Apple’s $1 Billion Investment In Didi: A Good Deal Or Not?

摘要: Many insiders commented that Apple had made a great deal, which is to invest $1 billion in Didi Chuxing, Uber’s rival in China. However, I will have to disagree with this idea this time. For me, Apple’s investment in Didi might not be a good deal at all.

(Chinese Version)

Many insiders commented that Apple had made a great deal, which is to invest $1 billion in Didi Chuxing, Uber’s rival in China. Some believe that Apple would be able to profit a great deal by investing in Didi when its sales of hardware such as iPhone is declining and it has a massive cash flow, others believe that Apple is actually showing its goodwill to the Chinese government, still others believe that Apple is also showing to the Wall Street the potential of the Chinese market and its willingness to play a role in the future self-driving car market.

For me, however, Apple’s investment in Didi is not necessarily a good thing.

To some degree, Apple is losing its competitiveness in terms of hardware-making in a market that is becoming increasingly saturated and homogenized. The only advantage left is Apple’s software ecosystem centered around the iOS system. On the surface, Apple’s investment in Didi might have something to do with its willingness to play a role in the IoV market and its change of mindset; In reality, the investment only demonstrated how the market share of iOS has been grabbed gradually by Android.

Statistics suggest that the market share of Android in the five most prominent markets in Europe (UK, France, Germany, Italy and Spain) grew by 7.1% in the first quarter of this year to 75.6%, and that its market share is also growing steadily in the US and China. To cope with the rising Android, Apple will have to strengthen its advantage in terms of software ecosystem, maintain trust from iOS developers and seek profit from this aspect.

A case in point is a piece of news which says that Apple would allow paid listing on App Store soon. As a matter of fact, Apple is trying to create a sort of “incentive mechanism”, where developers of some really fascinating APPs will receive support from Apple and seek for a brighter future, while more developers will be attracted to iOS‘s ecosystem which promises a brighter future.

Apple is well aware that only real innovation can help raise its own stock price, so it became essential for Apple to find an entry point into other markets and give the world the impression that Apple is going to do something really exciting. That’s exactly why Apple decided to invest in Didi, promoting Apple Pay and pave the way for getting a role in the IoV market. However, all these stuffs won’t help Apple’s revenue grow up in a short time.

For Didi, Apple’s investment will certainly boost its market valuation and make the financing process smoothly in the short time. In the long run, however, when Apple really endeavored to promote Apple Pay and compete with Alipay and WeChat Wallet, what will Alibaba and Tencent, which happened to be Didi’s the other two major investors, react?

Obviously, since Apple Pay entered China three month ago, there is so much cry and little wool. Whether we admit it or not, there’s still very few offline stores that support Apple Pay, and the growth rate is much slower than that of Alipay and WeChat Wallet. It’s unlikely that any player will be able to change the current Chinese e-payment market. Even if Didi supports Apple Pay one day, not a large number of new users will be brought to Apple Pay, since Chinese users have already been quite accustomed to Alipay and WeChat Wallet.

The inconvenient truth is that if Didi really supports Apple Pay one day, something really tricky will happen among Alibaba, Tencent and Apple. The introduction of Apple Pay into Didi will not only take away Alibaba’s and Tencent’s revenue and market share, but also undermine Alibaba and Tencent’s dominance over Didi, which might further lead to a change of mindset between Alibaba and Tencent. For example, Alibaba poured in RMB 3 billion just recently. If Alibaba and Tencent really became a little ambivalent on their support over Didi, then how could Didi further share their resources?

At the same time, I don’t find Apple’s initiative in the IoV market appealing at all. In an interview with Reuters, Mr. Cook revealed that Apple had been endeavoring to develop Apple’s in-car system CarPlay and introducing more information and entertainment services into cars. However, even if Apple did introduce Didi’s service and data into CarPlay, I don’t think making iPhone an intermediator of IoV attractive for users at all.

To be more specific, it’s not something innovative for iPhone users to turn smartphones into a connector. In China, BAT have already been doing something similar. For smartphone makers, such function doesn’t sound appealing to consumers at all. Fundamentally, it’s not cool or transformative at all, for example, Tesla has already been doing similar things long before.

What really moves Apple is a daily transaction volume of over 11 million on Didi, which is almost 80% of all the orders in the entire Chinese online ride-sharing market. More specifically, the number of daily orders on Didi in Beijing is six or seven times more than that of New York city. Mr. Cook must have been really excited about Didi’s potential based on these figures. Many insiders have long pointed out the possibility for Apple to make profit through investment when its sales of hardware stagnate and it owns a massive cash flow.

However, can Didi really help Apple make much profit? As is known to all, Didi’s market expansion is based on its high subsidies both for riders and drivers. In comparison, Uber might look quite stingy on such matter. In a word, Didi’s high daily transaction volume is the natural result of its money-burning subsidy strategy, not innovation. A business model based on subsidies can be misleading when we try to see the real potential of a market.

