in , , ,

Four Questions About Apple’s Car Project

Four Questions About Apple’s Car Project

This October I will celebrate my 40th year at Creative Strategies. At that time we were owned by Business International, a global consulting company, and Creative Strategies was their tech research and consulting arm. 

I became this company’s PC analyst at that time and was asked to cover IBM, who had just entered the PC market, and Apple, who created the first commercial PC with the Apple I and Apple II. 

Back in those days, there were no PC industry analysts. So, I and three others who were tapped to look at the future of the PC from their respective research companies, began our quest to carve out what today is a booming PC industry analyst segment of the computer research marketplace. 

Although I spent most of my time back then tracking the interest and growth of the IBM PC and its clone market, Apple was in my backyard. They were making a lot of inroads with the Apple II into hobbyists and some small businesses who used the first spreadsheet software called VisiCalc to automate their SMB accounting practices. It was the Apple II and VisiCalc that got IBM’s attention and led them to decide to enter the PC market by 1981. 

During my almost 40 years of covering Apple, I have watched it thrive, dive and thrive again. I have spent time with all of their top leadership over the years and was one of the first analysts asked to meet with Steve Jobs when he returned to Apple in 1997. 

Consequently, I have a pretty good sense of who Apple was in the past and who Apple is in the present. I also understand the fundamental tenets that drive Apple’s success. 

In my Forbes column last week I laid out some of those tenets and emphasized that while Apple does make hardware, Apple is really a software company. This was what Steve Jobs told me in a meeting I had with him and then CEO John Sculley not long after the Mac was introduced in 1984.  

Since I am known as one who has followed Apple closely since 1981, I have been asked by many reporters and various industry professionals about the recent reports that Apple is building an Apple Car.

I admit that my initial reaction when this idea was floated two years ago was extreme doubt. 

The automotive industry is way out of Apple’s core business today and would be a huge stretch for them to enter this highly competitive market. Yet, over the last three weeks, so many reports and, especially Wall Street analysts, are starting to give credence to Apple possibly doing an actual car.

We have even heard comments from Hyundai/Kia that Apple had approached them as a potential manufacturing partner. But this week, an article in the Wall Street Journal reported,- “Hyundai Motor Co. and Kia Corp. said they are “not in talks with Apple over developing an autonomous vehicle.” The two automakers have fielded multiple requests from other firms to jointly develop autonomous electric vehicles, though no initial steps have been determined, according to the regulatory filings.” 

Further reports suggest these talks are stalled but could resume in the future. 

Given Apple’s business tenets that have propelled them to becoming a 2.3 trillion-dollar company, I have four questions I would like Apple to answer if they are truly going to enter the EV automotive market in the future.

The first question is related to what I wrote about last week where I pointed out that Apple is great at popularizing man-to-machine interfaces for the masses. They commercialized the graphical user interface and the mouse via the Mac. They made touch a mainstream UI with the iPhone and the iPad. 

They made voice an important interface with Siri that is now part of the man-to-machine interface on all of their hardware. I believe their next breakthrough in UI commercialization will come through whatever they bring to market in AR and Mixed Reality goggles and glasses and make gestures another way to interact with our devices and their software. Creating great man-to-machine user interfaces is in Apple’s DNA.

A car, in a sense, would give Apple a new hardware palette to work with when it comes to how one drives a car, accesses data, applications and experience entertainment. Also, would Apple integrate AR and Mixed Reality into part of the automotive experience? Simply put, Apple would need to bring great innovation to the man-to-automobile user interface to set it apart from the rest of the emerging electronic vehicle market.

The second question involves another Apple tenet in which the hardware becomes a platform for Apple apps and services. When Jobs told me in 1984 that Apple was a software company, this is really what he meant. Apple’s goal was to make computers easy to use via software and the hardware was there to take advantage of Apple software innovations. 

If you know Apple’s history, Jobs was forced out of Apple in 1985 and started NeXT Computer and did not come back to Apple until 1997. When he came back, he first focused on new hardware and gave us the candy-colored iMacs. But by 1999 he began moving Apple beyond being a PC company with the iPod and started Apple down a new path that eventually birthed their services business. In the last holiday quarter, the services business alone brought in around $15 billion in revenue to Apple and is now part of Apple’s broader and most profitable arm of their business.

If an Apple Car is another “hardware” platform for its software and services, what innovation will Apple offer in terms of new UI’s, apps, and services? New forms of mapping and visual navigation for sure, but what types of new services could Apple offer that gives them monthly services fees?

