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Op-Ed: Putting Apple’s electric car project into perspective

CARPLAY-appleAt this point the fact that Apple is working on an electric vehicle is all but confirmed. Recent reports show that Apple is searching for a private road-testing site, they hired hundreds of workers with automotive industry experience and the company is even allegedly in talks with BMW to license some technology. Officials within Apple have yet to confirm the ambitious new product, but CEO Tim Cook acknowledged that the automobile industry is ripe for disruption and it is difficult to imagine them backing out at this point.

The electric car is reportedly codenamed ‘Project Titan’ and it is indeed a project of titanic proportions. Tesla CEO Elon Musk recently made some comments warning the Cupertino company of the complexity of manufacturing cars. Those comments were surprisingly met by mockery from a lot of Apple fans. I think Apple can and will make an electric vehicle, but I’d like to put the project into perspective. “Apple can easily make a car because they have billions of dollars in cash.” That’s the argument I hear over and over again, but I simply don’t understand it. I don’t think anyone ever implied that Apple doesn’t have the ability to finance the project themselves, or any project for that matter. That’s really the only thing this argument is good for – if someone says that Apple can’t afford to make a car – but again no one is saying that.

Due to the company’s responsibility toward shareholders, they can’t throw money at a project until it works out. They have to create a profitable product which in turn creates value to shareholders.

The question is not “can Apple afford to make a car?”, but “can Apple bring to market a compelling profitable product in the automobile market?”

The question is not “can Apple afford to make a car?”, but “can Apple bring to market a compelling profitable product in the automobile market?”

Apple’s recent product history leads us to believe that the answer is yes, but I think we need to manage our expectations. I don’t think we can compare Musk’s comments to the ones made by Palm CEO Ed Colligan in 2006 when Apple was rumored to be working on the iPhone:

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

Of course, history proved Colligan wrong after half of the “PC guys” started making smartphones and now dominate the industry. But the transition from personal computers to smartphones is hardly comparable to the transition from smartphones to cars.

Colligan didn’t foresee the now obvious fact that smartphones are simply miniaturized personal computers, but no matter how often the media calls Tesla’s Model S a “computer on wheels”, electric cars are not enlarged smartphones or computers. They do incorporate some of the same aspects – I mean they literally have computers in them – but vehicle design and manufacturing offer a very different set of challenges.

When developing the iPod and iPhone, Apple proved itself a champion of miniaturization, which to Apple’s credit is one of the most difficult process in tech, but that’s hardly a problem with cars. The main difficulty with manufacturing a car is to manage the complex supply chain resulting from the thousands of unique parts in an average vehicle. If even just one part is not available, the car cannot ship. There’s been a longstanding trend in the automotive industry to outsource most of the manufacturing and retain only the assembly process, engine design and of course the management of the supply chain.

This trend gave birth to giant automotive suppliers like Magna and Bosch. This is something Apple is familiar with considering its important relationship with massive suppliers like Foxconn. The Cupertino company certainly knows how to handle high volume supply chains and it has a more than decent track record of delivering products on time, but yet, we can’t underestimate the complexity of the average automotive suppliy chain.

You have several computers in a car and then, you have everything else: suspension, steering systems, HVAC systems, motor, inverter, cluster, infotainment system, sensors, brakes and I could go on and on. Each system needs to be integrated and comply to the rigorous regulations in the auto industry. 

We don’t know yet the level of manufacturing the company will handle versus outsourcing, but it is fair to assume it will be much more complex than what Apple is currently used to.

Then there is the actual design and value proposition of the vehicle.

Apple is not rumored to be working on just any kind of car, but an electric car. The holy grail of electric car is a $30,000 model with a practical range of over 200 miles. It’s hard to imagine Apple not going after a similar target, maybe with the usual brand premium attach to it.

They are several ways to help achieve a 200+ miles range for that price tag, some of which are completely new to Apple, like aerodynamics, and others are transferable skills for the company, like weight reduction and battery technology.Model-X-P90DAerodynamic performance significantly helped Tesla achieve the long range they are now known for. The Model S and X both have the best drag coefficient (0.22-.24) in their own categories.

But the real challenge lies with the batteries, especially their cost and energy density. Apple knows that and acquired talents in the field. They are among many investing in battery technology and wether they develop their own or partner up with a supplier, I am confident they will have a suitable technology by 2019-2020 – when they are expected to enter the market.

