Apple Automotive – Tinker, tailor, soldier, car? pt. III.

An automobile could be a sell signal.

• It has been a very long time since Apple has made a serious mistake but the commercial launch of an electric vehicle could very well be the moment that heralds the end of the uptrend as falling margins could significantly undermine its valuation.
• Unlike previous rounds of speculation around a move into the automotive industry, the current rumours refuse to go die down which implies that there may be something more than a prototype in the works.
• Regardless of the veracity of these rumours, making vehicles is difficult and even the best luxury manufacturers struggle to make more than 7-8% operating margins.
• The volume manufacturers make even less.
• The safety requirement and the long life cycle (14 years or 200,000) miles of vehicles makes design and manufacturing much more difficult than designing a smartphone.
• The rise of the Chinese manufacturers who have quickly worked out how to make hardware that easily rivals the best of the rest demonstrates how low the barriers to entry in this segment are.
• Hence, it is only the exclusive access to iOS and top-notch silicon that keeps the margins on the iPhone way above everyone else’s.
• Anyone who thinks that replicating this in the automotive industry is a simple task is in for a shock.
• To be fair, making EV’s is going to be a lot easier than petrol vehicles given how many fewer moving parts there are but it is the small things that make luxury vehicles work.
• The ability to manufacture a door that opens and closes in exactly the same way for 12 years, interior fittings that don’t degrade and continue to work for 10+ years is where the secrets of making luxury vehicles lie.
• Tesla does not do this and in fact, Tesla’s interiors are notorious for being like IKEA furniture which looks great when purchased but gets tatty pretty quickly after some hard use.
• Consequently, I think that if Apple decides to become an EV OEM, there are going to be significant teething problems as Apple gets its head around designing and building vehicles.
• This will result in product delays and disappointment.
• Furthermore, I suspect that the sale of EV’s will usher in a period where Apple’s gross and operating margins come under sustained pressure as revenue share from vehicles expands.
• Neither of these things is good for a company where the shares are priced for perfection (39.5x 2021 PER and 8.1x 2021 EV/sales) and could end up being a sell signal.
• Apple is searching for a segment where it can continue to grow its revenues, but I think automotive is not the right place for this company.
• Content subscriptions and other consumer electronics segments are much better fits than this.