Summary List Placement
In case you missed it, the Apple Car is back. In the past few weeks, both Reuters and Bloomberg have reported that something is up with what Apple is calling “Project Titan,” after years of starts and stops. There have even been confusing statements about a possible collaboration with Hyundai.
I don’t think Apple seriously wants to get into the auto business — in fact, I think Apple would rather sell Project Titan and be done with it forever— but plenty of tech and finance folks seem to think that time is right for Apple to go mobile.
As in, four wheels mobile.
No one who’s enthusiastic about a revived Project Titan is really thinking much about the traditional auto industry. Because of course the traditional auto industry has been so thoroughly disrupted and invalidated over the past decade that it sold a mere 84 million vehicles since 2015 in the US alone.
Tesla has sold some of those cars: approximately 1.2 million worldwide. As far as the US goes, less than 1% of the total since 2015. That’s not a disruption. It’s a rounding error.
But there is a shift underway in the auto industry, toward electrification. It’s driven by a complicated cluster of factors, including increasingly stringent regulations in Europe, a growing China market, and the logical desire of automakers to get consumers to swap their old gas-powered vehicles for new electric ones.
Tesla gets all the attention, but the Apple Car is forever news
In this context, Tesla is getting all the attention because the company is run by an entertaining CEO in Elon Musk, has survived several near-death experiences, has developed an impressive level of customer loyalty, and has transformed easy money from central banks into a $600-billion market capitalization. Tesla is now the most valuable automaker in the world, by a lot.
Project Titan is back because Apple’s current innovation trough is its longest ever. Since the iPhone, the company has rolled out a watch, some new headphones, and a credit card. Hardly the stuff of dreams from a company that’s supposed to define how we live in the 21st-century, at the intersection of design, entertainment, and communications.
Morgan Stanley’s tech and auto analysts published a joint research note last week in which they made a fairly straightforward case for Apple escaping this rut by offering a car. The global transportation industry is worth, by their estimation, $10 trillion, while the iPhone business adds up to about $200 billion. Apple doesn’t need to capture a commensurate share of transportation, it simply needs to nab a narrow slice to emulate its iPhone success.
That’s a nice case by the numbers, but a terrible proposition from an actual build-the-business standpoint. The iPhone advanced the triumph of the iPod, which built on Apple’s ability to deliver premium access to the internet with its computers. These were essentially all communications and entertainment devices, expensive in and of themselves, but cheap relative to something like an automobile.
All Apple had to do was optimize its manufacturing supply chain and vertically integrate the user experience to post an enviable 20% profit margin on gadgets that had to be replaced every two or three years.
Why a vertically integrated Apple Car would be a terrible idea
Morgan Stanley thinks that Apple would have to vertically integrate a car to make it a true product of Cupertino, but this is a ruinous idea. The modern auto industry — the one that manufactured and sold those 84 million vehicles in the US between 2015 and 2020 — did away with vertical integration decades ago.
Tesla is the only automaker that’s trying to return vertical integration to its former glory. And while its titanic market cap makes that effort look successful, in terms of manufacturing it has meant that Tesla has taken 17 years to sell as many vehicles in all of 2020 as GM sold in the US in the past two months.
In other words, you’d have to be completely, totally, utterly out of your mind to pursue a vertically integrated auto manufacturing model, unless your objective was to build and sell as few cars as possible using an antiquated methodology.
Also consider that while Tesla looks great now, for much of the past half-decade, it has looked terrible. At points, it basically hasn’t been able to manufacture an automobile, at least not at the standards of the industry. It’s also been selling itself, through steady equity raises, to fund its growth.
This has made Tesla into an investment that defines financial volatility. Apple, meanwhile, has been a rock of stability, perhaps the best set-it-and-forget-it stock of the 2010s, avidly shorted like any market darling but rewarding long-term investors who favor low risks and appetizing returns.
Messing with perfection
Apple currently has it all: wonderful market share, excellent management, beloved products, a stupendous brand, steady revenues, and magnificent profits. It’s as close to a perfect company as I’ve ever seen, and I can remember when it was on the verge of bankruptcy.
The payoff for perfection is a cash hoard that’s now at just under $200 billion. It has to be oh-so-tempting to look at Tesla’s risk-addicted ride and conclude that this is where the action must be. Why not spend some of that loot on a car? What’s the worst that could happen?
Well, Apple could blow it all. Car factories cost a few billion each to build, and an automaker can easily burn through $5 billion in a quarter. To achieve Tesla’s scale, Apple could incinerate the majority of that $200 billion in less than 10 years. And deliver, at best, two or three vehicle models.
Meanwhile, GM spent what is usually spends, $7-9 billion, to deliver about 50 different models in the fourth quarter. That’s right: 50! From a single carmaker.
I’ve been dispensing this wisdom since Project Titan first popped up, several years ago, and I think it’s fair to say that I’ve been relentlessly critical of the idea. Still, I’m dismayed when enthusiasm for the Apple Car resurfaces, usually propelled by a tech media that thinks Apple can do anything and that’s been emboldened by Tesla’s unlikely ascent.
“If you knew anything about the car business!” I typically holler into the void.
Luckily, I think Apple’s leadership has learned a few things about the auto industry since Project Titan was christened. I hope they’ve followed Tesla’s fortunes, and more importantly, its misfortunes. And I can’t believe that they’d wreck a great company to do something so stupid as trying to build a car.