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Former GM and BMW executive warns Apple: Your car will be a ‘gigantic money pit’

Published Sep 22nd, 2015 8:20AM EDT
Apple Car Gigantic Money Pit

The Wall Street Journal yesterday reported that Apple is not only moving full steam ahead on its electric car initiative, but is actually taking measures to accelerate development. In addition to tripling the size of its automotive development team, the report claims that Apple has set an internal, and rather ambitious, ship date of 2019.

Of course, the notion of Apple entering the car business is not without its fair share of unanswered questions. Consequently, it’s become somewhat common to hear seasoned auto industry insiders express skepticism about Apple’s plans to enter an industry as foreign, challenging, and cutthroat as the auto industry.

Most recently, former GM and BMW executive Bob Lutz appeared on CNBC and completely dismantled the notion that Apple has even a fighting chance to make even the tiniest dent in the auto industry.

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When asked if Apple was doing the right thing by entering the electric car market, Lutz laid it on thick:

No, I don’t think so. If I were a shareholder I’d be very upset because they’re currently engaged in a very high-margin business and the automobile business, at best, is a very low margin business. And you can’t show me one company in the world that, to date, has made a nickel on electric cars. They are generally money losers and the only reason that everyone is producing them is because they are necessary to meet European fuel economy regulations and U.S. fuel economy regulations. There is absolutely no reason to assume that Apple is going to be financially successful in the electric car business.

While ostensibly valid points, Lutz’s answer fails to take into account two things. First, Apple wouldn’t even consider entering the auto industry with a low-margin vehicle. Everything Apple releases enjoys healthy margins and there’s no reason to think an electric car from Apple would be any different. If Apple can’t figure out a way to release a high-margin car, it simply won’t release a car at all. Second, Tesla’s existence has nothing to do with meeting fuel economy regulations. Additionally, the margins on the Tesla Model S are actually quite high by auto industry standards. The fact of the matter is that Tesla’s balance sheet right now artificially low because its spending every spare cent it has on re-investing in itself via the Gigafactory and ongoing R&D initiatives.

Next, Lutz was asked if it was perhaps possible for Apple to come up with a new approach with batteries that might change the economic calculus of the equation. After all, remember that Apple earlier this year hired a number of top Ph.D scientists from A123 Systems, a company which specialized in advanced battery technologies.

Standing firm, Lutz bluntly said that Apple getting into the car business would be nothing more than a huge waste of money.

First of all, Apple has no expertise in batteries. They don’t make batteries. The specialized electrochemical companies make batteries and Apple is going to buy batteries like everyone else. And when it comes to actually making cars, there is no reason to assume that Apple, with no experience, will suddenly do a better job than General Motors, Ford, Volkswagen, Toyota or Hyundai. So I think this is going to be a gigantic money pit, but then it doesn’t matter. I mean Apple has an embarrassment of riches, they don’t know where to put the cash anymore. So if they burn 30 or 40 billion dollars in the car business, no one’s going to notice.

Again, Lutz here demonstrates a lack of understanding as to how Apple operates. Remember the long-rumored Apple HDTV? Well, it’s since come to light that Apple scrapped development on it because they couldn’t come up with a differentiated product that would justify a price point that would keep its beloved margins intact. In other words, Apple, a notoriously stingy company, is likely the last company that would simply throw tens of billions of dollars down the drain so casually.

Finishing up, Lutz was asked if Apple might rely on third-party manufacturers to make its rumored electric car.

Lutz responded:

Well yeah, they could. They could get Hyundai, Kia or a Chinese manufacturer to manufacture the cars for them and then they would put all of their software and interconnectivity in it afterwards, but I don’t see the advantage to that… But to say that [Apple] is going to do it with an electric car which is, from a cost standpoint, [that’s] the toughest way to go. And by the way, the electric car market is still miniscule. That just doesn’t make sense… If I were a board member of Apple, I’d ask some serious questions about this thing.

Without question, it’ll be beyond fascinating to see how this all plays out. Notably, Lutz is hardly the first auto executive to question Apple’s judgement here. A few months ago, former GM CEO Dan Akerson all but said that Apple has no idea what it’s doing when it comes to cars. And echoing a sentiment uttered by Lutz, Mercedes-Benz chief Dieter Zetsche has said that he sees no rationale behind Apple entering an industry with a relatively low return on investment.

If Apple ever does release a car, we’ll probably find out rather quickly if these auto executives were on the ball or if they’ll instead be added to a long list of people who famously guessed wrong and doubted Apple’s ability to enter and conquer a completely new market.

Remember this 2006 gem from former Palm CEO Ed Colligen?

“We’ve learned and struggled for a few years here figuring out how to make a decent phone,” Colligan said. “PC guys are not going to just figure this out. They’re not going to just walk in.”

The full video of Lutz’s interview can be viewed below.

Yoni Heisler Contributing Writer

Yoni Heisler has been writing about Apple and the tech industry at large with over 15 years of experience. A life long expert Mac user and Apple expert, his writing has appeared in Edible Apple, Network World, MacLife, Macworld UK, and TUAW.

When not analyzing the latest happenings with Apple, Yoni enjoys catching Improv shows in Chicago, playing soccer, and cultivating new TV show addictions.