The new widely-rumored product in the Apple pipeline is an electric car. Here’s why the world’s largest tech company should actually build one, but probably won’t.
At Apple’s WWDC 2016 we shouldn’t expect to hear anything about the company’s much-rumored electric car, but that doesn’t mean the biggest potential moonshot in company history won’t overshadow the events this week.
On hearing the rumors about Apple building a car, my first–admittedly cynical–reaction was, “Are they going to make it thinner and lighter?”
The company has spent most of the last decade banking on the value of making our technology smaller but more capable. Why would it want to get into the brutally competitive business of building the world’s largest consumer electronics devices? That’s what cars will increasingly become over the next decade.
There are an infinite number of reasons why Apple should be extremely wary of the getting into the automobile business, and two big reasons why they should absolutely make the leap. Let’s go through both lists, and then look at the most likely scenario.
Why Apple shouldn’t build a car: Infinite reasons
- Safety standards limit design: There’s a reason why so many of today’s cars look so much alike, even when they are manufactured by companies on different sides of the world. It’s because global safety standards and regulations constrain the creativity of automobile designers. Since design is one of the key places where Apple adds value in the markets that it enters, this puts hard limits on one of its strategic strengths.
- Long development cycles: Automobiles typically have 4-5 year product lifecycles. Some automakers are shortening pieces of that by making key decisions–especially infotainment and tech–later in the product lifecycle, but the bottom line is that it’s a very different game than the quick-hit consumer electronics industry. Apple could try to disrupt the market by shortening the automobile product lifecycle, but that could come with big safety and quality control risks.
- Small profit margins: The average profit margin for automobiles is 2.2%. Granted, the price tag is typically tens of thousands of dollars, but you have to spend a lot of money in order to make a small percentage profit. That leaves little room to experiment or make mistakes, so you can’t take too many risks. By contrast, the profit margin on the iPhone is over 65%.
- Manufacturing complexity: There are less than 100 parts in the iPhone. The average automobile has about 30,000 parts. Apple already has long supply chains and sketchy subcontractors to deal with. Building a car would mean hiring a lot more people and instituting a lot more bureaucracy to manage it all.
- Entrenched competitors: Toyota, General Motors, Ford, Nissan, Audi, BMW, Volkswagen, Fiat, Hyundai, Kia, Mercedes, Mitsubishi, Renault, and Porsche already have electric vehicles, and in some cases decades of research on EVs.
- New competitors with a big head start: Upstart companies like Tesla Motors, Smart, Google, Baidu, Faraday Future, and others have a big head start on Apple in attempting to enter the auto market with products to disrupt the traditional players. And, you can count on the fact that there are other startups secretly working on EVs and planning to jump into the market. Look for more companies like Edison Destiny to pop out of nowhere in the years ahead. The history of the tech industry tells us that the biggest disruptor will most likely be a startup laser-focused on one product.
- Apple’s weaknesses in critical areas: Tomorrow’s automobiles will be increasingly powered by software, data, machine learning, and the cloud (as we’ll talk about more in a moment). These are all areas where Apple continue to struggle against Google, Amazon, Microsoft, and other competitors in the tech industry. If it can’t quickly make up ground in these areas, then it will have little chance of becoming a disruptor in the auto industry.
Why Apple should build a car: Two reasons
One of the most important factors in a good disruption is always timing. Apple has used it to great effect in knowing the exact right time to enter a market.
- We’re on the cusp of a sea change in personal transportation: It’s easy to forget that electric cars have been promised for over a century. It’s only been in the last 10 years that automakers have really nailed it–and much of the innovation has been driven by Tesla and its battery technology. Today’s electric cars have far fewer moving parts (hundreds vs. 10,000 in an internal combustion engine), much fewer things to replace (tires, brake pads, and windshield wipers), and are much cheaper to operate (about 5 cents per mile in electricity vs. 10 cents per mile or more for gas in the average car). And once Tesla helps drive down the cost of batteries with its Gigafactory, the price of EVs is on course to drop below traditional cars by 2022.
- Tomorrow’s cars will be rolling boxes of AI, big data, and IT: Computer processors and software are assimilating today’s cars at a rapid pace, especially in engines and infotainment systems. With the emergence of autonomous vehicles, the whole car is going to be computerized within five years. That’s going to transform automobiles into rolling containers of artificial intelligence, big data, natural language processing, and mobile connectivity. The traditional automakers do not have the expertise in these subjects that the tech industry does, and that sets up a huge opportunity for tech giants to leapfrog into $900 billion global automobile market.
The most likely scenario
Apple has given a huge boost to its research and development budget over the past three years, and many analysts point to that as their main evidence of Apple working on something huge–most likely a car code-named Project Titan.
But, three years isn’t much in automobile product lifecycles. Cars take at least 4-5 years to germinate when they’re developed by companies with all the infrastructure in place to build them.
That’s why it’s much more likely that Apple is partnering with an automaker to whitebox or co-brand its first vehicle, similar to the way Tesla did with Lotus in launching the Tesla Roadster. Telsa focused on the stuff it could do best–building an electric motor and a unique battery system–while taking a lot of the car design, production, and assembly cues from Lotus.
The big question is where can Apple bring unique value to electric vehicles? Design, branding, and an app platform are the obvious answers. But there would have to be more.
No matter how you look at it, Apple would have a lot of work to do.