Apple this week invested $1 billion in Xiaoju Kuaizhi Inc., known as Didi — by far the dominant car-hailing service in China with 300 million customers. While Apple has long admitted being interested in car technology and has deals to put Apple technology into many car lines, this particular investment seems to have been a surprise to most everyone. Analysts and pundits are seeing the investment as a way for Apple to get automotive metadata or even to please the Chinese government. I think it’s more than that. I think it is a potential answer to Apple’s huge problem of foreign cash and a grab for leadership in what may well be the second automotive age.
Apple has about $200 billion in offshore investments. That number is continuing to grow yet making very little return compared to Apple’s phone and computer businesses. As I’ve written before Apple has been very good at leveraging its cash to get better terms from suppliers but that game isn’t going to be getting any better (or worse) and the cash continues to pile up.
So Apple keeps mentioning (hint-hint) a tax holiday that would allow them to bring all that money back to America while paying less tax on it. But a tax holiday hasn’t come. One might well happen if Donald Trump is elected but that’s too much of a crap shoot for Apple. Hillary Clinton might have done it, too, but Bernie Sanders has forced Clinton into a more populist position where she probably can’t be perceived as doing favors for corporate America.
If Apple can’t bring those billions back from overseas they at least want a better return. The Didi investment makes sense for all the reasons other writers have mentioned — Chinese relations, metadata, important Apple market, something behind Door Number Three having to do with self-driving cars — but there’s a lot more to it than that.
Why invest in Didi and not Uber? The major reason is because Uber is based in San Francisco — it’s an American company and so that $1 billion from Apple would have to come from Apple’s much smaller domestic cash stash. Also Didi’s valuation is less than half of Uber’s which means Apple gets more company for its money.
Think about it: which company is likely to ever grow 10X in value? Not Uber. 10X would be $625 billion — worth more than Apple, Google or any other company anywhere. For Didi, 10X is $265 billion — still a lot but more realistic, especially for a company that’s totally dominating the second largest world market for its services.
Another company that won’t grow 10X ever is Apple, itself. So if Cupertino wants capital gains, the better company to invest in is Didi, not Uber or Apple.
Now there are two more important points to make here. One has to do with cash and the other has to do with self-driving cars. Apple has the ability to finance any level of growth for Didi. If Didi wants to enter new markets, if Didi wants to assume financing obligations for new cars. If Did wants to — and this is the big one — buy Uber competitor Lyft, they can get Apple to finance it all from Apple’s stash of foreign cash. This is without regard to economic conditions in either China or the USA. If Apple wanted to buy Lyft directly they’d have to borrow or use USA cash. Helping Didi buy Lyft is a different story.
Yeah, but where are the self-driving cars? This is definitely the future and I think Apple is using this Didi investment to take a lateral run at the problem. Self-driving cars are going to be huge but the early market will also be problematic. Laws will have to be changed, people will die in accidents — it is going to be a mess for awhile. But not a mess in China.
Here’s a country where people mainly don’t drive private cars yet and where the government is autocratic (pun intended). The Chinese government, if it sees an opportunity to assume a technical leadership role, will very quickly throw its weight behind self-driving cars. And just like third-world countries tend to have better mobile phone service than landlines, the newer technology will quickly dominate because it will be entering something close to a vacuum.
Think of China as a billion-passenger test market for self-driving technology. It will bolster the Chinese auto industry, help the domestic financial sector, decrease pollution, and even help the housing market. Private cars probably won’t be the norm in China, either. And every one of those Didi self-driving cars will include Apple technology.
Only when the Chinese market has stopped having growing pains and freak accidents will Didi’s self-driving technology come to the USA and Europe. And along the way Apple will be buying more and more of this likely success story. It’s Apple’s unique way to solve a financial problem and at the same time buy a leadership position in the second automotive age.
I see this more as a transition for Apple from innovating and building their own products to becoming a venture capitalist investing their profits in hope of returns. It’s a sad thing to see but not surprising given the products they’ve been putting out lately. They have lost their technical leadership in laptops, the watch is a small niche product, the iPad has been in decline for a while and now the iPhone is in decline.
“They have lost their technical leadership in laptops,”
Look around and you will find every other brand laptop is a copy of Apple’s laptop designs.
Th Apple Watch is the first iteration and no one knows what will the 5 generation be like and how much market it will capture oh btw the Watch is a $6B market for Apple and which company wouldn’t like this sort of niche product.
The iPad and iPhone in decline but they still bring in billions in profits and not just revenues.
One more thing the tablets and smartphones markets are also saturated and do you sincerely think other companies wouldn’t be affected?
