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What Apple's Investment in Chinese Car Hailing Giant Didi Really Means It's all about selling services in China (and taking on Uber in the process).

By Scott Cendrowski

entrepreneur daily

This story originally appeared on Fortune Magazine

Zhang Peng © 2015 Zhang Peng

Apple gave Uber's main competitor in China a big boost today in a deal that could also improve Apple's fledgling services in the country.

The country's top car hailing startup Didi Chuxing (formerly Didi Kuaidi) said today it had accepted $1 billion from Apple as part of an ongoing fundraising round expected to raise up to $2 billion for the four-year-old startup. Uber and Didi are in a heated competition for market share in the world's biggest consumer market and both estimated to be losing more than $1 billion a year doling out rider and driver incentives.

Didi's president Jean Liu said the Apple deal happened quickly, following a meeting in Apple's Cupertino headquarters with CEO Tim Cook on April 20th. Liu couldn't offer specific areas in which the companies would cooperate but said on a conference call that the companies would benefit each other "on product, technology, marketing, and many other levels."

Analysts immediately speculated it could be good news for Apple Pay in China, a distant competitor to Alibaba's Alipay, as well as Apple's potential project in autonomous driving; Didi has a cache of data on traffic and rural Chinese roads.

"We are making the investment for a number of strategic reasons, including a chance to learn more about certain segments of the China market," Cook said in an interview with Reuters on Thursday.

Both companies were desperate for some good news in China. Apple has faced setbacks recently in its most important overseas market, which is responsible for a quarter of company sales. Its book and movie services were suspended last month because of new government regulations pressuring foreign content. Afterwards, billionaire investor Carl Icahn dumped his Apple stock on concerns about Apple's relations with China's government. An investment in Didi could indirectly help Apple's relationship with Beijing officials.

Didi, meanwhile, has recently generated negative publicity for crimes -- including rape and robbery -- committed by its drivers. The story of a teacher's murder in Shenzhen at the hands of a Didi driver was widely shared on Chinese social media earlier this month. This week Didi responded with driver suspensions and a new emergency button for riders to use if they're in danger. Uber had previously rolled the feature out in India.

For Apple, the immediate upside of its $1 billion Didi investment could be payments. "It gives their users another reason to use Apple wallet," says Chi Tsang, an HSBC analyst in Hong Kong. He said Apple Pay could be used to pay for Didi. "And then there's the co-branding part," he added. "If it says, for example, "We're launching Apple Wallet in Beijing and you can use it to order Didi and get a five kuai (yuan) discount.'"

The longer-term play for Apple could be expanding its services in China. "Apple right now in China is still being seen as a smartphone provider. Less people know Apple as a service provider," says Nicole Peng, the research director for APAC at Canalys in Shanghai. The suspended book and movie services, for example, had only started in China six months earlier.

"So the potential cooperation with Didi …could increase consumer awareness of using Apple for other services," Peng said.

Didi is the leader in China's ride-hailing market, but by how much is unknown.

Didi says it has 87 percent market share in the market for Uber-like private car-hailing in China; Uber's CEO Travis Kalanick said recently Uber commands 30 percent to 35 percent of the Chinese market. Some researchers support Didi's claim, while others -- like London-based researcher Mintel -- estimate Didi's market share of rides to be around 60 percent.

It is also unknown how much money Didi is losing, but it is probably a large figure. Talking in February, Uber's Kalanick said his company loses $1 billion a year in China. A venture capitalist in China recently told me that, if Uber is losing that much but controls less than half the market share of Didi, Didi's losses were probably much larger because of the discounts it offers to attract customers and drivers. "We wouldn't be here today if it wasn't for burning cash," Liu said last September. Around the same time The Financial Times reported on leaked documents showing Didi was expecting to lose at least $1 billion last year.

For its part Didi says it breaks even in about 200 of the 400 cities in which it operates and recently told people close the company it expects to earn a profit next year.

Scott Cendrowski is a writer for Fortune, covering China.

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