If there’s any truth to the old adage, “when there’s smoke there’s fire,” it’s becoming increasingly hard, if not downright impossible, to ignore the growing number of news reports and rumors suggesting that Apple is developing an electric car.
In the span of just about two weeks, the notion that Apple is working on an electric car went from crazy unsubstantiated rumor to a claim bolstered and corroborated by venerable publications like the Wall Street Journal. The Journal, for instance, relayed that Apple CEO Tim Cook has already approved the formation of a 1,000 strong car development team.
Adding even more specificity into the mix, Bloomberg recently reported that Apple is aiming to have production kick off by 2020. What’s more, Apple has already begun assembling an impressive team of folks with deep and broad expertise in automotive development.
Admittedly, that’s a whole lot of smoke. And naturally, there are no shortage of articles and opinion pieces already making bold predictions about how Apple is going to disrupt and revolutionize the auto industry and turn into a $3.4 trillion company as a result.
It’s time to jump back to reality.
While the idea of Apple bringing its design expertise to the auto industry is certainly intriguing, the Apple Car hype train has run amok, fueled by rumors and an abundance of wishful thinking. Amidst all the speculation and conjecture, there hasn’t been much in the way of a serious discussion regarding the myriad of reasons why Apple getting into the car business, and developing its own car no less, makes little to no sense.
1. Where’s the money?
Apple’s business model is pretty simple; it sells premium products at premium prices. Today, Apple has upwards of $180 billion in the bank because it sells products with high margins at tremendous volume.
This begs the question: Do the dynamics of the car industry align with Apple’s typical m.o?
I contend they do not.
The market for cars, in terms of unit sales, is extremely small relative to the markets Apple currently competes in.
As a quick illustration, the following chart, courtesy of Benedict Evans, illustrates the minuscule size of the car market in terms of unit sales relative to other industries.
But because cars are vastly more expensive than smartwatches, most people on board the Apple Car bandwagon believe Apple can make a lot of money with high margins.
The reality, though, isn’t that simple.
Margins in the auto industry for mass-produced vehicles are extremely low, with 10% generally considered to be quite good. BMW’s margins, for instance, tend to hover in the 8-9% range. In contrast, Apple products typically yield margins in the 35-39% range.
To gauge how Apple might fare in the auto market, many people are quick to look at how many vehicles luxury brands like Porsche and BMW sell every year. Suffice it to say, it’s a lot. But those brands have an endless array of models to choose from. If you hop on over to Porsche’s website, for example, you’ll find that the company, while having 4 or 5 main designs, has upwards of 46 different variations to choose from.
The iconic Porsche 911 alone, for example, has 21 different variations.
The same thing goes for BMW which manufacturers a healthy variety of different sedans and SUVs.
A more apt, if not downright obvious, comparison would be Tesla. Not only does Tesla manufacture electric vehicles, it’s a relatively new entrant into the auto industry and the difficulties it has endured may mirror some of the challenges Apple might face.
And just how many cars did Tesla sell globally in 2014? 31,655.
Now let’s entertain a wildly optimistic and wholly improbable scenario and imagine Apple, with just one or two car models, can somehow sell 10x as many cars as Tesla did in 2014, giving us a figure of about 310,000 units. For the record, that figure would make this mythical Apple Car a top 10 selling vehicle in the U.S. in 2014.
Now let’s assume that Apple, on the strength of its brand and supply chain expertise, can come out of the gate and immediately match BMW’s profit margins.
In 2013, BMW sold 1.65 million cars worldwide, a tally which includes the BMW, Mini, and Rolls-Royce brands. When the dust settled, BMW posted $78.9 billion in revenue and a pretax profit of $7.33 billion in profit, resulting in a profit of approximately $4,442 per car.
That said, if Apple in just a few years time can somehow manage to sell 310,000 units and make a generous $5,000 per car, that only comes out to $1.5 billion in profits, annually.
For Apple, that’s chump change. From January 2014 through December 2014, Apple generated $44.4 billion in profits. During the company’s most recent holiday quarter alone, Apple posted $18 billion in profits.
Even Apple’s Mac product line, during the last three months of 2014, generated more than $1.5 billion in profits.
The unique and harsh economics of the auto industry simply don’t align with how Apple tends to do business. Sure, there is a lot of money to be made selling cars, but most of the profits are made by selling affordable cars at huge volumes or by selling extremely expensive cars at low volumes.
Driving the point home, former Apple executive Jean-Louis Gassee writes:
Ford, the healthiest US car company, made $835M in net income last quarter, less than 4% of their $34B in sales. Compare that number to Apple’s record-breaking $18B profit. Tesla, Apple’s supposed rival in the fantasy blogs, pulled in a little less than $1B last quarter, and it lost about 10% of that. There isn’t an inkling of an explanation for why and how a superior product designed and built by Apple would bring superior returns.
