The Case for the Ap­ple Car

Are Ap­ple's Au­to­mo­bile Plans Smart or Crazy?

iPhone Life Magazine - - Front Page - 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

When cars be­come au­ton­o­mous, peo­ple will stop mak­ing pur­chases based on horse­power and torque and buy based on soft­ware and de­sign.

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.”

David Averbach is the CEO and Pub­lisher of iPhone Life and An­droid

Life mag­a­zine. David has an ob­ses­sion with all things Ap­ple. He grew up on Macs and now has a Mac­Book Pro, iPhone, iPad, and an Ap­ple TV. David en­joys trav­el­ing and Ul­ti­mate Fris­bee. He has been to over 20 coun­tries. To con­tact David, email him at David@iphonelife.com.

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