Friday, May 13, 2016

Why is Apple investing US$1 Billion in China’s Didi Chuxing?

Apple announced today it was investing $US1 billion in China’s ride-hailing company Didi Chuxing. CEIBS Professor of Entrepreneurship S. Ramakrishna Velamuri says the investment is an example of a growing trend in corporate venture capital (CVC) investing, particularly in China’s technology, media and telecommunications sectors. He offers more details about this deal activity and what is driving it:

We have seen a trend of corporate investing in the Chinese TMT (technology, media and telecommunications) sectors where large companies such as Baidu, Alibaba and Tencent invest not only in their own areas of strength, but in those of the other Internet giants. For example, Baidu, which has traditionally been strong in search, has invested in travel, e-commerce, education, and entertainment businesses. Our research shows that Baidu and Alibaba have respectively made 45 and 95 investments since 2007. We do not include in these numbers M&A transactions, where the acquirer seeks majority ownership through control. Global Corporate Venturing reported that Tencent invested US$ 5.5 billion in about 100 deals in 2015 alone (the split between investments and M&A here was not given).

This phenomenon of technology companies investing outside their core verticals is also prevalent in the US, but to a much smaller extent as far as we can tell. In China, the technology giants are making these investments as much for threat mitigation as they are for strengthening their competitive advantage. In some cases, they seek to mitigate threats arising from outside their core verticals that negatively impact them. For example, Alipay, Alibaba’s third party payment system, was negatively affected when Tencent leveraged its social media platform WeChat to first launch the Red Envelope (hongbao) innovation, and later introduce WeChat Pay, which has gained significant market share in mobile payments. An example of an investment to strengthen competitive advantage is the one made by Baidu in Qunar, where users can search for the best travel deals. These investments are sometimes exploratory, as neither the investor nor the investee may be clear about the potential synergies (when synergies are clear, the M&A route is preferred). Sometimes, the investor has a hunch about potential synergies and makes the investment to fully explore the possibilities. Corporate venture capital is as much, if not more, about generating strategic returns as it is about financial returns.Apple’s US$ 1 billion investment in Didi Chuxing may also be exploratory. As they say, they are interested in getting to know certain segments of Chinese consumers. This may give them deeper insights about new features to include in Apple Pay, which they have recently launched in China.

Professor Velamuri and his co-authors recently completed a research study titled "Creating Values through Corporate Venture Capital Programs: The Choice between Internal and External Fund Structures". It was published in the Winter 2015 issue of the Journal of Private Equity. Read more about it here.

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