It’s been about a year since Apple’s $1B 2016 investment in Didi Chuxing. At the time, there was a lot of discussion about the rationale for the deal. Would it garner goodwill with the Chinese government? Would it help Apple’s slowing sales in China? And so on.
So what happened?
It doesn’t look the deal had any short-term impact on Apple or Didi. That doesn’t mean it was a bad deal. In fact, In fact, it seems pretty smart. But it appears it was mostly about building a relationship. My guess is that Apple CEO Tim Cook and Didi President Jean Liu recognized that they have complementary expertise and share a common future in China (and technology). So a simple, limited-risk deal was a way to begin a relationship – and to access expertise. Minority investments are how big companies start to date each other.
My take is four points:
#1: It did not garner much goodwill with the Chinese government.
This was the New York Times’ main explanation for the deal. But Chinese total M&A for 2015 was $735B and outbound M&A was about $60B (PwC). A lack of capital is not a huge concern of the Chinese government today, as compared to 1995. And $1B barely registers.
Plus, Didi has a complicated government situation. Yes, local governments like the potential impact of ride-sharing on congestion but they are also against excessive disruption of State-owned taxi companies. They are also against making lots of taxi drivers angry. Similarly, provincial governments may be supportive but maybe not if ride sharing decreases demand for cars (auto manufacturing, servicing, auto parts suppliers). Keep in mind, the auto sector creates huge employment and the major car companies are significantly State-owned.
So putting $1B cash into an already complicated political situation was not an obvious win for Apple’s government relations in China. If Apple really wants to improve its relations with China’s government then their deals need to include words like “new R&D center” and “technology transfer”.
#2: The deal did not grow Apple’s business in China in the short-term.
This was Bloomberg’s take. Apple’s business in China is selling iPhones and iPads. Would a passive minority investment in a transportation app funding round change this? Would it change the competitive dynamic with Samsung or Xiaomi? It didn’t.
Additionally, there were arguments (WSJ here) that the deal could increase acceptance of Apple Pay in China. But against truly dominant competitors like Tenpay and Alipay? Getting Apple Pay on more phones is good. But competing against these entrenched local giants is a big challenge.
#3:This deal was not a big financial investment for Apple.
This was a tiny investment for Apple given their $233B cash balance (3Q2016). It could turn out to give good returns (note: Didi’s 2016 private market price was $25B. Up from $6B in February 2015). And perhaps Apple is benefiting from using foreign money that would be taxed if repatriated to the US.
But it’s also not a big enough investment to move the needle for Apple. And Apple is not a financial investor anyways. They typically acquire smaller tech companies in order to absorb them. So why did they participate in a funding round for a Chinese start-up anyways?
#4: This deal also has had no major impact on Didi yet.
$1B did not change much for Didi. They raised $3B in a few months in 2015 and can probably raise significant capital anytime they want in China. So yes, cash is certainly a strength but it is a strength that Didi already has.
The big question for Didi in this deal is technology, the one area where Uber claims (and probably has) an advantage. This is not technology at the app and coding level but in the bigger trends coming like self-driving cars. Uber is well positioned to integrate its service into other leading Western car, transportation and technology companies. And Apple is widely rumored to be investing heavily in auto technology (self-driving? electric?). A technology gap is probably a concern for Didi.
So my question is “is Apple bringing something that impacts the technology capabilities of Didi?” The answer appears to be “not yet”. It looks like it was a pure financial investment thus far. But maybe there were data or technology sharing aspects to the deal that have not been disclosed? Or maybe it will happen down the road? And that is my main point. Apple and Didi share a common future in technology and China.
So why did they do the deal? Well, because they like each other and this starts a relationship.
This was my take at the time and I’m sticking with it. Sometimes M&A it not about the strategy or synergies or returns. Sometimes it is about the individual personalities (Did Jack Ma really buy Evergrande Football Club because it helps Alibaba?). Sometimes people do deals just to do them. And because of the relationships. M&A is ultimately person-to-person.
I think Jean and Tim met. I think they liked each other and they liked each others’ companies. And they had already recognized the value of each others’ expertise and experience. It is reported that Apple and Didi had been in communication for a year prior to the deal.
Long-term, Apple needs China and Didi needs technology. So they have complementary expertise and share a common future in China and technology. Based on this they just did a simple, no-risk deal. And in doing so, they created a more formal relationship between their two companies. I still don’t see much business rationale beyond that. They went from flirting to dating but they haven’t yet married (a strategic partnership, a joint venture, etc.)
And perhaps this initial deal was just the first step toward larger collaborations? Perhaps a joint venture in cars? Large deals do tend to follow smaller ones.
Perhaps this relationship will turn out to be critical for one of them at a later time? A financial back-stop? It’s usually best to build your bridges before you need them.
Or perhaps they are just two leading tech CEOs who recognize the world is changing quickly (the rise of China; the collision of technology, cars and transportation; the rapid emergence of more Chinese smartphone makers, etc). So working together on a changing terrain is a smart move in general.
I waiting for a bigger deal to follow this initial smaller one. What comes next with Apple and Didi will be interesting to watch.
Thanks for reading. -jeff
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I write and speak about “how rising Chinese consumers are disrupting global markets – with a special focus on digital China”.
- Photo by Grzegorz Walczak on Unsplash