Most people buy or lease their cars and besides having to make monthly car payments and insurance, very few add any new monthly service fees today. The only monthly paid services offering that has proven successful so far has been SiriusXM Streaming Satellite service and some carmakers offering real-time auto-tracking as a service. 

If you have Apple CarPlay or Android Auto connections and subscribe to music or podcast services you would be paying for these, although not exclusively for your car.

I would think that Apple would need to be creative in terms of new services to offer specifically for an Apple Car to make investing in an Apple auto platform worth the cost and competitive exposure.

The third question is about margins. Apple’s hardware business has some of the highest margins of any tech hardware maker in the business. Their margins on hardware are in the 34-37% range. In services, the margins are well above 50% on all offerings. 

In a side conversation I had with Jobs when he came back to Apple, he let it slip that he would never accept margins under 22%. Historically this has proven very true. Everything Apple has brought to market since Jobs returned is well over that 22% bottom number we discussed. 

If you know the mainstream automobile market, the way they make their money is via volume and aftermarket services. The average margin on most autos sold is in the 4% to 9% range and could be as much as 15-20% for ultra-high-end luxury models depending on special features and additions. Tesla’s margins range from 15-25% but that could shrink as more of the big automakers enter the full EV market in the future. 

This is the one issue that really trips me up when I think about an Apple Car. They would need to get a great number of concessions when it comes to a manufacturing partner to get serious margins on an Apple Car. It is not like making millions of smartphones or iPads where volume and huge investments in automating the manufacturing process allow them to get margins upward of 34-37% on iPhones and iPads. 

I have met with two of the largest automakers in the world in the past and had them walk me through the cost of designing a new automobile and what it takes to actually manufacture them and eventually market them to success. It is a highly complex process and not an easy one either.

Along with margins, I wonder if Apple has the stomach to tackle this market with its challenges and potential pitfalls? 

The fourth question is related to the third and is about manufacturing an EV automobile. Apple got a great partner in Foxconn when they launched the iPhone in 2007 but had to invent some of the manufacturing equipment and processes for Foxconn to make these products.

Katy Huberty at Morgan Stanley, in a conference call with their clients, shared her thoughts on this manufacturing issue in this following excerpt published in Philip Elmer-Dewitt’s Apple 3.0 newsletter:

“Apple has a history of using its balance sheet to support suppliers in their early development. Despite its vertical integration, Apple will leverage suppliers and manufacturers to quickly scale a business, thus taking advantage of the supplier’s manufacturing expertise and component differentiation (leaning on hundreds of suppliers). They have also demonstrated a willingness to fund the capacity build-out to ease the burden on suppliers who typically have to add capacity well before the production ramp. Before the iPhone, Apple was spending $1bn/year on capex… but at peak, reached $13bn annually on capex, the majority of which was spent on purchasing manufacturing equipment for suppliers.”

As Ms. Huberty points out, Apple would have to be highly proactive in helping their manufacturing partner develop and fund any new manufacturing processes needed to create an Apple Car. Add to that the need to possibly even invent some new ways to manufacture an EV worthy of the Apple logo and this project gets even more intense for Apple. 

If Apple applies this same strategy with a proven auto manufacturer and indeed builds an EV car at some point in the future, they will have had to solve or answer all of the key questions I brought up in this article. More importantly, Apple would have to bring breakthrough technologies and serious innovation if they plan to be competitive with some type of Apple logoed electronic vehicle in the future. 

The flip side is that the market for fully electronic vehicles is in the two trillion dollar range as all automakers plan to eventually phase out gas-powered engines over time. GM has said they will phase out all gas-powered cars and trucks by 2035 and most other vehicle makers won’t be far behind. 

Tesla already has a major lead in the EV market and will continue to innovate, which will allow them to be a strong competitor in the fully EV market well into the future.

Should Apple create an actual smart EV, and proves extremely innovative in all of the areas I mention above, I think it could be a serious automaker for premium electronic vehicles.

However, I am still skeptical that an Apple Car could happen and will be watching for any news that confirms how Apple handles all of the concerns mentioned above. How they deal with these issues and questions will determine how much they understand this market and develop a plan to enter it with the goal to not only succeed in it, but also lead.

What do you think?

15 Tech Industry Leaders Share Their Top Priorities For 2021

15 Tech Industry Leaders Share Their Top Priorities For 2021

eCommerce, Delivery And The Gig Economy Create Opportunities For Both Fraud And The Artificial Intelligence To Detect It

eCommerce, Delivery And The Gig Economy Create Opportunities For Both Fraud And The Artificial Intelligence To Detect It