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

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  • Apple Automotive – Tinker, tailor, soldier, car? pt. II.

There is only one way this works.

  • Speculation has reached fever pitch with Hyundai admitting it has been in talks with Apple with regard to electric vehicles but this will not change the economics of making vehicles meaning that there is only one way that these discussions could produce something productive.
  • Hyundai shares initially jumped 24% on the news but then settled back to a 17% gain as Hyundai revised its press statement twice excluding Apple’s name and stating that has received requests for co-operation from a number of companies.
  • In plain English, this means that the first release was correct, but Apple got cross because it had been named explicitly and demanded that Hyundai print a retraction.
  • The Apple glitterati is of the opinion that this means that Apple will be launching a vehicle to compete with Mercedes-Benz, BMW, Audi, Tesla and so on in the luxury segment.
  • While everyone is getting very excited about Apple entering a new segment, no one is desperately concerned with the practicalities of such a move or what it will do to Apple’s financial performance.
  • Tesla’s travails over the last few years have demonstrated how difficult making vehicles actually is which is why it is being assumed Apple has gone to a 3rd party.
  • The presumption is that Hyundai makes the vehicle to Apple’s specification (much like Foxconn makes iPhones) which Apple then markets and sells as its OEM product.
  • However, this would still leave Apple with the problem of making high margins on vehicles which is what would be required in order for the overall profitability of the company not to go into decline.
  • This would be highly detrimental for Apple’s already precarious valuation which is why making a vehicle in its entirety makes little sense.
  • Furthermore, Hyundai is not a luxury vehicle maker and I suspect that it would have some difficulty is suddenly making the switch to produce a vehicle with the specification, trim and quality that the Germans have perfected.
  • However, there is one way that this could work and that would be in the form of a partnership.
  • Hyundai’s luxury brand is called Genesis and could be here where there could be co-operation.
  • I have long argued that the best way for Apple to penetrate the vehicle market would be for it to make an infotainment unit that the OEM could then include in its vehicle.
  • This is a unit from which Apple could make 40%-45% gross margin but the problem has always been finding an OEM willing to hand over all of its digital differentiation in order to gain some low margin share.
  • RFM research has long concluded that the OEMs were not willing to do this (see here) but perhaps the hard times that the auto industry has been through in 2020 has made some of the weaker players think again.
  • Hence, I can see a scenario where Genesis vehicles carry an Apple infotainment unit with Apple branding the digital element of the vehicle experience.
  • I think that the notion of Hyundai turning itself from an OEM into an EMS vendor which relies on very high volume at low margin to make a return on its investments makes very little sense for Hyundai.
  • Consequently, the only way I see this working is with a partnership with Apple supplying the infotainment unit and the digital vehicle experience.
  • If this were to prove very popular and Genesis started gaining market share as a result, one could see other luxury vehicle makers following suit.
  • Anything else such as making an Apple-branded electric vehicle continues to make no sense at all.
  • Hence, I think that vehicles remain irrelevant for Apple’s short and medium-term outlook where the valuation is already significantly overstretched just like almost all of its FAANG peers.
  • I still have no interest in owning any of them at the present moment and continue to look east rather than west for value.

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.