“Look around and you will find every other brand laptop is a copy of Apple’s laptop designs.”
Only if you’ve drunk the kool-aid!
Do you understand the difference between technical leadership and market share?
With all due respect.
Think you missed the entire point of article.
TC’s move is brilliant in so many ways.
It is the ultimate Corp innovation.
Apple can take on debt in the USA, and use that for whatever… like dividends or buying Uber.
The risk is if their cash or investments fall quickly, but their debt is fixed. It hasn’t stopped them yet.
Tim Cook was in charge of 2 things: supply chain and tax evasion. He was just the one guy who never threatened Jobs at the top of the hierarchy. Of course he will become desperate to stay relevant, the culture at Apple requires strong leadership to avoid the tide of technology catching up to them, in which case white boxes will dominate. Inside Apple there needs to be winners and losers, visible stars to keep the hustle going. Under Cook it’s the worst of both worlds: the boring stuff isn’t maintained, the exciting stuff hasn’t come out since Jobs died. The one smart thing Cook has done is not spend more money in R&D, because he is incapable of managing larger leaps. Money doesn’t create growth, culture does.
Swift, the Applecar, AppleVR, AppleTV… they’re not going to be massively relevant, they will be like the iPod HiFi boombox, or the first Motorola iPhone. Cook operated on fear here. He did what he “should do”, there will be no follow-through because there is no vision.
You are foolish to write a story in a way that makes sense of your feelings. The undeclared income played no role. The Didi valuation was not a discount relative to Uber, as you implied. This was just a “me too” action by Cook.
So who was it that “threatened Jobs at the top of the heirarchy?”
Luke, use The Force. Swift is extremely relevant and the AppleTV is selling like hot cakes. The other technologies you’ve mentioned have not even come out yet and you’re already dismissing it.
Search your feelings, you know it to be true.
Swift? Relevant? Nice joke.
Same with stale old ATV
So Apple hasn’t increased their R&D spending? Or has it? You better go read the financial reports then. Since the death of Jobs the increase of spending is only accelerating. Read Neil Cybarts take: https://www.aboveavalon.com/notes/2016/5/11/apple-rd-reveals-a-pivot-is-coming
So you actually say that Cook hasn’t done anything smart at all? The growth you cite isn’t to be found in Apple’s current products (except for maybe Watch and TV), so using that huge cash pile to sniff at things that could deliver growth in the future is very smart I’d say!
So, as I’m not a financial expert, I’m wondering where AAPL investors will be able to monitor the progress of this investment in Apple’s financial statements – in the Product Summary’s Other Products section, or the balance sheet’s ‘other income(expense), net’ – or both? How will it likely play out in these categories over time?
The idea of using China as a test lab for self-driving cars makes a lot of sense. Lower exposure to litigation and regulation as they work out the kinks and the average consumer does not have their identity wrapped with car ownership.
Apple definitely has big plans brewing. In 2011 they spent $1B on R&D. That figure has been rapidly increasing and is expected to be $10B this year.
Apple has traditionally been secretive about their plans until they are ready to launch a product. Tim Cook is maintaining that tradition.
Luke, use The Force. Swift is extremely relevant and the AppleTV is selling like hot cakes. The other technologies you’ve mentioned have not even come out yet and you’re already dismissing them.
Search your feelings, you know it to be true.
I hope trump or someone in congress can get a law passed:
For every dollar declared as a dividend, the company can repatriate one dollar held overseas, TAX FREE.
Uncle Sam gets his cut from the tax on dividend income, and the stock market goes crazy as the pressure to repatriate dollars in the form of dividends increases!
Re: “Apple has about $200 billion in offshore investments. ” The web link to Yahoo only says they have over $200B in “Long Term Investments + Property Plant and Equipment”.
I was reading your article for when you would say the reason is money laundering.
Not money laundering, more like kicking the can down the road. Apple has been hoping for a tax deal that is now very unlikely to come during Tim Cook’s tenure. So it’s time for Plan B, which is putting that money to work in ways that free Apple from the next tech cycle. In order to do that it has to be something big, because Apple has a lot of money to put to work, and it has to be enduring, which is to say not another social network. But if China throws itself into self-driving cars, which I suspect it will, that’s the kind of large enduring industry Apple wants to get into early.
Aren’t there a million people working in China as drivers?
Also, China doesn’t have the legal lottery system of laws we have here which significantly reduces the cost of the problems during development.
Well China has to suck as much $ out of USA as possible. Apple is a competitor to many Chinese brands. Better to just get their $, steal their tech, then shut them down. Cook is probably working for the Chinese gov’t as are the Clintons. Wake up America.
