SMARTPHONES: Apple Gives Car Money to China, R&D to India

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Bottom line: Apple’s $1 billion investment in a Chinese car services firm and establishment of an India R&D lab reflect China’s strength as an incubator of strong private companies and India’s as a software development hub.

Apple’s Tim Cook calls on China, India

It’s been an Asia-themed week for Apple (Nasdaq: AAPL) CEO Tim Cook, whose tour to China and then India casts a spotlight on 2 massive markets with huge potential for the company. This particular trip has been quite revealing for the gifts that Cook has awarded during the week, reflecting each country’s strengths and also its weaknesses.

China’s biggest gift was a $1 billion investment in local private car services firm Didi Chuxing, and also a smaller gift in the form of a new app to promote local musicians. India, meanwhile, secured a coveted R&D lab, which is one of Apple’s few outside the US and hugely prestigious. 

It’s probably no coincidence that Apple chose a private company for its first truly major investment in China. By pumping money into an existing firm like Didi with big growth potential, Apple avoided China’s problematic state-run sector and also minimized its risk of intellectual property (IP) theft that is rampant in the country. By comparison, India’s receipt of an R&D center plays to its strength as a software development hub, and also its stronger security systems for protecting IP.

Cook’s trip began early this week in China, where he was working hard to resuscitate his company’s image following a recent string of setbacks. Those included a sharp drop in Apple’s China sales during this year’s first quarter, and a temporary shuttering of its China online movie and book stores for unspecified violations of China’s strict self-censorship policies.

Cook kicked off the trip by attending a meeting with some of China’s leading app developers, including the head of Didi Chuxing, often considered a homegrown Chinese version of Uber. (previous post) Apple later unveiled a new app designed to promote local Chinese music (company announcement), and now the latest reports indicate he also met with China’s top telecoms regulator. (English article)

That meeting was revealed in an article on the Ministry of Industry and Information Technology’s (MIIT) website, whose Minister Miao Wei was quoted saying he hoped Apple could improve its R&D activities in China and also provide a secure user experience. China has grown rapidly to become Apple’s second largest market worldwide, but the US company has made relatively little direct investment there.

IP Theft Reputation

Most major tech companies like Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) now have China-based labs that develop products for their global product lines, even though China is notorious for IP theft from such labs. Apple has probably avoided setting up such a lab partly for that reason, and was hoping to placate critics of its lack of investment in China with the Didi Chuxing tie-up. But the MIIT comments seem to indicate some lingering displeasure at the lack of R&D investment, meaning Apple may have to try harder to polish its image in Beijing.

Cook traveled from China to India, where he sung the praises of a market that is still miniscule for Apple but has the potential to someday match China in size. In a nod to that big potential, Apple announced it will set up a new R&D lab in the city of Hyderabad that will focus on development of maps for iPhones, iPads and other Apple products. (company announcement) This particular center will create some 4,000 jobs, meaning its a relatively large investment probably in the $100-$200 million range.

At the end of the day, both the Didi and Hyderabad investments are quite large and neither China nor India is a winner or loser. But the decision to invest with Didi does seem to reflect Apple’s desire to maintain a certain distance from its Chinese business partners and work with companies that develop their own technology. The India investment shows more confidence in exposing its technology to the country, and perhaps will send a message to Beijing that it needs to continue working to improve its IP protection efforts.

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