I’ve never been gung-ho on the prospects of an Apple branded car ever hitting the road, at least not within the compressed time frame that many analysts seemed to enthusiastically champion. Over the past few months, the excitement associated with the idea of Apple stepping into the automotive world blinded many to the myriad of complex challenges involved in researching, developing and ultimately bringing a car to market.
From a Bloomberg report claiming that Apple wanted to begin car production in 2020 to an even loftier Wall Street Journal report claiming that Apple set a “target ship date for 2019,” analysts and others within the tech community quickly began to view the idea of an Apple Car not as matter of if but as a matter of when. To be sure, it was never any secret Apple was heavily researching the prospects of developing an electric car, but Apple often pours R&D dollars into projects that never ultimately get off the ground, with the company’s rumored HDTV being a prime example.
For months, I’ve maintained that Apple developing its own electric car made little to no sense for a variety of economic and logistical issues. Just a few days ago, the New York Times reported that Apple laid off dozens of employees from its car research team amid a shift in the project’s focus. According to the Times, Apple’s car initiative, now spearheaded by Apple executive Bob Mansfield, will focus more on self-driving car technology as opposed to the development of a physical Apple-branded car.
With that in mind, I thought it might be an opportune time to briefly run down why Apple, in my estimation, would be foolish to release its own car.
First off, there’s the issue of money. Apple’s all about the bottom line and margins within the auto industry are notoriously low even for luxury automakers like BMW. Whereas Apple typically enjoys margins in the 35-40% range, margins in the 8-10% range in the auto industry are considered impressive.
Consider a magical scenario where Apple in 2020 successfully managed to manufacture and sell 315,000 cars. I call this a “magical” scenario because 315,000 cars sold would immediately transform the mythical Apple Car into a top 10 selling vehicle in the U.S.
Now imagine that on top of selling 315,000 cars, Apple was also able to secure margins similar to what BMW enjoys. As a quick point of reference, the profits BMW enjoyed for each car it sold in 2013 was approximately $4,442.
Even if Apple manages to sell 315,000 cars and make a generous $5,000 in profit per unit sold, that comes out to $1.57 billion over 12 months. Now given Apple’s deep pockets, that’s not exactly a needle mover. Remember, Apple during its most recent quarter posted a profit of $7.8 billion. Also remember, with 17 million Apple Music subscribers, the company’s music streaming service generates approximately $2.4 billion in revenue across 12 months. If we assume that 45% of that is pure profit, that’s about $1 billion in profits.
All that said, is Apple really going to spend billions of dollars on car development and manufacturing when the profit levels would, realistically speaking, not even come close to matching what it accomplishes with Apple Music?
A more realistic scenario might have Apple selling in 2020 as many cars as Tesla delivered in 2015, which is to say somewhere in the ballpark of 50,600 units. Even if Apple can secure an even more generous profit of $8,000 per car, that’s a net profit of $404 million per year. Again, that’s chump change for Apple.
To be clear, the underlying issue isn’t whether or not Apple can release a car and make a profit, it’s whether or not the profits generated are sufficiently high enough to justify Apple’s entrance into an incredibly competitive and cut-throat market filled with established and sophisticated players.
Another issue that doesn’t seem to get much play in the press is that it’s not entirely clear what type of innovation or differentiation Apple could deliver in the car space. As opposed to the state of the mobile market in 2006, the car industry has no shortage of innovative and sophisticated automakers who continuously deliver impressive innovations on a consistent basis. Apple’s iPhone in 2007 was competing against laggard products from the likes of BlackBerry and Nokia. An Apple Car, in contrast, would be going to head to head with forward-thinking companies like Tesla, Porsche, BMW and Mercedes-Benz. That being the case, what would differentiate an Apple Car from the rest of the pack?
A few months ago I said the following:
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.
On another note, we haven’t even touched on logistical issues such as where will Apple sell these cars? Where’s the requisite infrastructure? Where will repairs be made? Additionally, developing a car from scratch requires a whole lot of manpower. And while Apple’s existing car-team was estimated to be in the 800-1000 range (before the aforementioned layoffs), consider that BMW has more than 100,000 employees worldwide. Tesla, meanwhile, currently boasts upwards of 14,000 employees.
As Jason Snell of Six Colors astutely pointed out a few months ago, Apple’s research into developing an electric car was and remains just that, research.
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?
With that in mind, reports that Apple is shifting the focus of its car project shouldn’t come as much of a surprise.