From “Apple to Chinese Consumers: Buy a New iPhone for Under $30 a Month, Interest Free” in Friday’s Wall Street Journal ($):
Apple, hoping to revitalize sales in China, has paired up with the world’s largest financial-technology company to give iPhone buyers an affordable purchase option: up to two years of interest-free financing.
Apple and Alipay, a popular Chinese mobile-payments network owned by Jack Ma’s Ant Financial Services Group, this week informed customers that they could borrow money at no cost to buy products on Apple’s online store and pay for the devices in monthly installments over 24 months…
Huabei, which means “just spend” in Chinese, on Wednesday told customers that it could temporarily increase their credit limits to enable them to purchase Apple products.
While such loans are interest-free for shoppers and can spur them to make big-ticket purchases, retailers are in effect footing the financing costs.
My take: The risks are real. Last I heard, China had $34 trillion in private and public debt. See China’s Debt Bomb.
The market discounts the value of Apple’s cash.So why not use it to increase sales of high margin iPhone?. If we assign a 2% default rate (arbitrary guess) to iPhone sales in China only, the net margin % impact to WW total is tiny. And the actual margin dollars are all incremental.
From the WSJ article;
“…Apple has a store on Alibaba’s Tmall online marketplace, where Huabei users have been able to get interest-free financing for one year to purchase iPhones and other Apple products. The current 24-month financing offer ends on March 25, Apple told users of Alipay.
“… An Ant spokesman declined to comment on the terms of the company’s arrangements with Apple. An Apple spokesman declined to comment.
Apple’s website said holders of credit cards issued by three state-owned Chinese banks can also obtain 24-month interest-free financing to purchase its products.
“… they could borrow money at no cost to buy products on Apple’s online store and pay for the devices in monthly installments over 24 months.
So Apple already had several methods of zero interest one and two year financing for iPhone buyers in China. The new Ant financial offer seems incremental.
How big an effect can this increment be?
Regarding financial risk for Apple. Who holds the debt? Apple or Ant?
Regarding financial risk for Apple. Who holds the debt? Apple or Ant?
There’s likely a shared risk agreement between Apple and Ant.
Everybody should follow the link above “China’s Debt Bomb”. Over leveraging is always a problem, but the danger here seems to corporate debt. From China’s perspective that problem goes away in an EXPANDING economy. Resolving China’s trade problem with the US and Eurozone makes defaults manageable.
I always thought the US had the upper hand in trade negotiations. Now I’m convinced of it. China needs trade (aka exports) more than the US needs Chinese production. A ton of formerly Chinese produced goods have migrated to Vietnam, Thailand, Philippines and Indonesia since China’s current dictator for life took office. The current trade tensions between China and the US will continue the flow.
The bigger issue is energy. China could collapse on an American decision/failure to supply oil. I don’t have hard proof of this, but an oil-man I know has claimed it to be true.
Don’t put salt in your oil, but do take this with a large grain.
Coupled with the Goldman Sachs credit card, It seems Apple wants to turn hardware sales into a de facto subscription service.