Here’s a quick overview of the battery technologies currently in use in the most popular electric vehicles:cell densityBut if we go back to manufacturing. Once Apple settles on a battery technology for its vehicle, they would need a large supply of it, very large.

To get some perspective, the battery of an iPhone 6 Plus is rated at 11 Wh of energy, while an average car would need a battery pack with at the very least 45 kWh of energy to achieve 200 miles of practical range on a single charge. Meaning that to produce the battery pack for one car, you need the equivalent of about 4,000 iPhone 6 Plus batteries. In order to produce just 50,000 cars, which is about Tesla’s expected production in 2015, Apple would need more batteries than it did for the 170 million iPhones it sold during the last fiscal year.

With its own annual production of 50,000 cars, Tesla is already consuming about 10% of the global production of lithium-ion batteries. The automaker is building a massive battery factory in the Nevada desert, the Gigafactory, to produce 50 GWh of battery packs annually at full capacity in 2020, which should be enough for about 500,000 vehicles and to double the global production of li-ion battery cells.

Tesla is not just dabbling with the Gigafactory. Once completed, it will be one of the largest buildings in the world by footprint and square footage:gigafactory-w-buildings

If Apple wants to enter the auto industry with an electric car in any meaningful way, it will have to embark in a similar project as Tesla’s Gigafactory. Until the company shows signs that such a project will happen, I can’t get too excited about the prospects of Project Titan.

I’m a fan of Apple’s products. I’m writing this on my Macbook Pro and I probably have two or three other Apple products within reaching distance right now. I’m sure Apple can design an interesting car, but I don’t know what other improvement they can bring to market by making a vehicle. The most interesting improvements Apple could bring to the car industry would be its user experience, connectivity and apps integration, but the company is already introducing most, if not all of these through Carplay without the need to get into the actual hardware.

But I want to get excited about Project Titan. So if Apple is to enter the car market, my question to you is: what significant improvement can Apple bring to the automotive industry?

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  1. R Douglass - 7 years ago

    I may be quite wrong, but I seem to recall a rumor noting that Apple is a ‘silent partner’ in the construction of that Tesla Gigafactory…
    Does anyone else recall such information?

    • Fred Lambert - 7 years ago

      Musk met with Apple’s M&A director before the Gigafactory was announced, which sparked a bunch of rumors including the one you mentioned, but they are still only rumors.

  2. pedrorito - 7 years ago

    Cars will suffer a massive change in terms of design, functionality and usage of renewable energy, but the biggest change will be the auto business itself. Let’s look to the path that smartphones industry is having. It’s more and more obvious that the market is saturating. There is no more excitement with new products. In software there are 2 or 3 platforms, and these platforms are starting to behave like services. With this year announcement from Apple that we can acquire an iPhone as a service and we will have a new one every year, even hardware will become a service. We pay some money monthly and we get all the services, including software and hardware. And we don’t have to care: we will always have the latest software and now the latest hardware with no excitement. The fight now is in choosing the best brand for this all-in-one service. Brands fight for trust and integration between products. With cars it will be the same. With so much functionality, self-driving, etc, in the future we will pay to access the best transportation service. That’s it! And Apple wants to be there, and with the highly valuable brand that they have, the highest in the word, they don’t want to lose this opportunity.

  3. Gary Frost - 7 years ago

    Everyone needs to keep in mind that Tim Cook was (and arguably still is) the architect of Apple’s Supply Chain monster that gobbles up suppliers profits faster than Walmart can. Actually, a lot of the success of Apple can be attributed to Cook in that one area alone. He was the guy and there is no reason to think that he has any false expectations about manufacturing an automobile. More than anything I believe Apple sees itself becoming a supplier of core components for various industries matter if there is an Apple product in that space or touching on it. I could see that Apple may have different level’s of involvement in the automotive process and vehicle structure. This may include it’s own version of an EV, but it is not likely limited by that. I look forward to see what apple may do…

  4. Ahmet - 7 years ago

    In addition to the above-mentioned arguments, the main argument against making an Apple car is the profitability. As bad as they are in a lot of things, the auto companies know very well how to manufacture their cars at the lowest cost possible. Apple would either have to significantly decrease the cost of manufacturing a car and/or it would have to be able to sell the car at a serious premium. Bear in mind that, even with its high cost of cars, Tesla has not made much serious profits during its history. These, I see as highly improbable.

