Unless you’ve been hiding under the proverbial rock lately, you’ve probably already heard many of the rumors about Apple’s electric vehicle development project. If you haven’t heard, here’s a recap: Earlier this month, minivans outfitted with a mysterious array of rooftop gadgets were spotted in multiple locations around the U.S. After the minivans were traced back to Apple, various news organizations began pushing their insider contacts for any clues about the ultimate purpose of the vehicles.
This led to a flood of leaks about a supposedly secret electric vehicle development project that The Wall Street Journal’s sources said is codenamed “Titan” and involves hundreds of workers. Other sources that spoke with the Financial Times claimed that the project had been initiated by Tim Cook late last year and was being researched at a confidential lab located away from the main Apple campus.
While unsubstantiated rumors about secret Apple projects should always be taken with a grain of salt, the early reports soon became more credible as more concrete evidence was uncovered. A recently filed lawsuit revealed that Apple was being sued by A123 Systems over several employees that it had poached from the electric/hybrid vehicle battery manufacturer. Around the same time, 9to5Mac researched the extent of Apple’s recruitment from the auto industry and discovered over a dozen workers that the company has hired since late last year who appear to have skills that are ideally suited for building an electric car. Finally, as reported by Bloomberg, Tesla CEO Elon Musk met with Apple executives in 2013 for what might have been an attempt to acquire the cutting-edge carmaker.
With the growing amount of evidence that appears to support Apple’s interest in automobiles, it may be time to stop wondering if the Cupertino-based company is really building a car and start examining the money-making potential of this new venture. One analyst who has already weighed in on the revenue potential of an Apple car is Cantor Fitzgerald’s Brian White.
“Anyway you look at the auto market, the opportunity could be significant for Apple,” wrote White in a research note cited by Barron’s. “For example, IHS Automotive is projecting global automotive sales to reach 88.6 million units in 2015, with the U.S. at 16.9 million units. According to Kelley Blue Book, the average transaction price (ATP) for light vehicles in the U.S. was $32,500 in September 2014. Using these statistics, we estimate the automotive market in the U.S. equates to a revenue opportunity of approximately $549 billion and the global opportunity at nearly $2.9 trillion (at U.S. ATP).”
Of course, in order to benefit from this revenue, Apple first needs to secure a share of the automobile market. With a cash pile that stood at $178 billion at the end of last quarter and a brand that has been deemed the most valuable in the world by Forbes, Apple may be able to acquire a sizeable share of the car market easier than most other newcomers could. Piper Jaffray analyst Gene Munster believes that 10% of the U.S. car market would be a “moderate success” for Apple that would result in $50 billion in new revenue for the company each year, according to a research note obtained by Apple Insider.
However, revenue alone doesn’t tell the whole story. One of the reasons that Apple was able to build up such an impressive cash reserve in the first place is because of the unique qualities of its iPhone — a product that is doubly blessed with high profit margins and a relatively short lifecycle. According to researchers at IHS, an unsubsidized 16GB iPhone 6 that Apple sells for $649 only costs the company a total of $200.10 after calculating the bill of materials (BOM) and manufacturing expenses. Combine the iPhone’s high profit margin with consumers’ tendency to upgrade to the latest model every year and you start to understand how Apple managed to post a record net profit of $18 billion and gross margin of 39.9% last quarter.
The obscene profits that Apple derives from its iPhone business stand in sharp contrast to the profits that most carmakers are able to make. According to Autos.com, the profit margins for most luxury cars are in the range of 10% to 15%, while some low-end models have a profit margin as low as 3%. Additionally, most consumers hang on to their vehicles for an average of more than seven years, according to Experian market research.
“If I were an Apple shareholder, I wouldn’t be very happy. I would be highly suspect of the long-term prospect of getting into a low-margin, heavy-manufacturing [business],” former General Motors (GM) CEO Dan Akerson recently told Bloomberg. “A lot of people who don’t ever operate in it don’t understand and have a tendency to underestimate.” As noted by Bloomberg, GM posted a profit of $1.99 billion with a gross margin of only 14% during the fourth quarter of 2014. “I’d rather have the margins associated with the phone,” added Akerson.
Former Apple executive Jean-Louis Gassée raised similar concerns about Apple’s rumored entry into the auto industry in a post on his Monday Note blog. “Ford, the healthiest US car company, made $835M in net income last quarter, less than 4% of their $34B in sales,” wrote Gassée. “Compare that number to Apple’s record-breaking $18B profit. Tesla, Apple’s supposed rival in the fantasy blogs, pulled in a little less than $1B last quarter, and it lost about 10% of that.”
On the other hand, when it comes to breaking into new markets, it seems that many of the standard rules do not apply to Apple. When Apple unveiled the original iPhone in 2007, the company was considered an industry underdog and many pundits predicted that the device would be a spectacular flop. At that time the mobile industry was dominated by cheaper devices with physical keyboards made by Nokia and RIM (later renamed BlackBerry).
In 2007, Bloomberg’s Matthew Lynn called the $499 iPhone “a luxury bauble” that was destined to fail. Former Microsoft CEO Steve Ballmer laughed at the iPhone’s relatively high price and predicted that it wouldn’t appeal to business users because of its lack of a physical keyboard, as reported by Wired. So while there are many “obvious” reasons why an Apple car may seem like a bad idea today, it’s also a good idea to remember that Apple has an impressive track record when it comes to finding unexpected ways of making money in new markets.
Follow Nathanael on Twitter @ArnoldEtan_WSCS