Thoughts On An Apple Car

Over the last two weeks, there have been a series of reports that Apple (NASDAQ:AAPL) is working on building its own electric car that could take on the likes of Tesla. While the Wall Street Journal reported that Apple’s car project, code-named “Titan”, was in the works with the company assembling a team of several hundreds of employees to work on the initiative, Bloomberg went on to say that a potential car could hit production as early as 2020. ^[1] The prospect of seeing an Apple car are indeed exciting given Apple’s history of redefining product categories, but it also raises some questions. In this note, we discuss the implications of Apple’s potential foray into the automotive space.

Our $128 price estimate for Apple is slightly below the current market price.

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Apple Has The Resources, Can Assemble The Expertise

Tesla Motors has proven that it is possible to build a successful car company from the ground up by combining strong leadership, the right group of people and a reasonable amount of capital. Tesla’s success also indicates that the barriers to entry into the automotive market are not as high as they were previously thought to be. The company has eschewed the traditional dealership model, instead choosing to sell its cars through its own retail locations or online, and has also been building its own after-sales service and charging infrastructure. Its success provides a level of confidence that Apple could also be able to build an automobile business. Apple has reportedly been aggressively hiring talent – ranging from automotive designers to vehicle dynamics engineers – away from car companies, and the company also has the product development experience and leadership needed to move the project forward. Apple also has the financial wherewithal (roughly $180 billion in cash) to fund the project or to acquire companies with the required expertise. Additionally, the Apple brand is likely to have significant cachet among the next generation of car buyers, which could make it easier for the company to compete against the established order in the automobile industry.

Project Could Be Lucrative If Apple Focuses On The High End

Electric cars presently represent a very small, yet rapidly growing segment of the automobile market in the United States. Although just about 120,000 plug-in vehicles were sold in the U.S. last year, it represents a 23% increase from 2013 and 128% increase from 2012. ^[2] While industry-wide margins in the automobile industry in general are relatively low, the margins for a truly innovative electric car are likely to be much higher. For example, Ford has gross margins of under 13% while General Motors’ gross margins stand at below 9%. In comparison, Tesla has gross margins of above 27%, although it remains loss making owing to higher R&D costs and operating leverage. While this remains a far cry from the roughly 38% gross margins that Apple currently garners, we believe that this is something Apple can work with given its scale and the potential upside to overall earnings. However, Apple will likely have to focus on the high end of the electric vehicle market, much like Tesla, since this is the segment in which one can generate large margins. Additionally, making a high-end car would allow the company enough headroom to make a truly innovative product, without having to build a car constrained by costs considering the currently high battery prices.

Car Would Require In-House Manufacturing, Could Take Time

Much of Apple’s success in the consumer electronics space is attributable to its solid product and software development capabilities, as well as its sales and marketing strategy. However, manufacturing isn’t exactly in the company’s DNA, given that it has almost always outsourced production to contract manufacturers such as Foxconn and Quanta, with components sourced from large suppliers such as Samsung, Sony and Qualcomm. The concept of contract manufacturing isn’t really prevalent in the auto industry, barring some very high-end, low-volume cars. Entering the mainstream auto market will likely require in-house manufacturing on Apple’s part, and this is something that is likely to take time and effort, given that it entails building, tooling up and staffing manufacturing facilities and also developing a robust supply chain. Even Tesla has been facing issues and is struggling to ramp up production of its Model S sedan. While Apple is a dynamic company, building a culture of manufacturing is likely to take time. Additionally, Apple has a reputation for being relatively patient with its product development cycles, spending years until it perfects and polishes a product. For instance, the iPhone and the Apple Watch reportedly took roughly three years to build, and the timeframe to develop and bring to market a complex car could be much longer.

No Guarantee That It Happens

The project is reported to be in its infancy and there remains a possibility that an Apple-branded car may never see the light of the day. Many technology companies, including Apple, are known to investigate the possibilities of potential products by assembling teams and building prototypes that may never be commercialized, and it’s entirely possible that Apple could shelve the car project if it doesn’t meet internal expectations. Even if a final product doesn’t materialize, there are several technologies – such as batteries and software – used in an electric car that could be deployed in Apple’s consumer electronics business. Apple could also decide that it would be better off by providing hardware and software solutions (for example connected cars or self driving vehicle solutions) to power the next generation of automobiles rather than building out its own car.

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1. Apple Gears Up to Challenge Tesla in Electric Cars, WSJ, February 2015 [↩]
2. Electric vehicle sales charged up in 2014, Fortune, January 2015 [↩]