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(Bloomberg Opinion) – If Apple Inc. is to succeed with its car project, it must target the $ 230 billion luxury car market. This might be the only way to keep investors happy. But replacing 125-year-old incumbents like Mercedes-Benz will not be easy.
The iPhone maker has relaunched its efforts to build its own vehicle, Reuters reported last month, although there are at least five years left before production, Bloomberg News revealed Thursday. Since the project began in 2014, Apple has suffered numerous false starts, laying off hundreds of employees in 2016 and 2019, as costs skyrocketed and the focus shifted from electric vehicles to autonomous driving technology. and vice versa. If CEO Tim Cook continues, he faces tough choices on how to enter a market with notoriously meager profitability.
Despite all of its recent stock market successes, Tesla Inc. has demonstrated the pitfalls that arise from a lack of automotive experience, repeated manufacturing snafus, and a lack of production goals. So there is no doubt that Apple would outsource 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 almost 100 employees who worked with Apple, helping to guide the tech company through the engineering process. But working with Magna never helped determine how or where to build a car.
This time around, Magna isn’t the only option. Foxconn Technology Group, which makes iPhones under contract for Apple, is also entering the auto industry – it formed a joint venture last year with Fiat Chrysler Automobiles NV, the merging Milan-based auto giant with the French group PSA. And perhaps more aptly, established automakers are now very serious contenders.
Indeed, on Friday, the Korean Hyundai Motor Co. appeared to confirm a local report that it was in talks with Apple, before going back on its statement. Such a reconciliation could help resolve some of the issues Apple previously experienced with the components.
In consumer electronics, the Californian company is used to getting the first information about the best technology. After all, it is the biggest player in the market when it comes to generating profit for suppliers. If Apple wants exclusivity on the latest cutting edge 3D sensor technology, say, vendors are stepping up to contribute to the more than 200 million iPhones the company is expected to sell this year.
It’s different when it comes to cars, as Apple learned in 2016. With little visibility into how many vehicles it planned to ship in its first year, or when it might happen, it There was little incentive for a supplier to supply components exclusively when a customer like Volkswagen AG would sell some 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 company Geely Automobile Holdings Ltd., General Motors Co. and, Of course, Hyundai’s partnership with fellow Korean manufacturer Kia Motors Corp. All of them have developed electric vehicle platforms with sufficient scale to entice suppliers to fight for contracts. Some have expressed their willingness to build vehicles for other brands – VW is already working with Ford and GM with Honda.
Still, if teaming up keeps your fixed costs low, it poses a cost efficiency challenge. A contract manufacturer typically costs around 10% more than building the vehicle yourself, according to Eric Noble, chairman of the Car Lab automotive board. And profit margins in auto manufacturing are already thinner than they are for the iPhone. Tesla likely enjoys a gross profit margin of around 30% on the Model 3, Bloomberg News reported in 2018. Apple’s gross margin on the iPhone is almost double.
The biggest expense in electric vehicles is on 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 accounts for more than a third of the total manufacturing cost, at around $ 13,000 each. If, as Reuters suggests, Apple is able to find a way to lower that cost with new battery technology, car manufacturing becomes a more attractive proposition. But even a 50% cheaper battery would likely leave a car below the profitability of Apple’s iPhone if the price is similar to Tesla’s.
Price is the obvious way to bridge the gap. Apple is not going to make a consumer car. It must be a luxury vehicle, and it must probably be priced north of $ 100,000, especially if it has autonomous driving capabilities that use sophisticated lidar technology. In theory, that would be a similar pricing strategy to the iPhone, but in practice, it would target a completely different spending bracket, which wouldn’t be easy. The Dyson vacuum gave up its own vehicle efforts after realizing it would need to charge 150,000 pounds ($ 200,000) each.
Apple has a better chance of becoming a serious automaker. It has an edge over incumbents in software and design, and may even have a leap over battery technology, although such advantages don’t last forever. The best way forward would be with a price closer to a Ferrari than a Fiat.
The race begins again.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Alex Webb is a Bloomberg opinion columnist covering the European technology, media and communications industries. He previously covered Apple and other tech companies for Bloomberg News in San Francisco.
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