    • Fred Lambert - 7 years ago

      Tesla has a ~25% gross margin on the Model S. They don’t make profit because they invest every penny in growth.

  5. telecastle - 7 years ago

    It would be insane for Apple to compete with Tesla. There’s no point in trying to do it. Tesla has had a waiting list for their cars for years now, and they can’t make cars fast enough to satisfy the demand. This is provided that Tesla is targeting only the upper middle class crust and wealthy with their Model S and Model X vehicles. I had a pleasure of test driving a Model S for an hour, and that car is a blast. There are a few things Tesla could improve in the interior of the car, such as make their leather seats perforated, but for the most part, and especially as far as the driving experience is concerned, the car is near perfect.

    Why would Apple need to compete with Tesla, whereas they can buy Tesla for 150% of the current market capitalization value and not even notice the cash impact? The only possible reason is that Elon Musk refuses to sell Tesla to Apple.

    Apple will not be able to build car better than Tesla, and Apple’s products are geared toward people with money due to Apple’s appetite for exclusively high-margine products, Apple would be targeting the same market nich. As Tesla is ramping up production, the demand of the rich will be satisfied faster. Apple for sure won’t try to create an affordable mass-market product; its is not what Apple does. Therefore, Apple would have to build a product that competes with Tesla head-to-head for the same market segment, and this is quite different from building a new product that was targeting at dislodging Blackberry a decade ago. Tesla is no Blackberry – it’s a serious high-tech company that has many years’ worth of head start on Apple in building a car.

    The question is then, Why is Apple hiring its own team of engineers and some of them from Tesla? The only logical answer to this is a hostile takeover of Tesla. It’s a known fact that Elon Musk will be leaving Tesla soon to concentrate on Space X and colonization of Mars. Once he leaves Tesla (with some of his executive team and top engineers), Aplle will make Tesla’s shareholders an offer they will not be able to refuse. By that time, Apple will have a well functioning executive and design team with traditional automotive and electric car industry experience ready to take the wheel of Tesla as a contingency to having top level Tesla engineers and executives leaving Tesla at the time of a hostile takeover bid by Apple.

    • Fred Lambert - 7 years ago

      Elon Musk never said he will leave Tesla. Actually he explicitly said he will NEVER leave Tesla. What he did say is that he will not stay CEO forever, but he is also Chairman of the Board and Chief Product Architect. He will likely leave the CEO role, but stay and his other functions at the company after Tesla delivers the Model 3.

      It’s silly to think that Apple would even try a hostile takeover of Tesla. Musk owns 27% of the shares and he has a great relationship with most of the board and important investors which are also investors in his other companies. It would be extremely costly for Apple to attempt a takeover. We are talking about tens of billions here. I just talked in my article about Apple’s mountain of cash doesn’t mean they can just spend it inefficiently. If they were to spend tens of billions just to buy Tesla, they would be better off just throwing money at Titan until it works out.

  6. Dafty Punk - 7 years ago

    There are a few points about this whole thing that need to be made. Currently Apple has insanely high gross margins. This helps it both with profitability and also makes the stock look good. Selling a car, which will have much much lower margins then an iPhone won’t help the stock.
    I do think that Tesla and Apple together are ripe to turn this industry on it’s head. If/when Apple makes a car, I bet it will use Tesla’s charging infrastructure. Tesla always said they welcome other companies to use they supercharger network if they help invest in it and make it grow. Apple’s cash (Most of which is overseas) is perfect for international Supercharger expansion.

  7. rtd5943 - 7 years ago

    I think 2 areas Apple can excel in this space is not exactly in the car itself, but in the automotive buying and ownership experience. Apple consistently ranks in the top companies worldwide for customer service and their retail stores are second to none. Imagine designing your Apple car in an intuitive app in 10 minutes, selecting financing, valueing a trade, and submitting a down payment via ApplePay. Two weeks later your car shows up with an Apple genius for initiation and training. Then they drive away in your trade. Service calls on the fly via the same app. Someone will come and change your wipers and add fluid while you’re at work. Done and done!

    • Fred Lambert - 7 years ago

      you are pretty much describing Tesla’s service though.

