ambitions:

Visa is trying to turn those numbers more in its favor. In the U.S., it is going after spending categories, such as parking and rent, that have been entrenched in cash and check payments for decades. Abroad, it is partnering with governments to move more payments onto its network, including an agreement that it recently signed with the Polish government to move the country to a cashless system.

For what it’s worth, my landlord (more accurately, his in-house management operation), who has an office building that takes up a full block on Park Avenue in the upper 40s, plus has seven residential buildings, takes only checks for rent. One factor may be that in NYC, if a landlord accepts a rental payment from a party, that party obtains a legal interest in the lease. That in turn means the landlord would lose one of his main axes for controlling who lives in the apartment (or worse, a corporation could pay make a rental payment and in theory let anyone it authorized stay in the apartment). It’s easy to see on a check who is making the payment. On a bank transfer, the landlord may regard it as too much hassle to verify the source of a bank auto-debit to be worth any potential labor-savings on other fronts. I’d be curious to learn from any readers who rent what types of payments their landlord accepts.

In the meantime, those of you who like cash should not just make a point of paying in cash, but also tell the employees and in particularly, anyone who appears to be a manager that they will lose your business if they stop taking cash. Vocal customers may be the best way to head off Visa’s profiteering.