Apple (NASDAQ:AAPL) recently registered a new company, Apple Technology Service (Shanghai) Ltd., to operate in the Shanghai free-trade zone and introduce Apple Pay to its Chinese customers. CEO Tim Cook previously said launching Apple Pay in China was at the "top of the list" of the company's priorities. However, the company has had problems negotiating with China UnionPay, which has a near monopoly on payments across China.
But just as Apple took its first steps into the market, Swiss watchmaker Swatch (NASDAQOTH:SWGAY) unveiled a new watch for making mobile payments in China. The Swatch Bellamy, which isn't a full-featured smartwatch, contains an NFC chip for making payments. The watch doesn't connect to the Internet or a mobile device. Instead, Swatch partnered with China UnionPay and Bank of Communications to allow payments through the chip, which charges a registered user's account. The watch will launch in January for 580 yuan ($91), and eventually arrive in Switzerland and the U.S.
Why Swatch cares about China
Bernstein analysts estimate that 45% of Swatch's sales come from Chinese consumers. But a saturated low to mid-range watch market and a weakening Chinese economy caused Swatch's net income to plunge nearly 20% annually in the first half of 2015.
To make matters worse, Swatch's namesake brand faces rising competitive pressure from smartwatches. Jean-Claude Biver, CEO of LVMH's TAG Heuer, recently told CNBC that the Apple Watch was "big competition" for devices that cost between $200 and $2,000. A recent report from research company RedTech Advisors/Talking Data claims that Apple has already sold over a million Apple Watches in China since its launch in May. That's about a fifth of the Apple Watches that have been sold so far.
That growth sent traditional watchmakers scrambling to respond with their own smartwatches. Tag Heuer and Fossil have both partnered with Intel and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google to launch Android Wear smartwatches powered by Intel processors.
Swatch didn't partner with those tech giants. Instead, the company developed watches with health and payments features, like the fitness-tracking Zero Touch One and the payments-powered Bellamy. The company hasn't revealed any plans to make a full-featured smartwatch yet.
Why Apple probably isn't worried
Swatch might have beaten Apple to the punch in mobile payments in China, but Apple probably isn't worried. In addition to selling over a million Apple Watches in China, demand for iPhones has been robust, with three to four million iPhone 6s units being sold during its launch weekend.
Apple controlled 12% of the Chinese smartphone market during the second quarter, according to Counterpoint Research, making it the third largest phone maker in the country after Xiaomi and Huawei. Earlier this year, iOS app downloads in China surpassed those in the United States. That strong growth in hardware and software gives Apple a lot of clout in negotiating favorable deals. That's probably why the negotiations with UnionPay have dragged on for such a long time.
In the U.S., Apple receives $0.15 for every $100 in processed payments. Chinese banks, which send all interbank transactions through UnionPay, have been reluctant to charge those fees. But as Apple's ecosystem grows in China, so will consumer demand for Apple Pay. As a result, UnionPay might have to reach a compromise with Apple. Swatch can't rely on that ecosystem strength. Instead, Swatch can only depend on the strength of its brand and a potentially brief first-mover's advantage in mobile payments.
But considering how many people are already buying Apple Watches in China, a finalized agreement with UnionPay could simply be seen as icing on the cake for Apple Watch buyers. Conversely, the addition of mobile payments to the Swatch Bellamy might not be enough to challenge Apple's full-featured Apple Watches. Moreover, the Bellamy must be registered with one of the Bank of Communication's 2,785 branches to be activated. That hurdle could further throttle the use of Swatch's mobile payments.
Timing is everything
Earlier this year, Google agreed to waive transaction fees for credit card companies on Android Pay. It did so because after signing with Apple, many major credit card companies introduced a "tokenization" system that blocked other payment services from charging transactions fees. Since Google didn't ink a deal before that happened, it couldn't secure any transaction fees.
Swatch didn't disclose the details of its deal with UnionPay, but it likely negotiated Google-like conditions instead of Apple-like ones. Apple, on the other hand, likely wants to meet UnionPay in the middle so it can still generate revenues from mobile payments in China. Therefore, Apple probably doesn't care that Swatch introduced mobile payments in the country earlier.