In addition, regulations over online ride-sharing platforms seem to be tightening. It is likely that ride-sharing service providers will have to report to the government relevant data. A draft regulation on online car-rental service is to be issued in May. According to some insiders, the proposed regulation might regulate the scale of all the ride-sharing platform and allow no platform to become dominant. The regulation will certainly pose a threat to Didi in the future.

Moreover, the proposed regulation might control the number of cars on online platforms, give license to drivers, regulate price, control the standards to sign up as drivers, etc. If so, the revenue model and scale of online ride-sharing platforms might be held questionable and the income of drivers will decline. In other words, platforms will certainly continue to provide online ride-sharing services, yet their revenue potentials, scales will be strictly controlled by the government.

The inconvenient truth is that Didi still fails to develop a sustainable and promising revenue model. In this case, Apple’s secret plan to add credits to its own financial report through investing in Didi might be spoiled. Apple is just thinking too much.

Besides, Didi will continue its money-burning strategy, so it’s still a long time before investors can harvest and make profit. Recently, Wei Cheng, chairman of Didi , revealed to the press that its subsidy strategy will persist and investors should be patient enough.

Travis Kalanick, CEO of Uber, revealed to media about what speed Didi is “burning money”. According to him, Didi gave a subsidy of over $70 million to drivers every week. If so, I wonder if Didi’s expansion will really turn into a good revenue book in the future. After all, it won’t take much time for Didi to use up $1 billion investment from Apple. “Many investors will choose to invest when they see future potential, but if the company they invest in fail to live up to that expectation, then such investment is a mistake at the very beginning,” said Mr. Sanwal, a world-famous investor.

So will Apple’s investment convey a sense of goodwill to the Chinese government? I’m afraid not. After all, the Chinese government have always been quite ambivalent towards online ride-sharing platforms, since the ride-sharing market is a huge challenge to the vested interests of traditional public taxi system.

That’s why the draft proposal lists online ride-sharing platforms only as a supplement to the public transportation system, and treat ride-sharing cars as one type of choices under the system of taxi system. Some related ministries and bureaus have also referred to online ride-sharing services as high-end. It’s quite obvious that the Chinese government is protecting the vested interests of the traditional taxi system. In this sense, Apple’s investment into Didi will only help it become even more potent, which is the exact opposite of what the Chinese government wishes to see.

For regulators, what’s really essential is to strike a good balance between traditional taxi system and online ride-sharing platforms, between citizens and taxi drivers. If online car-sharing platforms become so overwhelming, then it would be hard to strike such a balance.

At present, online ride-sharing platforms such as Didi is haunt by safety concerns. How to protect riders, how to motivate drivers to pick up riders in rush hours, how to narrow the range of the dynamic pricing mechanism, how to verify drivers through innovative monitoring system and how to develop a sustainable revenue model… these are all urgent questions ride-sharing platforms such as Didi need to answer. Moreover, in face of fierce competition from other ride-sharing platforms, Didi will have to find some other ways to keep its users, for example, by improving user experience and developing innovative revenue model.

At this point, Apple’s investment might drive Didi to continue its money-burning strategy and thus Didi’s plan to solve the above problems will be delayed. Fortunately, Didi will spend most of the money in R&D and innovation, at least according to Ran Tao, vice president of Didi Chuxing. However, it remains to see if capital can really boost innovation.

If a startup is developing a product that caters to the future trend, if it can adapt to change swiftly, if it is hard for internet giants to copy it… these are all indicators to see if a startup is worthy of investment. Didi does meet some of the above criteria, but the only problem is that there’s so much uncertainty about its future.

For example, will it be able to make profit in the long run? Is it capable of further expanding market? Nobody knows! For one thing, there’s government policies to be held in concern; for another, there’s a strong rival like Uber, which seems to be in the upper hand in areas such as self-driving cars than Didi.

At last, some critics noticed a shift of mindset here: when Alibaba invested in Didi, many Chinese netizen said that Alibaba was investing in unlicensed car service; when Apple invested in Didi, they said that they were investing in the future. Although both of them invested in Didi, Chinese netizen seems to have an extremely good impression on Apple, a foreign brand.

Wall street investors aren’t blind. What will really boost Apple’s stock price is real innovation. No matter why Apple chose to invest in Didi, a company irrelevant to Apple’s business, such investment will not do any good to investors at Wall Street.

After all, Apple didn’t invest in a rising company with a promising product. Although $1 billion might mean no big deal for Apple, and it’s just a trial and error, and nothing else, Apple will have to avoid being dragged a project that brings no profit but only “burns money”.

In conclusion, Apple’s investment in Didi might not at all be a good deal.

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[The article is published and edited with authorization from the author @Xinxi Wang, please note source and hyperlink when reproduce.]

Translated by Levin Feng (Senior Translator at PAGE TO PAGE), working for TMTpost.

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