Morgan Stanley: Apple's $1B in Didi could be transformative

"If Apple chooses to launch a car," writes Katy Huberty, "it can go to market as hardware-as-a-service instead of through traditional dealerships."

Five days later, Wall Street is still buzzing about Apple's $1 billion investment in Didi Chuxing, the Uber of China. (See What the analysts are saying.)

In an ambitious note to clients Monday, Morgan Stanley's Katy Huberty has tried to put some rough numbers on what she sees as a potentially transformative deal—further evidence that Apple is in the process of pivoting from smart phones to smart cars.

By the end of her report, she's peered several generations into the future to envision autonomous cities designed to accommodate Level 4 self-driving cars—the ones that don't have steering wheels.

Excerpts from her bullet points:

  • Investment in Chinese ride-sharing business more than meets the eye. An Apple autonomous car fleet paired with a leading (~87% market share in China) car sharing service creates a large addressable market... We estimate a $145 billion addressable market for ride-sharing in China by 2020, assuming 7% of the 2 trillion miles are shared at a value of about $1/mile. We see significant growth to a roughly $500 billion market by 2030 as ride-sharing gains adoption while value per mile falls to $0.50.
  • Today’s global auto industry is a very large, untapped mine of one of the world’s most valuable commodities: your time. With roughly 10 trillion global miles traveled at an average speed of 25 miles per hour and a passenger occupancy rate of 1.55, there are approximately 400 billion vehicle hours per year and more than 600 billion hours of total passenger vehicle hours trapped in today’s light vehicle transportation complex.
  • China screens as one of the most fertile markets for the development of shared, autonomous transport networks. Our team expects Chinese vehicle miles traveled to grow at a [rate] of 10% through 2030 with shared miles accounting for 34% of the total (22% of miles executed by electric vehicles). (See chart below.)
  • The car is evolving into a mobile, supercomputing, content consuming, data producing, software driven, machine learning, cloud connected, robotic swarm. This process may take a generation to play out completely, but it seems many firms have decided that it is difficult to be ‘too early’ in getting the ball rolling. Both incumbents and new entrants appear to view the auto market as a market of miles and services run at an enterprise level rather than a market for machines owned and operated at an individual level.
  • We expect the time horizon of the first announced autonomous cities may be sooner than the market realizes. While such efforts in the area of level 4 autonomous driving (i.e., no steering wheel) may only represent a small minority of global miles traveled, we believe the initial ‘proof of reality’ of the model even at a hyper local level can change the lens through which investors, consumers and regulators perceive the path of commercialization going forward.

Investor reaction to the deal was varied, Huberty writes. But she thinks Apple may have scored a twofer:

"Value investors want capital return and accretion. Growth investors want a transformative deal. Apple’s $1 billion investment in Didi Chuxing is a balance of both—an insignificant dollar amount (at least to Apple and its shareholders) that potentially opens up transformative opportunities longer term."

Below: Huberty peers a generation into the future.
Screen Shot 2016-05-16 at 6.11.49 AM


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