Apple Auto – Wrong turning.

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Making a car still makes no financial sense.

• While commentators and investors are getting increasingly excited regarding the prospect of Apple launching an automobile, no one is considering the impact that this would have on profits and cash flow.
• Instead all of the focus is on Apple bulking up its team to 1,800 people and launching an automobile in 2019 (WSJ).
• The fundamental problem with the automotive industry is that companies do not really make money on making cars.
• Instead they make more on financing and after sales services such as extended warranties and service contracts.
• Furthermore, it is a highly regulated industry and one where the user purchase decision is driven by brand, performance and form factor.
• This is where the problems begin should Apple enter the automotive industry.
• Apple doesn’t know anything about engines, brakes, wheels or aerodynamics and it is very unlikely to be able to become an expert in these areas any time soon.
• Apple prides itself on earning 40% gross margins on the products that it sells and unless it can earn 40% gross margins on wheels, brakes and sheet metal, an automobile will be significantly margin dilutive.
• I think that this would be catastrophic for the valuation of the company as the main pillar of Apple’s valuation is its fantastic profitability.
• While I continue to think that Apple will not be launching a car, I do think that an infotainment unit is not out of the question.
• An infotainment unit plays directly to what Apple is good at and would likely be priced low enough to carry a price that gives Apple 40% gross margins.
• The downside to this is that to really be value add, an infotainment unit needs to be integrated into the systems of the automobile itself.
• This is the sole domain of the current automakers.
• Automakers may be seen as slow, slumbering giants but recent industry trade shows have served to be a wake-up call.
• I see them becoming fully aware of the importance of the infotainment unit and the connected car as well as the threat that is posed to them by Apple and Google.
• Consequently, I very much doubt that they will give free access to their systems meaning that Apple and Google will need to work with the car makers rather than against them.
• It is clear that the quality of the infotainment unit experience and the degree to which Digital Life services are made available in the car will become a part of the user purchase decision.
• However, it is very unlikely to become all of it as it is in smartphones and tablets.
• Hence, Apple’s lack of experience in automotive design and engineering is likely to be an issue in the creation of a product where it hopes to make 40% gross margins on the whole product.
• I continue to believe that an automobile product line would be highly detrimental to Apple’s profitability and as a result it I think it makes no financial sense to go down this road.
• However, an infotainment unit has the potential to work well, plays directly to Apple’s strengths and could make financial sense.
• This would be a good additional source of revenues and profits but is not going to have any tangible impact before 2020.
• I continue to prefer Microsoft for the ecosystem as so much less is expected of it compared to Apple or Google.