SMARTPHONES: Apple Finally Invests in China with $1 Bln Didi Deal

Bottom line: Apple’s new $1 billion investment in Didi Chuxing is a smart way to show its commitment to China and pursue car-based services, while avoiding intellectual property theft that might come if it set up its own R&D facility.

Apple invests in Didi Chuxing

I’ve been saying for years that Apple (Nasdaq: AAPL) needs to make a major investment in China to show its commitment to the market, but was quite surprised to read it was finally taking such a step with plans to pump $1 billion into local hired car services giant Didi Chuxing. But after some more thought, I realized this particular investment actually has a certain form of logic that I’ll explain shortly. And it also shows Apple’s commitment to the market.

This particular announcement also comes as Apple experiences a sudden series of setbacks in China, following a good streak that saw it do quite well over the last 2 years. Those setbacks were led by Apple’s disclosure last month that its Greater China sales plunged 26 percent in the first quarter of this year. That bad news was followed by the company’s loss in a local trademark dispute involving the iPhone name, and after its China book and movie services were blocked for unspecified reasons. (previous post)

As the bad news mounted, word emerged that CEO Tim Cook was preparing to go to China for what looked like a damage control trip. This latest investment could well be part of that damage control effort, designed to focus on a more positive story involving Apple and deflect public attention from all the recent negative news.

According to the latest headlines, Apple will invest the $1 billion in Didi Chuxing, formerly known as Didi Kuaidi, as part of its broader efforts to better understand the Chinese market. (English article; Chinese article) Apple isn’t saying much more about its new partnership, which is almost certainly its biggest investment ever in China.

Didi was reportedly close to raising $1.5 billion in its latest funding round last month, and I suspect this latest investment by Apple is part of that funding. (previous post) That particular deal was said to give the 5-year-old Didi a market value of $20 billion, which would imply that Apple is getting about 5 percent of the company through its new $1 billion investment.

Most media reports are pointing out that the investment does seem a bit strange, since Didi operates a taxi hailing app and also a private hired car service that competes directly with US giant Uber. Like many other companies, Apple is also reportedly looking into car-related services that might include in-car entertainment systems and self driving vehicles.

Leveraging Car Relationships

I would somewhat agree with the view that this new investment looks a little strange, since Didi Chuxing doesn’t own most of the cars in its system but instead works with them on a contractual basis. But it could technically still encourage those vehicle owners to install Apple-operated entertainment, navigation and other systems in their cars, which could provide an important new revenue source as iPhone sales slows in its second largest global market.

From a broader perspective, this investment also does seem to represent a smart move aimed at boosting Apple’s image in China. While Beijing has been broadly supportive of Apple in the last year or two, a major point of dissatisfaction has been the US tech giant’s relative lack of direct investment in the market. Apart from a few Apple Stores and some recent solar power plants, Apple has made relatively little direct investment in China despite its growing importance.

Most big foreign companies have traditionally invested in China by setting up product development centers and manufacturing facilities costing millions or even billions of dollars. But Apple has shied away from that, probably over concerns about intellectual property theft and also because it prefers to let third-parties like Taiwan’s Hon Hai (Taipei: 2317) do its actual manufacturing. Accordingly, this kind of investment allows Apple to show its stronger commitment in China and pursue car-based services, while avoiding the problem of exposing itself to intellectual property theft that is common in the country.

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