- Apple's $1 billion investment in Didi Chuxing is a great financial and strategic move for the Cupertiano giant.
- It shows that Apple might start to embrace inorganic growth and Didi Chuxing will help Apple optimize on new store locations.
- Lastly, Apple will see a substantial capital appreciation and could ameliorate its relationship with the Chinese government via Didi Chuxing.
Apple Inc. (NASDAQ:AAPL) joined the sharing economy with a $1 billion investment in Uber's largest Chinese competitor, Didi Chuxing Technology (formerly Didi Kuaidi). It is the largest single investment Didi Chuxing has ever received.
"We are making the investment for a number of strategic reasons, including a chance to learn more about certain segments of the China market," Tim Cook, CEO of Apple, said. "Of course, we believe it will deliver a strong return for our invested capital over time as well." - Reuters
Apple's investment in Didi Chuxing is unorthodox for Apple. It is unorthodox because Apple likes to outright buy startups so that it can absorb their technology into its pipeline. But with Didi Chuxing, not only did it buy a small stake, but Apple is also not getting a board seat.
This has created a lot of speculation as to why Apple made such an investment.
This article explains why the acquisition is better for Apple from a financial and strategic (political) point of view.
Embracing Inorganic Growth & Optimizing New Store Locations In China
The $37 billion remaining (Apple has returned $163 billion, including $117 billion in share repurchases, to investors) in Apple's $200 billion capital return program did not seem to bolster investor confidence after Apple's Q2 2016.
Apple's $1 billion investment in Didi Chuxing could imply that its next growth frontier could come from an accretive acquisition. Investors have been worried that Apple is not putting its massive cash pile to better use. Although Apple makes small acquisitions, the Didi Chuxing investment implies that it is open to making big ticket accretive acquisitions.
This is a great milestone for Apple because it might imply that the company is beginning to further embrace inorganic growth. Apple has for years been known to develop everything in-house. Its current major growth drivers were all developed in-house. But we have learned that inorganic growth can rapidly accelerate the pace of innovation. Companies with large cash piles such as Google (the YouTube acquisition) and Facebook (the Instagram acquisition) have greatly benefited from inorganic growth.
Apple is better positioned to follow the same path. This is because the company has a lot of cash. For example, Apple ended the quarter with $232.9 billion in cash plus marketable securities. But 90% of that cash is outside the United States. Now, since Apple is trying to penetrate into new markets, the cash outside of the U.S. will be put to better use.
Investments like the Didi Chuxing investment will enable Apple to increase its knowledge of various segments of the Chinese market.
This can happen because as a minority shareholder in Didi Chuxing, Apple has the right to inspect Didi Chuxing's stock ledger, its other books and records. This can come in handy for the Cupertiano giant when deciding which cities and locations to open new stores in. Apple can leverage Didi Chuxing's 300 million users in over 400 cities to locate the most frequently visited places, thus optimizing its new store locations.
Project "Titan" and Advancing Apple's services
There have been rumours of an iCar. The Wall Street Journal originally reported on the iCar project codenamed "Titan'. MacWorld reported similar rumors citing that Apple has more than tripled its R&D costs from $3 billion to $10 billion in 4-years. Implying that Apple might have something big in the pipeline.
But Apple's investment in Didi Chuxing points to something different from an iCar. Apple might now be focusing on services within the car. I say this because the $1 billion investment only represents 4% of Didi Chuxing's $25 billion valuation. Relative to Apple and Didi Chuxing's valuation, Apple could have made a larger investment. This is why I think it might just be Apple's attempt to advance its various services e.g. Apple Pay and Apple Music.
In addition, this is Apple's second largest investment after the $3 billion acquisition of Beats Electronics in 2014. Beats had a purpose. It helped launch Apple's Music service.
Didi Chuxing might have a dual purpose: It might help Apple roll-out project "Titan" to market or expand its service segment within the car. If the rumors of project "Titan" are true then Apple's investment might mirror the actions of General Motors. General Motors for example, recently acquired autonomous driving technology company Cruise Automation. It also has a stake in the U.S. ride-sharing company Lyft. General Motors and Lyft are planning to start testing a fleet of self-driving taxis within a year.
This ties well with Apple's investment in Didi Chuxing because of a related comment Didi Chuxing's CEO made after announcing Apple's investment.
"We're big believers in autonomous driving and we believe technology is the solution," Liu said. "We can work with different partners on autonomous driving, and it is technology neutral."
Making it possible that Apple's project "Titan" might be more than just a rumor.
Conclusion: Capital appreciation & political acceptance
Apple is likely to see attractive capital returns down the line. This is because even though Didi Chuxing claims to have more than 87% of the market for private car-hailing in China, Didi Chuxing's penetration rate is only 1% in China. Meaning that there is a lot of room for Didi Chuxing to grow and for Apple to see capital appreciation.
I think that whether Apple's intention is to put some cash to better use, optimize on store locations, path to developing autonomous cars or attempting to convince Didi Chuxing to adopt its services, the move is a positive from a financial and a strategic point of view.
Lastly, this is also a good political move. For a company with $232.9 billion in cash plus marketable securities, $1 billion is not a huge cash commitment. This is why it is likely that the major driving force behind the investment is political.
When Didi Chuxing's CEO was asked if the $1 billion investment will help Apple ameliorate its relationship with the Chinese government, he said:
"The policy makers in China now have been more and more open now," Liu said. "There's a good foundation that we can help each other in many ways." - The Business Insider.
Didi Chuxing is not a state-owned Chinese company but it is a state-backed company. For example, part of Didi Chuxing's shareholders is the Chinese Investment Corporation ("CIC"). The CIC is a sovereign wealth fund responsible for managing part of the People's Republic of China's foreign exchange reserves. This is why I think the investment is Apple's way of showing that it is willing to make huge investments in the Chinese economy and in advancing China's technology.