A $1 billion Apple investment as a way to placate China

A $1 billion investment by Apple in a Chinese ride-hailing app is a rounding error for the Silicon Valley giant, which generates about $4 billion in profit every month and has $233 billion in cash and securities in the bank.

But Apple’s surprising interest in the company, called Didi Chuxing, and its out-of-character willingness to publicize the news Thursday evening could go a long way toward showing the Chinese government it is interested in supporting local business.

More than any other major U.S. technology company, Apple has had huge success in China. In the last fiscal year, Chinese consumers spent $59 billion on Apple products.

With that success has come huge risk. In recent years, Beijing has grown more aggressive in pushing an agenda aimed at expanding local tech companies, forcing multinationals to play by its rules if they want access to China’s markets.

Apple has faced increased scrutiny recently in China, where regulators shut its iBooks and iTunes stores. Other companies that have hit such roadblocks, like Cisco, Microsoft and Qualcomm, responded by investing in local partnerships and trying to portray themselves not simply as foreign companies, but as stakeholders in China.

“Apple must be increasingly sensitive to the need to improve its government relations and to stake out a more entrenched position in the China market,” said Mark Natkin, managing director of the China technology research firm Marbridge Consulting. “So making a sizable investment in a leading Chinese IT company will buy it a lot of good will.”

He added that Apple would probably have to follow up the investment with other partnerships and spending in China if it wanted to stay in Beijing’s good graces.

In Apple’s case, the new investment also helps it show Beijing howits operating system and iPhones are closely linked with the rise of app development within China; Didi’s app, for example, is the most downloaded ride-hailing software in China.

“Didi exemplifies the innovation taking place in the iOS developer community in China,” Tim Cook, Apple’s chief executive, said in a news release.

For nearly a decade, Apple’s phenomenal growth was powered by the popularity of the iPhone. But sales of the device have slowed and last month the company reported its first quarterly drop ever in iPhone sales, along with its first drop in overall revenue in 13 years.

Many investors hoped that strong growth in China would offset some of the iPhone’s deceleration. Revenue growth in the greater China region, which includes China, Hong Kong and Taiwan, hovered around 70 percent or more all last year. But last month the company said quarterly sales in greater China had fallen 26 percent compared with the previous year.

For Didi, the deal is a way to beef up its systems. The Chinese company serves close to 300 million users across more than 400 Chinese cities — more users than Uber — but lags technologically, analysts say.

For more than a year, Apple and Didi — which share several partners, including Japan’s SoftBank and Coatue — had been in contact. Apple was one of a handful of technology companies that, over the past year, Didi had talked with to better familiarize itself with the West, according to a person briefed on the deal.

In April, Cook sat down for the first time with the leaders of Didi to discuss working together.

Just three weeks later, Apple was ready to take things to the next level with the announcement Thursday of the $1 billion bet on Didi, one of its largest investments ever.

In the midst of Didi’s last major round of raising funds, the relationship quickly deepened, the person said. The two companies managed to close the deal with “lightning speed,” Didi’s president, Jean Liu, said in a conference call discussing the deal late Thursday.

The two will work together on technology, marketing and products, Liu added.

Cook has repeatedly said that Apple is looking for investment opportunities for its huge cash hoard. Apple has invested small sums in app developers before, and the company views China’s app developer community as a prime source of future growth.

“What this means to me is that Apple is firmly committed to the Chinese market,” said Brian Blau, an analyst with the Gartner research firm. “They are going to look at lots of opportunities.”

Apple’s move also draws it further into a Chinese market crisscrossed with competitive alliances. With the investment, Apple is now aligned with China’s two largest Internet companies, Tencent and Alibaba, as a major shareholder in Didi. And Didi gained Apple as a big-name ally in its battle with Uber in China.

Google’s chief legal officer and head of corporate development, David Drummond, is on the board of Uber. And in 2013 Google’s venture capital arm, GV, invested $258 million in Uber.

But the partnership between Uber and Google has grown more distant over the past few years as both sides have independently pursued self-driving car projects. Uber has also made moves to wean itself from Google’s map technology, including an acquisition of mapping startup deCarta.

Investing in ride-hailing services gives Apple a doorway into the world’s largest auto market and smartphone market by cars and phones sold, and an opportunity to better integrate its devices with cars in China. China’s Internet companies are already hard at work developing driverless car technology and entertainment systems for cars, many of which are based on Google’s Android software.

Apple has been working on its own secret car project, which one independent analyst, Neil Cybart, said accounted for a huge share of the billions of dollars in research and development spending by the company.

“Maybe they could be a technology supplier to Didi. Maybe they could learn from Didi,” Blau said.

The auto market might be one new way that Apple can keep itself relevant to Chinese leaders who often view foreign tech firms in terms of how much utility they have in China as teachers of local companies, Natkin of Marbridge Consulting said.

“As that utility wanes, the room to maneuver dwindles and the welcome mat starts to get drawn under the door,” he said.

(THE NEW YORK TIMES)