Let me peer into the future…yes…I see…Apple gradually becoming a Chinese company…wow…!
What’s much more likely is Didi slowly becoming an American company.
“If Apple can’t bring those billions back from overseas….” Let’s be clear, the verb should be “won’t” not “can’t.”
Or to be even more clear, can’t afford to.
Isn’t the key word that’s wrong here “back”? My understanding is that the money was gained from outside of the US from non-US sales, and most likely tax has already been paid on it in the place the economic activity occurred i.e. outside of the USA. So what claim has the USA on this money anyway?
Good point, sounds like double taxation: https://en.wikipedia.org/wiki/Double_taxation . Wouldn’t it be great if there were a columnist, discussing the practice of tech investments made in foreign countries, who also explained the tax implications incentivizing such practices?
For Apple to bring back billions and pay taxes under the current tax structure would be nothing short of corporate malpractice. As a public company with shareholders that equals “can’t” bring the money back. Its playing fast and loose with (shareholders) other peoples money.
Invest cash outside the US – check.
Less litigation in China – check.
Government support and encouragement in China – check.
Cheap, cheap labor in China – roadblock.
It costs nothing to hire a driver in China for the day. A taxi is cheap (unless you pay the Tourist Tax from the airport). The incremental of cost of a self-driving car is going to have to be very cheap – $100, maybe.
Look, here’s the thing about self driving cars… Why do I need to own one? If its self driving, just let it drive to wherever I am and then to wherever I need to go. What happens to it before and after that is basically irrlevant to me. I don’t even need a garage anymore. What does that sound like? Uber. So the user interface to self driving cars is going to be something that looks a lot like Uber. Where best to do this? Where people aren’t really culturally used to car ownership. Where government can by executive fiat decide how to allocate road building resources. Sounds like the People’s Republic.
You don’t need to own a self-driving car. Think supply side. Think the latest 10-100M vehicle recall you read about.
Now re-read the most important sentences in Bob’s post: “…people will die in accidents — it is going to be a mess for awhile….”
No, it is going to be a mess exactly forever, where “mess” means that there will be no legal standards of accountability for driverless cars; it will be impossible to hold anyone to blame. And that is the goal and the purpose.
You don’t need to own a self-driving car. You need to be compelled to rent one, so that when it causes injury or property damage, there is no way to determine who was responsible.
Although car ownership is lower as a % in china its a massive aspiration, so Im not sure the idea of persuading everyone that self driving is the way to go is any easier there than here. The real challenge with self driving cars (other than legal status) is the social factors about owning a car – we could all be driving really cheap cars but have been brainwashed into thinking that our car shows who we are – I believe I read somewhere the average american family spends 15%+ of its income on there car(s) – clearly financially the uber-self driving car model makes great sense but will people anywhere in the world be able to overcome the aspirational side of car ownership.
It seems to me you can display your social status and wealth, if you are that sort of person, by hiring an expensive and showy vehicle just as well as you can by buying one, perhaps better. You walk out of a meeting, party or whatever and the vehicle from rolls-royce-r-us turns up. It is more publicly visible, especially when the well dressed driver says your name -everyone knows you have only the best. I should write adverts for a living…
“Look, here’s the thing about self driving cars… Why do I need to own one? If its self driving, just let it drive to wherever I am and then to wherever I need to go. What happens to it before and after that is basically irrlevant to me.”
Yes, you don’t need to own a self-driving car — if you’re happy with quality of accomodations on the
average cross-town bus. When the riders before you were a young couple who simply rode around
the park for an hour so they could engage in intimate relations, or someone who had too much to
drink and got sick all over the seats, or… use your imagination. A self-driving rental that isn’t checked
and cleaned after each use is likely to be mis-used in short order. Too many people simply don’t take
the same care with something they don’t own.
can’t wait for smart cars to finally enter china.
i think this will be super great for the chinese pollution problem if the auto-pod vehicles can be electric and half width as expected.
the drivers who do own cars in china are so terrible as to be dangerous so getting more of them and their huge cars off the road will be a big benefit. they love having servants anyway.
most drivers buy their drivers license without a test and don’t know the rules of the road and certainly don’t drive defensive – it’s every man for himself.
college students however do learn to drive and get a license so they can sell their points to rich drivers who speed everywhere, they can’t afford cars…
What’s a “point”?
Driving demerit points. Rich person breaks traffic rule, they pay off the police and a random student, their demerit points end up on the student’s file instead of their own.
