Technology giant Apple (NASDAQ: AAPL) has fallen on hard times lately. After reaching a peak of $135 last year, shares now sit near $94, a significant decline from its highs. Apple investors are concerned about its falling sales in China, a key geographic market, and its lack of a new breakthrough product.
A new Apple investment could go a long way in solving both of those issues. Apple is investing $1 billion into Chinese ride-sharing company Didi Chuxing, which competes directly with other ride-hailing services Uber and Lyft.
By some reports, Didi is preparing an initial public offering in the U.S. that could come as early as next year. On some critical levels, the Apple investment represents a major step forward.
Apple Investment and Innovation
China is one of the world’s premier emerging markets. It has a population of 1 billion and a rising middle class, which makes it fertile territory for a consumer-focused company like Apple. Indeed, since Apple devices were made available on Chinese telecom giant China Mobile (NYSE: CHL) service, China has become Apple’s second-biggest sales market.
However, business conditions have deteriorated in China over the past year. The rising U.S. dollar and slowing economic growth in China have led to a steep decline in sales. Last quarter, Apple’s revenue from China declined 26% year over year. China saw a steeper decline than any other geographic region last quarter.
Apple’s sales in China were down 32% from the previous quarter, which indicates a steep reversal in that critical emerging market. Consequently, it’s no surprise to see the Apple investment in what could be a huge growth area.
Ride-sharing is one of the hottest trends in the economy right now. Uber has proven to be a hit with consumers, who love the convenience of summoning rides from their phone and getting picked up at their door.
Seeing as how China could soon become Apple’s biggest market for smartphone devices, it’s only natural for Apple to invest in ride-sharing there. This is especially true considering the reports out that Apple has its own ambitions in the automotive market.
A Way to Connect With Chinese Consumers
The rumored Apple Car is an exciting idea, but there is not much to go on. Rumors contend that Apple is in the process of building a self-driving car. But this could be off base; very little from Apple leads investors to believe it wants to start building cars. After all, auto manufacturing is a very costly, capital-intensive business.
A more likely path could be through the in-car experience. Apple CEO Tim Cook has stated that as far as the automotive market is concerned, the company’s focus remains on its services platforms, particularly its CarPlay system. CarPlay links smartphones to vehicle infotainment systems.
The Didi investment represents a foray, albeit a modest one, into the automotive industry. Rather than build its own car, it may make more sense for Apple to invest in technology and software designed to penetrate the auto industry. Ride-sharing could be one such point of entry.
Didi is a major player in the Chinese ride-sharing market. It controls 87% of the car-hailing market in China. It has been embroiled in a tough battle with Uber to control market share, and the investment from Apple could be a much-needed shot in the arm.
Apple Investment and Its Goals
Eventually, Apple’s goal in all markets, including China and the U.S., is to bring consumers into its ecosystem. It designs its products with the specific goal of making its devices and services operate seamlessly with one another.
This is what will help Apple transition from a pure hardware company that sees a jump in earnings when it releases a new iPhone followed by a multi-year stagnation, into a blended product and services company with more consistent recurring streams of revenue from year to year.
Going forward, with the advent of ride-sharing and self-driving vehicles, it’s not inconceivable to think that one day an automobile could simply be a much bigger smartphone. With that in mind, Apple’s $1 billion investment in Didi makes a great deal of sense.
Disclosure: The author personally owns AAPL.