Matthew Yglesias, writing for Vox, has a more optimistic take and argues that Apple can make a lot of money in the auto industry because they’ll be able to secure margins far higher than the auto industry standard.
If Apple makes a car, it will be a high margin car because Apple only makes high margin products. If it succeeds it will succeed for the same reason iPhones and iPads and Macs succeed — people like them and are willing to buy them, even though you could get similar specs for less.
And just what, exactly, is a high margin car? Amongst luxury brands, Porsche reportedly has the highest margins in the industry at about 15%. Where’s the evidence that Apple has the secret sauce to do better? Curiously, folks in the tech industry don’t really seem to grasp how ghastly expensive the entire design, development, testing, and manufacturing process is for a full-fledged car at scale.
Additionally, once you start breaking down luxury car sales by specific models, the volumes become so small as to make the notion of Apple entering the auto industry with one or two models completely impractical.
Ultimately, the question isn’t whether or not Apple can manufacture a car and sell it at profit. It’s whether or not the profits it generates from auto sales can be sufficiently large enough to warrant entering a highly competitive market in the first place.
Making an Apple-branded car is a big risk with a high chance of failure, but it’s not qualitatively different in that regard from making an MP3 player or a smartphone.
Since when did entering the car industry become so easy?
The risk in developing a car from scratch, and at a scale that would prove profitable to Apple, is insanely higher than the risk Apple took on in getting into the MP3 player or smartphone market. At worst, we’re talking about Apple potentially losing billions and billions of dollars. At best, we’re talking about Apple spending billions of dollars and then slowly but surely recouping those costs over long periods of time.
2. What type of innovation can Apple truly bring to the table?
When critics foolishly lambast Apple’s small market share, a common retort is that Apple is like the BMW or Mercedes-Benz of the auto industry, which is to say they may have a small market share, but they make a whole lot of money selling elegant, forward-thinking products.
Which is to say, a hypothetical Apple Car wouldn’t be entering an industry plagued by backwards-thinking corporations more than happy to just sit back and bask in the glory of past successes. On the contrary, they’d be entering a vibrant and highly competitive industry consisting of incumbents with decades worth of design and manufacturing expertise. They would be entering an industry that, quite frankly, isn’t necessarily in need of the famed Apple touch.
BMW. Audi. Mercedes. Porsche. These are luxury brands that already embody the ethos of Apple product design. And last but not least, we have Tesla, a company largely considered the Apple of the car industry. With Apple supposedly intent on developing an electric car, it’s much more instructive to take a close look at Tesla as opposed to any other luxury car brand.
Tesla’s current flagship car, the Model S, is effectively an advanced computer on wheels. A universally praised vehicle, the Model S is an unabashed gem of engineering prowess and ingenuity. With its large 17-inch display, unrivaled safety record, and jaw dropping driving performance, the Model S is arguably the car of the future today. Hardly a unique opinion, the Model S has won innumerable accolades for its design, safety, and performance. Just last month, Consumer Reports called the Model S the best car on the market for the second year in a row.
Point being, what gap in the auto industry is there as to make room for Apple to come in and innovate? Where’s the disruption going to come from?
Proponents of an Apple Car are quick to toss around words like “revolutionize” and “disrupt” without ever providing specific details as to what such improvements would entail.
Furthermore, Apple executives have stated on numerous occasions that they’re only interested in entering new product categories when they feel they can bring something new and better to the table.
For example, here’s how Apple executive Greg Joswiak explained Apple’s methodology for entering new product categories:
If you can’t enter the market and try and be the best in it, don’t enter it. You need that differentiation. At Apple if we can’t be the best then we are not interested in it.
That said, what evidence is there that Apple can out innovate companies like Tesla and other auto bigwigs with proven track records of excellence in an industry in which Apple has literally little to no experience?
One of the reasons Apple was able to upend the music industry and the smartphone market is because it successfully introduced innovations into otherwise stagnant industries. The car industry has no such glaring innovation deficiency.
Again, Tesla in particular has proven to be a beacon of automotive innovation.
The one wildcard in all of this is Apple’s research into battery technology. If Apple can somehow deliver a car with enough range to put Tesla to shame, then maybe there’s something worth discussing. Even so, it’s not exactly as if Tesla, a company that has been researching and improving upon power efficient battery technology for years on end, is an industry laggard.
3. Where’s the infrastructure? Where’s the team?
Developing and building a car is insanely expensive; we’re talking factories, assembly lines, incredibly advanced and futuristic robotics. Just getting things off the ground requires enormous sums of cash, something which Apple of course has in spades. Still, auto factories can’t be constructed over night. As Benedict Evans tweeted not too long ago, “There’s no Foxconn for cars.”