Chinese music is cool! Just don’t use the 9.7″ iPad Pro to try to schedule a ride.
Why not?
But … but … “we” don’t need cars in cities! The unsustainable infrastructure costs for Public Transit, Cycling and Walking is a fraction of what’s needed for cars. And who wants to sit in grid lock! We just need a special facial tattoo to designate status! 😉
Which is why people who live in cities don’t buy cars.
Which doesn’t address the question “why do we need driverless cars”. The places where they would be most useful (busy cities) are the places they will never be viable.
I wasn’t trying to answer the question of why we need driverless cars, merely that the number of cars goes down as the hassle of ownership and the alternatives to ownership go up. No one would be working on driverless cars if they didn’t anticipate some benefits.
But where is the ethical side of using china as a test field?
I know goverment there will help cover the tracks but Apple’s reputation will be seen as cuminist partener and hugely damaged.
It’s already well known that we’re all partners with China, considering most of our products are made there, including iPhones.
As someone who has been to China many times (usually Wuhan), I can’t imagine self-driving cars in China. The Chinese don’t even pretend to follow traffic rules. It is not unusual to see people driving on the wrong side of the road. I personally wouldn’t even consider driving in China. In fact, every time I cross a large street, I feel like I am risking my life.
New York City? Boston?
As someone who’s been in a Beijing taxi driving on the wrong side of the street I can agree with jd777. I was also almost run down by a motorcycle trying to escape the sidewalk barriers to get on the street in Beijing.
NYC and Boston are a much better class of chaos.
I agree as well, Chinese drivers are ridiculous. Never seen anything like it in the USA. I understand India is similarly anarchic from various Youtube videos.
Sounds like the perfect place to train driverless cars to drive defensively.
Think about this… All cars are removed from a part of a city. Only driverless cars are allows to operate there. (That makes self driving cars a LOT easier.) No one owns a car, the driverless cars are part of a service. When you need a ride you order it on your smart phone like you would with Uber. The cars are all electric can be topped off while waiting at strategically placed staging areas.
.
Think about the amazing convenience such a service could provide. You would really never need to own a car. Think about how this would change a city region like NYC’s Tribeca neighborhood. The area would be cleaner, quieter, less congested, more comfortable, and a better place to live and raise a family.
.
How many cities could do this?
Not many. I don’t know the general cost of living there, but the cost of a driverless car service would make it NOT a good place to raise a family.
> All cars are removed from a part of a city.
It’s been done. There are plenty of cities that heavily restrict (prohibitive costs) or outright forbid car access in central zones. The reasons are noise, traffic and polution. So whether the cars are driverless or not is irrelevant, what matters is that the vehicles are transitory and as efficient as possible. Where “efficient” checks all the marks above: low noise, able to accomodate more people in less vehicles (mass transit), and low or zero emissions (electric).
Thing is, this has already been achieved, with electric streetcars, buses and subway trains. I can certainly see cars for rent (taxi, Uber etc.) being cut some slack due to their being transitory and if they upgrade to electric. But being driverless doesn’t bring any extra advantage.
https://www.kickstarter.com/projects/583591444/mineservertm-a-99-home-minecraft-server/comments
You have ignored the Kickstarter backers you made 30,000.00 off of…. please finish this project or prepare yourself for a class action from your backers. I am tired of asking, begging and hoping.
Self driving electric pods (cars) that automatically refuel themselves and are called and billed by an app will completely disrupt transportation.
Apple has a lot of the pieces in place – iPhones with ability to provide preferential app integration, Apple Pay with credit info, Apple Maps, local corporate presence with stores. And they are working on the car technology. Software is one of their fields of expertise.
To mobilize a city or region with charging stations, overcome legal hurdles, set up a fleet etc. will require massive investment.
Apple is equipped for all of this. And it provides a nice barrier to entry for the competition.
Pure app companies like Uber will have a difficult time competing.
It will become much bigger than the current Apple in the end.
China is strategic, if they can government leverage there.
Re: “Self driving electric pods (cars) that automatically refuel themselves and are called and billed by an app will completely disrupt transportation.” If you own your own Apple Pod, and don’t need a driver’s license, how will the pod get to the Apple Store/Garage for repairs and maintenance? Will Apple’s price for charging and service be competitive?
Something you said reminds me of an ad by IBM, featuring Avery Brooks:
https://www.youtube.com/watch?v=vzm6pvHPSGo
Bob: “Yeah, but where are the self-driving cars?”
Avery: “I was promised flying cars! I don’t see *any* flying cars!”
Perhaps you should make an homage video. 😉
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