Apple's Didi Investment: A Leapfrog View Of The World

| About: Apple Inc. (AAPL)

Summary

Much has been made of Apple's $1 billion Didi investment.

So far the news has been focused on near-term issues.

Here's a big-picture view that could change your take on it.

Image Source: Apple Apple (NASDAQ:AAPL) recently inked a deal to invest $1 billion into Chinese ride sharing company Didi Chuxing. It's been called everything from a good idea, to a bad idea, to an expensive idea to a cheap one... But I think it's something else entirely.

Headline news!

When a company like Apple makes a billion dollar investment it gets a lot of attention. That's particularly true when it's a different approach from the norm. In Apple's case, the giant tech/consumer products company usually prefers to buy companies outright than invest in them. So Apple's Didi move is unique in many ways.

How expensive it is, meanwhile, depends on your view. At the end of last year, Apple had around $17 billion of cash, $21 billion of short-term investments, and a whopping $178 billion or so of long-term investments on its balance sheet. A billion for a Didi investment doesn't seem like such a big deal comparatively speaking. That said, Bloomberg quoted unnamed insiders who pegged private Didi's valuation at $26 billion. That's seems expensive for a company still trying to build a business.

And there's more to think about, here, too. For example, why was the deal inked? Is the Didi investment a way to make nice with the Chinese government so Apple can reopen its online movie and book stores? Is it a way to ensure that its mobile payment system gets included in Didi's service? Is it a way to learn more about China? There's a lot of speculation. All of which may be true to some degree, but I think the issue is bigger.

Leapfrog

Do you remember the VCR? How about the land line telephone? In emerging economies many people don't. That's because developed markets did the original innovation and development and then came up with better replacements, DVDs and cell phones, respectively. Emerging markets didn't have to bother with all the intermediary steps and just leapfrogged to the new technology.

Sure, there are land lines in many emerging markets. But the proliferation of cell phones has been much faster and cheaper. I see Apple's investment in Didi as a way to prepare for just such a leapfrog when it comes to cars. The leapfrog here is likely to be car ownership itself, as new technology and systems (services like Didi and Uber) combined with changing demographic trends to shift the way people look at the automobile. Essentially, the changes we're seeing today mean that you don't actually need to own a car to get reliable, safe, and cost effective transportation.

This is a potentially big issue in China. China recently announced that, on average, there are 30 cars per 100 households in the country. Doing some rough math, assuming four people per household, that means there are around 30 cars per every 400 or so people, or about 115 per 1,000 (which is the normal number used for comparisons like this). Compare that to the United States where there were around 450 or so cars per 1,000 people, according to The Atlantic. That stat is a few years old, but it's actually low relative to a lot of other countries. In fact, I wouldn't be surprised if it was a conservative estimate.

But step back and compare the two numbers and you'll see that China has a long way to go before it reaches the same car penetration rate as the United States. A car company might see this and think there's a gold mine of an opportunity to sell cars in China. And that might be true, but what about the changing face of the auto industry?

Self driving cars, ride sharing services, and increasing numbers of people living in urban settings where its expensive to own and store a car all suggest that the need to actually own a car is diminishing. Now we have a car culture in the United States, so it might be hard to kill off car ownership here. But China doesn't have a car culture because so few people actually own cars. What if, like the VCR and cell phone, this developing market never bothers with the car ownership step, and just goes right into the sharing economy when it comes to the auto space?

A worthwhile expense

If this shift does come to pass, and I don't think it's that far outside the box that it could, Apple just got a seat at the table for what would be a massive business paradigm change for western companies used to customers who buy their own cars. With so much cash sitting around at Apple, I think Didi is a worthwhile insurance policy. And if it helps ingratiate Apple to the powers that be in China along the way, that's good, too. Pushing even further out on the time line, however, a seat at this table in China could provide valuable lessons for what such a change could mean for developed markets as they, too, head down the path of reduced car ownership. Maybe Apple's investment in Didi isn't such a bad thing after all.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.