So will Apple go it alone? Will they partner up with an existing auto maker? These are extremely important questions that need to be addressed before analysts start drooling at the notion of Apple creating an entirely new and wildly profitable revenue stream.
According to the most recent Apple Car reports, Apple’s car team currently stands at 200 and may eventually expand to reach 1,000 individuals. In the car industry, that’s nothing.
BMW has well over 100,000 employees worldwide. Porsche has 22,000 employees worldwide. In 2014 alone, Tesla doubled its workforce to over 10,000 employees.
The point is, for Apple to make money selling cars, it will need to sell a lot of them. To do that, they need sprawling and complex infrastructure investments, not to mention a sizable workforce.
As opposed to apple’s other forays into new industries, you can’t secretly assemble a team of 150-200 employees and expect them to create an amazing car the likes of which the market has never seen before.
Developing a car requires years of advanced planning, much of which can’t be hidden from public view. Without any of the requisite infrastructure in place, it’s truly hard to take the “Apple will release a car in 2020” talk seriously.
4. Where’s Apple going to sell it?
Apple Stores are great for checking out and purchasing the latest Macs or iPhones, but with a car in the product lineup, Apple will quite literally have to start from scratch. Is a company as controlling as Apple really going to be okay with selling cars via traditional dealerships?
That seems extremely unlikely.
It stands to reason that Apple would opt to follow Tesla’s model which involves company owned dealerships that provide complete control over the entire user experience. But as anyone who has followed Tesla can attest, the dealership franchising laws that exist across the country have made it extremely difficult for Tesla to get its stores up and running in certain states.
Even if we assume that franchising issues get ironed out in the next few years, establishing a nationwide network of Apple Car stores would require an exorbitant amount of time and money. It’s important to note that the number of Apple retail store locations grew steadily as the company’s popularity and profits skyrocketed. High demand and growing sales provided the requisite bedrock for retail expansion.
It’s hard to see how a similar strategy would work with cars, a product users need to actually test drive before purchasing.
If Apple starts out with a few dealerships in just a few states early on, it’s fair to assume that sales volume won’t be high enough to offset the immense costs involved in getting everything up and running. On the other hand, if Apple starts out with a wide net of stores across the country, that’s a lot of expended capital for a product that may not even prove to be a hit with consumers.
Consider this: Apple has 446 retail stores across the globe. The number of BMW dealerships is in the 3,200 range.
5. Apple is starting from scratch
One of Apple’s longstanding strengths is its ability to leverage existing technologies and a strong ecosystem to greatly increase the likelihood new products will become hits. The iPod was able to leverage the iTunes Music Store to reach even greater heights. The iPad was a terrific value proposition because it worked with Apple’s already popular App Store. The upcoming Apple Watch, similarly, will leverage that same App Store ecosystem along with a passionate installed base of iPhone users.
An Apple Car, however, requires Apple to effectively start from scratch. All of the typical data points that fall in Apple’s favor — the ubiquity of the iPhone, the App Store, its worldwide chain of retail stores — are completely irrelevant when it comes to designing and releasing a car. It’s one thing for Apple to leverage its strengths and enter a new product category, it’s an entirely another matter for Apple to enter an entirely new industry.
6. A more likely scenario
Again, the question isn’t if Apple can make a car. The question is if Apple can make a car profitable enough to justify the expense of getting into the car business in the first place.
Personally, I don’t think Apple has concrete plans to release a car to production by 2020 or any specific date in the future. Rather, I think Apple has put together a team to explore the possibility of developing a car. More to the point, I think Apple is assembling a group of extremely smart individuals in order to assess the viability of further research. I think Apple’s car ambitions, at this point, represent nothing more than a typical R&D project, albeit on a grander scale.
If Apple’s team of engineers, after two years of work, don’t think they can create a battery that can match what Tesla is doing, then Apple will likely bow out before even entering the ring. As the quote above from Joswiak relays, Apple doesn’t get into a new product category unless it feels it can be the best.
And that, I think, is what all of these car rumors really represent: A deep exploration into the possibility that Apple can develop a best-in-class automobile as to warrant continued development.
As Jason Snell of Six Colors writes:
The next step in this process isn’t hiring a thousand people and planning a release date. It’s probably setting up a team to investigate all the issues involved in entering this field. Is there something here? What are the issues with entering a new industry? What do we need to create ourselves and what do we buy from suppliers? Do we do this ourselves or with partners? Should we buy someone or invest in someone? Are we really building a car, or just subsystems for a car? And is this all a bad idea that we should forget ever happened?
While Apple is likely tackling these problems currently, it’s curious that many in the media are already assuming that they’ve been solved.