Are Apple’s Automobile Plans Smart or Crazy? by David Averbach
Since its invention in 1886, the automobile has held a special place in the public’s imagination. Perhaps no product elicits as strong an emotional response as the car, which could explain why upon hearing rumors of Apple entering the market, I immediately wanted to see how Apple would meet the challenge.
According to Walter Isaacson’s biography of Steve Jobs, the idea of building an Apple car is not entirely new. Isaacson found that Apple had briefly explored developing a wide range of products, including a car, even before deciding to develop the iPhone. When I first read Isaacson’s book in 2011, I figured Apple executives must’ve briefly discussed it during a wild brainstorming session but that it was too crazy for them to have seriously considered the possibility. As it turns out, according to a recent report by the Wall Street Journal, not only did Apple seriously consider the idea, it also currently has hundreds of employees working on turning that idea into a reality. According to Bloomberg, Apple could release a “Tesla competitor” as early as 2020.
So how crazy is the idea of an Apple car? While the idea is a bold bet, it doesn’t sound quite as far-fetched to me as it did in 2011. There are several compelling reasons why it makes a lot of sense for Apple to develop a car, and also several reasons why it may be a bit too crazy to work.
Why the Apple Car Makes Sense
An Industry Ripe for Disruption
Apple has grown into the largest company in the world by building the best operating system on the market and integrating it with beautiful hardware. In the next decade, two industries will require a leap forward in operating systems: the so-called “Internet of Things” and the car. Apple has already announced an operating system for the Internet of Things with the launch of Apple’s Homekit, so, in some ways, the car makes a lot of sense as the next great frontier.
According to Morgan Stanley, a car’s software currently makes up about 10 percent of its total value, but experts predict that within the next decade, that percent will rise to upwards of 60 percent. Obviously one of the factors driving this dramatic shift is the invention of the self-driving car. According to the head of Google’s autonomous driving project, self-driving cars will be street legal within 3–5 years. When cars become autonomous, people will stop making purchases based on horsepower and torque and buy based on software and design. These are Apple’s two main specialties and could allow the company to successfully compete in the industry.
Putting Apple’s Money to Work
Apple is one of the few companies lucky enough to have accumulated so much money it isn’t sure how to spend it. At the close of last quarter, Apple had $175 billion in cash on hand. To put that in perspective, that’s enough money to buy Ford, GM, and Tesla and still have more than $27 billion left over. While having a lot of cash on hand is certainly better than the alternative, it still presents a lot of challenges. Investors expect Apple to be putting that money to work, investing in profitable new ventures, yet there are only so many investments that Apple can pursue at any one time. One of the auto industry’s greatest challenges is also one of the reasons Apple may be seriously considering entering the market—it requires a lot of upfront capital. This means that not only is the auto industry ripe for disruption, but there are also very few companies capable of disrupting it.
Expanding the Ecosystem
In the past couple of years, Apple has devoted a lot of attention to making its devices more interconnected. With the launch of iOS 8, you can now start typing an email on your computer and finish it on your iPad, and you can answer a phone call and send a text from your iPad or Mac. By making its devices interconnected, Apple is building a digital ecosystem of sorts. Once you buy an iPhone, the interconnectivity of devices means there are a lot advantages to buying a Mac over a PC or an iPad over a Kindle Fire.
As cars become increasingly software centric, the Apple car could become the ultimate expansion of Apple’s ecosystem. The Apple Watch could serve as your car key and Siri could give you turn-by-turn directions while you stream music from iTunes Radio. Expanding the ecosystem keeps customers hooked on Apple’s new products. If you owned an Apple car, would you ever buy an Android phone again?
Why Launching an Apple Car is Crazy
Low Margins
Apple’s business model is relatively simple; it sells high-quality, high-margin electronics. In the 4th quarter of last year, Apple accounted for about 20 percent of the total volume of smartphone sales. Yet in the same quarter, Apple accounted for a staggering 93 percent of the profits earned by smartphone manufacturers, according to a survey by financial group Canaccord Genuity. According to analysts, the iPhone 6 and 6 Plus have a profit margin of close to 70 percent.
Perhaps the biggest reason why Apple launching a car sounds a bit crazy is that the auto industry has never been a high-margin business. In 2014, Ford had $144 billion in sales and pocketed a little over $3 billion. That’s a mere 2.21 percent profit margin. Toyota had a better year, with close to an 8 percent profit margin, but still not even in the same stratosphere as the profit margins Apple is used to earning. Tesla is using a direct-to-consumer sales strategy that it is hoping will lead to profit margins upwards of 20 percent; however, Tesla lost around $300 million last year and has yet to prove that this sales approach can be successful in the auto industry.
Long Life Cycle
One of the reasons Apple may be looking to expand into a new area is that it has seen a steady decline in iPad sales year-over-year for four straight quarters. One industry analyst is predicting that sales will be down 30 percent in 2015. One of the main theories as to why iPad sales are declining so sharply is that the life cycle of an iPad is longer than that of an iPhone. Whereas most people replace their smartphones every one to two years, many owners of older iPad models have not yet felt compelled to upgrade.
If Apple is disappointed by the life cycle of the iPad, it will be heartbroken by that of the automobile. According to a recent study by IHS Automotive, the average car on the road in America is over 11 years old. To put that another way, the average American car is four years older than the original iPhone. The combination of low margins and long lifespans makes the auto industry an unappealing choice for Apple.
Manufacturing Challenges
Apple is widely regarded as having the best industrial design team in the world. On the back of every product sold by Apple you’ll see the phrase “Designed by Apple in California.” One thing you will never read on the back of an Apple product is “Manufactured by Apple in California.” Apple outsources almost all of its manufacturing to third parties outside of the US. Taiwan Semiconductor Manufacturing Company makes the A8 chip, Samsung and LG manufacture the displays, and Foxconn assembles the phones.
From Ford’s assembly line to Toyota’s “lean” manufacturing system to Tesla’s robotics, there are few industries as synonymous with manufacturing as the auto industry. And no car company in the world outsources its manufacturers. Even Tesla, which in many ways could serve as Apple’s benchmark in the industry, not only manufactures its own cars, but has also revolutionized the process through the use of robotics. There are too many safety concerns to trust the complex process to a third party. If you thought “Bendgate” and “Antennagate” were a big deal, wait until you hear about “Brakegate” and “Airbaggate.” There is no way that Apple could outsource the manufacturing of a car, and while Apple is an expert in a lot of areas, manufacturing is not one of them.
Should They or Shouldn’t They?
The industry is ripe for disruption, and who better to shake things up than Apple? But the analyst in me thinks it’s a bit crazy. It’s too big of a risk and not a high enough reward. That being said, isn’t innovation for its own sake what Apple has always been about? I think the best answer I can give you is to quote Apple’s legendary “Think Different” campaign:
“While some see [the risk takers] as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.”