      • rtd5943 - 7 years ago

        Well damn. Didn’t realize they were this extensive as I’m not an owner. Guess I need to become a customer sooner rather than later. Thanks.

  8. PhilBoogie - 7 years ago

    I think it’s great to see an author respond to so many posts.

  9. Bobby - 7 years ago

    I think Tim cook is planning very strategically and planning for an Apple 10-20 yrs down the road. The pace of innovation is accelerating every year and Cook understands that Apple must invest in categories and sectors outside of their core competence to make sure that they don’t miss out on the next best thing. Cook in his short tenure as CEO has been a staunch advocate of sustainability and renewable energy. I think he clearly sees the writing on the wall that energy and mobility sustainability is the future and apple must embrace it. What better way to stay in that arena and connect with their customers than to manufacture a product that is associated with freedom.

    If the car of the future is a battery with wheels and cameras/sensors + tons of software, then i’d argue that it’s not even really outside Apple’s core ethos of melding hardware and software to create a rich and simple experience. Musk has always said that designing a car is easy, but making and training the machines that manufacture the cars is the difficult part. Apple doesn’t just design the phones, but creates the processes, technologies, the tools, and manages the supply chains better than any other company on earth. Plus Cook has been saying that the experience of purchasing and owning a car is ripe for change. Connecting with customers is what Apple does. I think they are currently designing a product and an experience that will be attractive to customers and invest in the technologies and supply chain to make it happen, be it batteries or engineering competence.

    Also, money is cheap now, they have nothing to loose in taking a few risky R&D projects….

    “A corporation with lots of unrepatriated earnings does not have to repatriate those earnings to engage in domestic investment or payouts to shareholders. It can just borrow money for its domestic activities, and this borrowing is almost costless because creditors know that the unrepatriated earnings can be tapped at any time.

    Apple has given us a great example of how this works. In April, the company announced that it wanted to begin a $60 billion share buyback program. The only problem? “According to analyst estimates, Apple has $145 billion of cash – but only $45 billion on hand in the US, and thus not enough to fully fund the share buy-back program,” Reuters reported. In theory, share buybacks and dividends are exactly what corporations cannot do with unrepatriated income. In practice, however, Apple was easily able to fund its buyback program without paying a dime of tax.

    In April, Apple issued $17 billion in corporate bonds—the largest bond offering in American corporate history. The interest rate Apple paid on 10-year bonds was only 2.415 percent, or only 74 basis points above the rate on 10-year Treasury bonds that day. But that is just the sticker price. In fact, the interest on the bonds is then tax deductible—at a 35 percent corporate tax rate, the business-interest deduction covers 84.5 basis points of the borrowing costs, lowering the after-tax interest costs to 1.57 percent, or 10 basis points lower than Treasuries. With expected inflation above this level, Uncle Sam and bond buyers actually paid Apple to hold onto their money for 10 years.” (Kitty Richards and John Craig- Center for American Progress)

    For any any massive investments in infrastructure, battery factories, or manufacturing facilities, they can simply issue bonds from my understanding.

    • PhilBoogie - 7 years ago

      [going completely OT here…]

      “Apple has given us a great example of how this works. In April, the company announced that it wanted to begin a $60 billion share buyback program. The only problem? “According to analyst estimates, Apple has $145 billion of cash – but only $45 billion on hand in the US, and thus not enough to fully fund the share buy-back program,” Reuters reported. In theory, share buybacks and dividends are exactly what corporations cannot do with unrepatriated income”

      Does it have to be AAPL stock though? Since most of their cash is oversees (Europe?) could’t they simply buy up APC.F?

      • Bobby - 7 years ago

        ‘Overseas’ is a misnomer. From the same article…

        “To qualify as “offshore” for tax purposes, U.S. corporate money must be controlled by a foreign subsidiary, but it does not have to be invested abroad. In fact, for many corporations, these foreign profits already sit in Manhattan, in accounts in American banks. For example, as of last May, Apple had $102 billion in “permanently invested overseas” income not subject to the U.S. corporate tax. On Apple’s books, this untaxed profit is “offshore” because it is controlled by two Irish subsidiaries—even though these subsidiaries park their funds in bank accounts in New York. This $102 billion that has yet to be subject to U.S. taxation is already in the United States, not trapped in Ireland. Apple cannot use this money directly for American real estate acquisitions, dividends, share buybacks, or funding for operations in Cupertino, but the money is being loaned out in the American economy by American banks, funding American mortgages and small-business loans just like any other American deposit.”

