Industryweek 10973 Dididache 1

Apple Pays Bargain Price -- $1 Billion -- for China Taxi Company

May 13, 2016
The iPhone maker said it was investing in Didi, which handles more than 11 million rides a day and serves about 300 million users in China. 

Apple Inc.’s (IW 1000/13) $1 billion investment in China’s largest ride-hailing service could help accelerate growth in the world’s most populous country -- and earn goodwill with Beijing.

On May 13, the iPhone maker said it was investing in Didi, which handles more than 11 million rides a day and serves about 300 million users in China. The deal was hatched in just 22 days--a sign of how important the Chinese market is to Apple CEO Tim Cook.

Hooking up with Didi could help Apple secure a firmer foothold in the world’s largest mobile arena at a time when the company is looking to combat a slump in its smartphone business. The tieup also represents the company’s first public investment in the auto market and could provide valuable insights should Apple proceed with its own car, while further blurring the boundaries between the automotive, technology and ride-sharing industries.

At the same time, Cook can’t have failed to recognize the political optics. Last month, Chinese regulators shut down Apple’s iTunes and iBooks services, serving notice that the company was no longer immune to Beijing’s powerful regulators. Until then, Apple had largely avoided the kind of interference that has plagued other American companies, including Google and Facebook.

“I think the Chinese government probably looks at Didi and wants to see them succeed, and having someone like Apple being able to backstop is probably pretty attractive,” said  Brian White, an analyst with Drexel Hamilton. “No one can backstop a company like Apple can.”

Many analysts have interpreted the crackdown on U.S. firms as part of the Chinese government’s bid to build and support domestic companies, including Huawei Technologies, Tencent Holdings and Xiaomi. The Chinese government will almost certainly look favorably on a deal that helps Didi, a homegrown player, battle Uber. Other U.S. companies also see partnerships with Chinese firms as a way of expanding in Asia while also allaying concerns over foreign threats to homegrown innovation.

Staying in China’s good graces is key for Apple, which in recent years has counted on sales there to drive growth but has begun to see signs of a slowdown. For the three months ended March 26, revenue in Greater China, which includes Hong Kong and Taiwan, fell 26% to $12.5 billion. Cook has pledged to continue investing despite an economic slowdown.

The Apple-Didi deal took root during an April 22 meeting at Apple’s headquarters in Cupertino, California, between Didi President Jean Liu and Cook. Liu quipped that any company named after a fruit “could achieve something big.” Didi’s legal name, Xiaoju Kuaizhi Inc., means “little orange.” After Liu and Cook’s initial meeting, lieutenants on both sides worked out the specifics and 22 days later the deal was done.

“The whole deal closed in lightning speed," Liu said. “We were very impressed by Tim. He’s an amazing, iconic leader.”

The investment potentially wins Apple powerful allies in China. Alibaba and Tencent, Chinese Internet giants, could help Apple market Apple Pay and other services, while Didi gives it experience in transportation as it weighs an entry into automobiles.

Didi was created last year when separate apps backed by Tencent and Alibaba merged. Didi now operates in 400 Chinese cities with 14 million registered drivers, offering services from taxis and private cars to social ride sharing and test driving. The company is locked in a battle with Uber, which despite pouring money into its Chinese operations has just a fraction of Didi’s revenue there.

Until now, Apple has mostly bought or backed smaller companies developing technology that complements existing offerings: its largest acquisition was the $3 billion spent on headphones-maker and streaming music service Beats in 2014.

“This is a definite sign that Apple is interested in tackling transportation challenges,” said Brian Blau, a San Francisco-based Gartner Inc. analyst. “If Apple has their own technology in the future, this would make sense from the perspective of Didi wanting to use Apple car technology.”

The tapering of iPad and iPhone sales, coupled with the slow adoption of the Apple Watch, has invited criticism of Cook while simultaneously stirring debate about what its next blockbuster product could be. Apple has been secretly working on a car and is pushing its team to begin production of an electric vehicle as early as 2020, according to people familiar with the situation.

With the Didi investment, Apple becomes the latest technology company to team up with automotive players. General Motors Co. has hooked up with Lyft Inc. while earlier this month Alphabet Inc.’s Google and Fiat Chrysler Automobiles NV agreed to co-develop about 100 self-driving prototypes. Mercedes-Benz parent Daimler AG meanwhile owns German taxi-hailing app MyTaxi alongside carsharing service Car2GO, which competes with BMW AG’s DriveNow.

Besides gaining access to the booming ride sharing business in China, Apple could also glean insights into driving behavior and mapping data that would inform any push into autonomous vehicles. Neither Apple nor Didi have yet divulged what technology or data they might share.

While applauding the $1 billion investment in Didi, some analysts say Apple needs to use its $200-billion-plus cash hoard for many more deals.

“The real question is not that they’re putting $1 billion into Didi,” said Colin Gillis, an analyst at BGC Partners. “It’s why haven’t they done 200 more of these types of deals?”

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