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Business Management

Is Apple's $1 billion stake in Didi a good strategic move?

Apple’s decision to invest $1 billion in Didi Chuxing, a Chinese car-hailing app has been deemed surprising by the industry. Mostly because it seems out of character for Apple as the company rarely invests in startups, especially of this magnitude. But given the current state of iPhone sales and the smartphone market in general – the investment makes sense. Fewer people are upgrading their iPhones, there has been a 20 percent decline in Apple shares and poor sales in China. Plus, with Didi rumoured to be targeting an IPO as early as next year, Apple could be seeing a return sooner than thought.

Apple’s CEO Tim Cook says the investment is for a number of “strategic reasons” and will help Apple “better understand the Chinese market”. Some analysts believe one of the strategic reasons is to get a strong footing in the driverless cars segment. As Analyst Rob Enderle at Enderle Group tells IDG Connect: “Cook is struggling to diversify his revenue sources, [at the moment] all of his current ones are in decline. Since we are before the front end of self-driving cars and Tesla has been so successful using an Apple like sales model it appears he wants to diversify to cars now.”

Patrick Moorhead, President and Principal Analyst at Moor Insights and Strategy sees this investment as Apple’s broader diversification into services: “I can see how Apple Pay could become the preferred payment mechanism and how Didi could start more than driving people, but also goods and services similar to what Amazon is doing in America. Self-driving cars are a long way off, but having 100s of millions of customers doing ride hailing and ride sharing is a good start.”

How will this investment help Didi Chuxing?

Didi is hugely popular across 400 cities in China and has 300 million users. Meanwhile, its US rival Uber is losing $1 billion a year in China in order to stay competitive against Didi. Notably, it has already secured funding from Chinese giants Tencent and Alibaba.

Moorhead believes Didi should utilise Apple’s ability in “creating good consumer experiences” and leverage its advice as much as “humanly possible” to help improve the experience.

For Enderle this investment will put Didi in a stronger position to face Uber head on: “They can expand more quickly and more effectively compete against Uber, and it creates a financial alliance which could eventually result in a unique car designed by Apple for Didi."

On the surface, Didi looks like a worthy investment. But how much will Apple really benefit from this in the long-run? For one, self-driving cars are set to take-off in the near future which will inevitably lead to car-hailing becoming more popular. The traditional notion of owning a car is changing, particularly with the younger generation who can get around more conveniently through other means of transportation. “There is a substantial belief that when we move to self-driving cars much of the market will move from ownership to an Uber like service and it appears Apple wants to get on the ground floor of that,” Enderle says.

 How have other foreign companies fared in China?

Building long term partnerships in China with the hopes for eventual fruitful returns has been challenging for US tech companies. Google famously closed its Chinese search engine in 2010 after discovering its Gmail accounts were hacked. But reports suggested that the relationship was never really ‘over’ and now Google is saying that some of its services will return to China.

Intel has had a rocky few years, and recently laid off around 12,000 of its staff. The semiconductor company is now re-focusing its attention in the cloud and Internet of Things space. But back in 2014, in a last ditch effort to penetrate the smartphone and tablet market, it turned to Chinese chipmakers Spreadtrum Communications and RDA Microelectronics and invested $1.5 billion to leverage local Chinese relationships and build Intel-Architecture-based smartphone chips. The terms of the exact deal are unknown but in an interview with EE Times, Spreadtrum’s CEO Leo Li said Spreadtrum is “under no obligation” to use Intel’s technologies unless they prove to be competitive in the market.

Enderle refers to foreign investors being squeezed out by China when no longer needed. In 2006, German companies Siemens and ThyssenKrupp provided China with Maglev train technology, a magnetic levitation that allows vehicles to move without touching the ground to build the world’s fastest train.

At the time, this was a mostly unproven technology, so Siemens along with other manufacturers saw an opportunity to test it and China was more than happy to be its testing subject. But according to Jason A Inch, author of ‘China’s Economic Supertrends’, Siemens was hoping that this deal would lead to further business opportunities in the future. It didn’t happen. Furthermore, Chinese companies started using the technologies themselves and in 2012, a Chinese company announced its own variation of the Maglev technology. China is now going to start a trial run of a magnetic levitation train completely designed by its own local firms.

“China is growing to become the most powerful market in the world. I think the tech firms are in a bit of a feeding frenzy at the moment but the risks are massive and still somewhat unknown,” Enderle says.

But Moorhead does not see Apple being squeezed at the low-end unless the company stops innovating on premium experiences: “I foresee more US investments in China so that US companies can better go after the rising China middle class. The Chinese government wants to see US companies make big investments as a demonstration of their long-term commitment to China. Even better would be a transfer of IP, which the Chinese government looks very favourably upon.”

So where does all this leave Apple? Apple has been fortunate to have enjoyed a prosperous, perhaps even smug ride over the last decade watching its profits soar while its competitors have often stumbled. And despite its recent downturn, in the grand scheme of things, Apple’s remains hugely profitable and this investment will hardly leave a dent. 


Also read:

Intel's Chinese stake and the rise of global tech M & A

Intel shrinks jobs but does it regret its colocation U-turn?

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Ayesha Salim

Ayesha Salim is Staff Writer at IDG Connect

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