        Apple cannot DIRECTLY use the overseas cash, but they can indirectly use it by loans/ debts issued to the US parent company from its subsidiaries.
        Financial magic!

  10. Amitai Palmon (@amitaip) - 7 years ago

    I wonder how Apple plans to make an electric car while the iPhone’s battery can’t last a single day

  11. J Smith - 7 years ago

    I think its hard for us to really conceptualise the creative prospects of Apple entering into this new industry as much as it was hard back then to conceptualise the iPhone. I am a believer in creativity and design and I trust Apple will not go into a new industry without aiming at changing it.

    From a business perspective Apples growth has reached its peak and shareholders require Apple to continue to grow so in that regard the next logical industry would be cars. A lot of specific circumstances have lined up which suggest Apple is going this way, least of which is Johny Ive changing his role (read computer hardware / software has been handed over so he can focus on the car, while retail is just the cover) together with Marc Newson a designer with experience in aeroplanes and cars.

    I imagine the overall experience of driving will change, lots of gadgets but also lots of design and consideration. Its not important to add gimmicks as it is to have a fresh set of eyes look into the same problems that the same people have been trying to solve. Design is the key here not so much the electronics.

  12. Jos (Netherlands) - 7 years ago

    Apple can buy Volkswagen for a mere $ 50 billion. That includes Porsche, Bugatti, Audi, Lamborghini, Bently.
    Loose Seat and Skôda and they will have all the knowledge, skills and capacity to produce cars.

    I have an other thought. What if they develop a unit which can be deployed on existing cars.
    This unit gives those cars the sensors to take of all the management of systems, and therefor of the car.

    This could be the breakthrough to self-driving cars and traffic management.
    It is also a solution to the big issue of the massive write-off of old-skool cars.
    Governements could make this mandatory.

    That’s disruptive.

  13. Ahmed El Zoughby - 7 years ago

    Lots to talk about… 😀
    I can be bias to Apple but when it comes to Tesla and Musk they both do the same at least to my favourability chart lol

    What I am really afraid of is that this hustle move to EV from -everybody hence samsung must be trying in secret lol- could very well cripple the environment in the other way around… lithium would become the new gasoline… 😀 idk! I think we still have to see much more advancements in the area of storing energy, I can’t remember the exact figure but Gates said something about 10% of our production in energy is the capacity of all batteries are there… so I guess the real problem lies there and this would really help making such big move as the Gigafactory can really be minimised in footprint to achieve the same output.

    Apple and Tesla as one:
    I really really hopped that this would happen but my reason for it to not to happen is Elon Musk him self, I think he’s the “contemporary Steve Jobs” kind of a guy, which means he cannot be controlled and Apple can’t do this having a super blackhole in it’s highest chain of command… Sadly I can imagine this only with Musk as CEO of Apple… but this would mean Steve Jobs’s Apple would change I think for worse! let’s Just hope they don’t kill them selves in the way… 😀

    The Profit Margin and Products:
    Apple has a huge pile of cash and they really don’t have something valuable they through it at and this is it… anything less than 30% margin we would be kidding in Apple’s financial mind. So they can have huge profitability yes and keep the production growth pill on the cash pile not the R&D bill… that’s where Apple has huge gain where the R&D efficiency after profit revenue is the best in the world by far.

    but again, Apple would probably tank us with 100K$ price tag as it sadly always aim for the luxury market…
    The better question to ask is how many Cars Apple willing to launch by 2019-2020. Tesla has cars in 3 categories now and working on the 4th and 5th in the long run. If Apple didn’t offer 2 categories with very very vast difference in price tag that would be bad for Apple. My bet is Apple going for a 50k$ and 100k$ price tags on 2 different cars… I don’t imagine a model X Apple car in the beginning but surly model S and 3 (or BMW i3 😉 ).

    The Supply Chain:
    Tim Cook’s place to shine… so Apple can surly have us WoWed by that time no one can actually imagine what Apple’s plans for the production line! Apple has no assembly line! so let’s take a seat there and just be wowed lol.


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