Apple plants seed in China taxi service

Didi Chuxing, China’s largest ride-hailing company, has made no secret of its admiration for Apple. The company’s official name, Xiao Ju Keji, which means Little Orange Technology, is a reference to the US technology group. Visitors to Didi’s campus in Beijing are told how Cheng Wei, its founder, was looking at the logo on an Apple store and thought, “If I can’t be an apple, I can be an orange”.

That admiration seems to be working in both directions: Apple invested $ 1bn in Didi last week, its biggest minority investment ever.

The deal is not a huge outlay for a company that has net cash of $ 153bn but it is an unusual move given that Apple has previously shied away from using its cash to invest in start-ups. Unlike other big tech companies, such as Google and Intel, which have active venture arms, Apple has a longstanding tradition of incubating new ideas in-house.

The Didi investment also points to the growing list of challenges facing Apple in China, a country that has become increasingly important to its growth prospects. It could have wide ramifications for Apple’s efforts to move beyond the iPhone into services, say analysts.

For several years, China had been a key source of fresh demand for Apple as iPhone penetration reached saturation in more developed markets such as the US. But this reversed dramatically in the most recent quarter, when sales in greater China dropped 26 per cent, contributing to Apple’s first drop in revenues in more than a decade.

The disappointing sales figures were just the latest bad news out of China for the US group, at a time when the government has become increasingly restrictive towards foreign tech companies.

Following the passage of new laws on internet content this year, Apple’s film and book services were blocked in April. And this month, the company lost a lawsuit against a Chinese group that uses the word “iPhone” on leather cases and accessories. Apple has also tussled with Beijing over data.

Carl Icahn, the activist investor who had been one of Apple’s biggest shareholders, pointed to the company’s challenges in China as a key reason behind his decision to sell all his stock. He told CNBC a day after the disappointing results that Beijing could “come in and make it very difficult for Apple to sell there”.

Apple may hope to benefit politically from its alliance with one of China’s leading start-ups. “The policymakers in China have been more and more open,” said Jean Liu, president of Didi, in a media briefing on Friday. “There’s a very good foundation where we can help each other in many ways.”

Apple’s investment in Didi, its first publicly disclosed funding of a transportation company, which valued the Chinese group at $ 25bn, underscores how the company is looking beyond hardware and toward services.

Apple’s $ 3bn acquisition of Beats Electronics, the headphone maker and music service, in 2014, was instrumental in the launch of streaming service Apple Music a year later.

Meanwhile Apple has been working on a secretive car project, though the company has never publicly acknowledged this. Several of Apple’s recent acquisitions have been of small start-ups with technologies that could be useful in an intelligent car.

Asked on Friday about whether Apple and Didi could go beyond ride sharing — to work jointly to develop their own smart or driverless cars, Ms Liu was coy. “We are confident that we will benefit each other on product, on technology, and on many other levels,” she said.

Ms Liu would not disclose specifics of how Apple and Didi would collaborate, but she said product integration, marketing and data science were possible areas.

We are confident that we will benefit each other on product, on technology, and on many other levels

Geoff Blaber, an analyst at CCS, says: “It’s about diversification into services and learning about what is becoming a very segmented automobile market.” As it gets into services, Apple will need to better understand local markets, he adds, and the Didi partnership could help.

Didi has joined a strategic partnership with fellow Asian car hailing apps Ola in India, GrabTaxi in Southeast Asia, and Lyft in the US, in what some say has come to resemble a global coalition against Uber, Didi’s main competitor.

Apple’s cash arrives at a crucial time for Didi, as it is locked in an expensive subsidy war with Uber China, as well as two other Chinese ride-sharing start-ups, Yidao and Shenzhou. Didi has raised more than $ 2bn from investors as part of this fundraising round, including the funds from Apple, bringing its total funds raised to more than $ 6bn.

Travis Kalanick, Uber’s chief executive, said he had heard of the Apple deal only on the day it was announced even though the companies worked together. “We have a partnership with Apple,” he says. “We have done so many things with them and continue to partner with Apple in ways that move the industry forward and get us excited.”

For Apple, a single investment in Didi is not going to make its challenges disappear overnight, particularly when it comes to privacy issues.

“Certainly their various services beyond hardware will continue to face a lot of pressure here,” says Mark Natkin, managing director at Marbridge Consulting in Beijing. He adds that privacy is a thorny issue for any foreign tech company. “If you are not very comfortable giving the government access to your data you can’t do business here.”

If you are not very comfortable giving the government access to your data you can’t do business [in China]

At the same time, Didi is facing its own political challenges in China, as Beijing is preparing new regulations on ridesharing that could radically reshape its business. Those rules, first issued in draft form last October, are being revised and have come to be seen as a litmus test in the struggle between the government’s pro-innovation and conservative forces.

While Didi already has the backing of China’s most powerful tech companies, including Tencent and Alibaba, which are both investors, the relationship between these tech giants and the state-owned sector has at times been an uneasy one.

But the race for the Chinese ridesharing market continues. Didi says it is still fundraising for its current round, and has not yet disclosed who its other investors are.

Additional reporting by Charles Clover and Richard Waters

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