Apple's taxi stake may be a new turn for digital investing

Its Didi Chuxing investment may turn out to show how to do digital investments right

Mohammad Chowdhury
Updated: May 24, 2016 08:34:54 AM UTC
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The Didi Chuxing investment by Apple may turn out to show how to do digital investments right and.. if successful, provide an opportunity for Apple to extend its current business model (Photo: Jason Lee / Reuters)

Last week, Apple acquired a $1 billion stake in Didi Chuxing, the Chinese ride-hailing business. This investment will let Apple look more closely at how to serve taxi riders better, and with a partner such as Apple, it will enable Didi to see how to use mobile technology more effectively. Didi has only 1 percent of the Chinese commuting market, but since China generates 1.1 billion journeys a day, Didi’s 11 million daily rides is already substantial and the number is set to grow. China has such potential: The number of rides hailed in Beijing is 5-6x what is done in New York City.

But while the behemoths of the technology and communications industries have proven to be great at building businesses, they have generally been weaker at investing in emerging areas. IBM, AT&T, Telefonica and Vodafone have all built global businesses through carefully executed steps over decades, resulting in huge revenue growth and healthy shareholder returns. But several of the world’s major TMT players over the past few years have undertaken investments that haven’t gone right, or they have not invested where and when they should have. Impatience, in one form or other, seems often to be at the root of such failures.

There are at least three patterns around digital investment not working for impatient capital:

1.    A bridge too far Faced with stagnation in growth because markets are saturated, TMT companies are usually looking for new areas out of their current strategic comfort zone. In an attempt to do this, some go for a bridge too far, a good illustration being Vodafone’s foray into social media when it launched “360” in 2009, a service underpinned by a homegrown social media platform to compete with the likes of Facebook, along with apps, maps and other services and a dedicated range of devices. The company overstretched into businesses, such as apps development and social media, which it wasn’t fit for competing in, which required a brand and core skills that Vodafone didn’t have, and in specific market segments where customers were already happily wedded to other offerings.  The result was a rapid demise of the investment proposition, resulting in 360 being quietly withdrawn following the fanfare at launch.

A bridge too far is a form of impatience because the company tries too hard to change its fortunes, rather than taking a more sustainable, perhaps longer, route.

2. Bet small, win big
Some TMT companies have purposely decided to do the opposite which is to be cautious and keep their hands-off by investing small in high growth potential companies. Some companies have set up “ventures” arms which invest anywhere between $10 million and $50 million in targets, kept in a standalone entity at a distance from the core business. But ventures arms are notorious for not being clear about whether the investee is a pure laboratory experiment, a possible candidate for mainstreaming or a business to be integrated in the near term. Often investments start with the right idea, but then objectives drift as time goes on. There are countless examples of such ventures, usually run through a satellite office located in a technology hub by executives who have limited access to the mother ship’s senior board. Common examples are “extension” businesses invested in areas such as health care, education, logistics, and other IoT-related opportunities.

Bet small, win big is a form of impatience because investors expect big things from small investments, and the management can come under fire for not delivering when the growth or synergies expected don’t materialise. One example of such impatience is of a major European telecom operator’s decision a few year’s ago to sell of its minority stake in China Mobile, a fast growing telco with whom there could always have been future opportunities to collaborate.

 3. Putting the devil in the dashboard
TMT players are used to managing businesses which scale first and then provide stable, predictable returns against well understood metrics. And so they love creating management “dashboards” and “enterprise performance management” tools that show where the business is headed. These tools are essential for stable businesses in predictable times, but they don’t serve well new ventures in market segments which are not yet understood, because the operating patterns are not stabilised. Too often major players impose overarching management oversight on new ventures, where the investee doesn’t get an opportunity to breathe or prosper at its own pace and pattern, and often, doesn’t have the opportunity to fail fast either. Telefonica Digital in 2011 is a good example of this, where the mother ship placed unrealistic and impractical measurements on a number of small, emerging digital businesses it acquired.

Putting the devil in the dashboard is an example of impatience as it shows how the mother company is not willing to give space for a new flower to blossom.

The Didi Chuxing investment by Apple may turn out to show how to do digital investments right:

  • Apple is investing a substantial sum, $ 1billion, but not one which bets the company - it is less than 1 percent of Apple’s cash stockpile
  • The investment represents a 1.64 percent stake in Didi, so Apple will not be trying to run the company or impose KPIs on how it measures performance
  • Apple joins experienced investors such as Tencent, Temasek and Softbank
  • Didi itself is an investor in Lyft and in OLA – other ride-share businesses – giving Apple indirect access to other ride-share opportunities
  • If successful, it might provide an opportunity for Apple to extend its current business model

The thoughts and opinions shared here are of the author.

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