Apple and Didi – Catch a ride

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Apple’s investment looks more financial than strategic.

• Apple has agreed to invest $1bn in Didi Chuxing (formerly Didi Kuaidi) in a move that I think has nothing whatsoever to do with its own efforts to design and build a vehicle (see here).
• Didi Chuxing is the result of a merger of Didi Dache (backed by Tencent) and Kuadi Dache (backed by Alibaba) which provides taxis and vehicles for rent using smartphone applications in China.
• It claims to complete 11m rides per day, with 300m active users giving it 87% of the private car hailing market in China.
• These figures are hotly disputed by its rival Uber China which claims to have 30% market share giving a total well over 100%.
• Whatever the reality is, I think that Didi Chuxing has the edge if only because it is truly a local company.
• Uber China has been at great pains to show that it is also a local company but I think it will always be seen a foreigner.
• This immediately puts obstacles in Uber China’s way as the market environment in China actively encourages the development of local companies to the detriment of foreigners.
• The complete failure of Google, Facebook, Amazon and Walmart to make a dent in China is good evidence of this fact.
• The one exception is Apple and this is why I suspect that Apple was able to make this investment.
• I have very little doubt that Amazon, Google, Facebook or even General Motors would have been very happy to invest, but seeing as all of them directly oppose home grown alternatives, I suspect that all of them were viewed with concern.
• Apple stands out because Chinese consumers demand its products, the Chinese ecosystems are able to monetise Apple devices and its share gain has been at the expense of another foreigner, Samsung.
• Consequently, I think the Chinese do not see Apple as a big threat, but even if they did, they would not be much they could do about it as its products are in such high demand by consumers.
• That being said, I struggle to see what strategic value Apple gets from this investment other than the possibility of a good financial return.
• Apple will learn a little about the Chinese market from being a 5% shareholder, but not much more than it will through having its own retail points of presence in the country.
• It may bring Apple closer to Alibaba and Tencent, neither of whom are real rivals yet but have some mutual interest as RFM calculates that a meaningful amount of Tencent and Alibaba’s revenues are generated by Apple devices.
• For Apple, this represents an investment of 0.6% of its net cash balance and 2 days of cash flow from operations.
• Consequently, if it all goes wrong, it will be virtually unnoticed but given the current valuation of Uber, Apple could double or triple its money quite easily.
• With 900m smartphone users and a population of 1.3bn, China could easily be a larger taxi market than US and Europe put together.
• Consequently, while this is an investment at the riskier end of Apple’s normal appetite, it has scope for upside and Apple might just learn some interesting things and make some important friends.
• Apple’s outlook for 2016 remains difficult coming off the hugely successful iPhone 6 replacement cycle but in terms of fundamental value it remains a great option for long term income investors.