(Opinion of Bloomberg) – If Apple Inc. to make a success of its car project, it should target the $ 230 billion luxury car market. This is perhaps the only way to keep investors happy. But relocating 125-year-old incumbents like Mercedes-Benz will not be easy.
The iPhone maker has reshaped efforts to build its own vehicle, Reuters reported last month, although it is at least five years of production, Bloomberg News revealed on Thursday. Since the project began in 2014, Apple has undergone numerous wrong starts and laid off hundreds of staff members in 2016 and 2019 as costs dropped and the focus shifted from electric vehicles to self-driving technology and back again. If CEO Tim Cook continues, he will be faced with difficult choices to enter a market with scarce profitability.
Despite its recent success in the stock market, Tesla Inc. has showed the pitfalls resulting from a lack of motor experience, which repeatedly endures the production of snafus and lacks production objectives. So there is little doubt that Apple would contract the manufacturing to a third party, such as Magna International Inc., as my colleague Chris Bryant wrote.
At one point about five years ago, the Canadian company had nearly 100 employees working with Apple, who helped manage the tech firm through the engineering process. But working with Magna never led to the effect of how or where to build a car.
This time, Magna is not the only option. Foxconn Technology Group, which makes iPhones under contract for Apple, is also entering the automotive industry – it formed a joint venture last year with Fiat Chrysler Automobiles NV, the Milan-based automotive giant that merges with the French PSA group. And perhaps more pertinently, established car manufacturers are now very serious candidates.
On the contrary, it looks like Korean Hyundai Motor Co. a local report confirmed that it was in talks with Apple before returning the statement. Such a connection could help solve some of the earlier problems that Apple had to deal with components.
In consumer electronics, the California company is used to getting the best technology. After all, it is the biggest player to make a profit for suppliers. If Apple wants exclusivity on the latest 3D sensor technology, vendors say, they are dropping themselves to contribute to the more than 200 million iPhones the company is expected to sell this year.
This is different when it comes to cars, as Apple learned in 2016. With little insight into how many vehicles he would ship in the first year, or when it would happen, the supplier had little incentive to supply components only when customers like Volkswagen AG would sell about 10 million vehicles that year.
So it makes sense for Apple to partner with an established player, and five stand out: VW, the Renault-Nissan-Mitsubishi Alliance, Volvo SE and its Chinese parent Geely Automobile Holdings Ltd., General Motors Co. and of course Hyundai’s partnership with co-Korean manufacturer Kia Motors Corp. All have developed electric vehicle platforms with enough scale to encourage suppliers to get contracts. Some have expressed a willingness to build vehicles for other brands – VWs are already working with Ford and GM with Honda.
Nevertheless, keeping your fixed costs low in collaboration, it is a challenge when it comes to profitability. A contract manufacturer usually costs about 10% more than manufacturing the vehicle itself, according to Eric Noble, president of the car lab office of the Car Lab. And profit margins in car manufacturing are already slimmer than for the iPhone. Tesla probably has a gross profit margin of about 30% on the Model 3, Bloomberg News reported in 2018. Apple’s gross margin on the iPhone is almost twice as large.
The biggest single expense in electric vehicles is for the battery, which does not benefit from economies of scale due to the fixed cost of raw materials. In the Tesla Model 3, the battery is more than a third of the total manufacturing cost, about $ 13,000 each. If Apple, as Reuters suggests, can find a way to reduce costs with new battery technology, car manufacturing will become a more attractive proposition. But even a 50% cheaper battery will likely not leave a car with Apple’s iPhone profitability if the price point is similar to that of Tesla.
Price is the obvious way to bridge the gap. Apple is not going to make a mass market car. It should be a luxury vehicle and should probably be priced north of $ 100,000, especially if it has self-driving capabilities that use sophisticated lidar technology. In theory it would be a similar pricing strategy as the iPhone, but in practice it would be a very different spending class, which would not be easy. Vacuum cleaner manufacturer Dyson put off his own vehicle efforts after realizing he would have to ask for $ 200,000 apiece.
Apple has a greater chance of becoming a serious carmaker. It has an edge over the incumbents in terms of software and design, and may even have a leap in battery technology, though such benefits will not last forever. The best way forward would be with a price point closer to a Ferrari than a Fiat.
The race is on again.
This column does not necessarily reflect the opinion of the editors or Bloomberg MP and its owners.
Alex Webb is a columnist for Bloomberg Opinion discussing the European technology, media and communications industry. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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