Why an Apple EV Might be the End of Tesla


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Over the last couple of days I’ve been having some further discussions with people about what sort of car Apple might create if indeed they are developing one. As I said in my first post on the topic the other day, if Apple is going to build a vehicle, it will almost certainly be a premium EV in direct competition with the Tesla Model S and Model X. For any company getting into building cars for the first time today, this is probably the only rational course.

A major component of the investment in developing a vehicle is the powertrain and for internal combustion engines, that is a huge differentiator with different manufacturers having decidedly different characters. In its existing businesses, Apple contracts with other companies like Foxconn and Samsung to do all the actual production and they likely would for a car which I’ll come back to. For most of the important parts that are actual product differentiators like processors and fingerprint sensors, Apple does the design work in-house and only them manufactured to their specifications. They generally don’t like to licence these components.

Similarly, I don’t think a company like Apple would want to buy engines from an incumbent automaker because these are not commodity components and they don’t have the expertise to design engines from scratch in a reasonable time frame. On the other hand, while electric motors can vary significantly in design and construction, they are much less differentiated as far as the customers go.

Building high-power electric motors or even licensing one from an existing manufacturer is not nearly as difficult. Buying in motors can be seen more like buying memory chips or even having processors built by Intel or Samsung.

Going the premium EV route also makes sense when you look at what customers will buy. At the $25-35,000 price point of a car like the Nissan Leaf, consumers are much more price sensitive and its much more difficult to make the financial case for an EV when you have limited range and utility. This is why a number of automakers are now focusing on performance oriented hybrids, PHEVs and BEVs as we saw at the Detroit Auto Show. http://www.navigantresearch.com/blog/performance-dominates-detroit-auto-show-even-for-hybrids

Premium customers are generally more willing to absorb the up-front cost hit for an electrified vehicle, especially when you start talking about something with a really large battery. In the phone market where $200-300 will buy you a really nice carrier subsidized premium smartphone, getting tens of millions of customers is quite manageable for a number of manufacturers.

Getting customers to pay the true cost for an entry-level EV is an entirely different matter. Nissan only found 30,200 customers for the Leaf in the U.S. last year and has only sold a bit more than 160,000 globally since 2010. Those limited sales have come at a price where Nissan is almost certainly losing several thousand dollars per unit.

Despite it’s enormous cash horde, Apple is unlikely to get into the car business to throw away billions of dollars even if it means significant revenue growth. That’s why I believe that if Apple does pursue the path of building vehicles, they will do it at the high end where consumers are far more likely to pay the prices that would give Apple something closer to the returns they are accustomed to.

Disruption

If Apple does cause disruption in the auto industry, it will probably be very different from what happened in the phone business. Because the cost of electrified vehicles remains substantially higher than most customers are willing to pay, and the cost is unlikely to come down dramatically anytime soon, Apple will primarily affect the premium brands. Tesla is by far in the most vulnerable position because they rely 100% on the same customers that would be most drawn to an Apple EV.

Tesla is in the midst of huge spending on the Gigafactory, the Model X and soon the Model 3. Other than selling ZEV credits, and some batteries to Mercedes-Benz, they have no other significant revenue streams or a huge cash hoard to tide them over. I totally disagree with Jason Calacanis’s prediction that Apple will buy Tesla for $75b in 18 months. I think if it becomes clear that Apple is going into the car business, Tesla’s wildly optimistic stock price may collapse and Apple could end up buying some Tesla assets, particularly the Gigafactory, for a bargain price. If Apple goes down this path, they probably wouldn’t want Tesla’s Fremont assembly plant, preferring instead to contract a company like Magna to build vehicles for them.

After Tesla, Apple’s impact will be felt most keenly by the German premium brands, Mercedes-Benz, BMW and Audi. However, hybrids and plug-ins are a relatively small segment for each of these companies and they have much deeper pockets than Tesla.

As for the industry as a whole, the Apple effect will probably be in terms of user experience as it was in smartphones, tablets and computers. Assuming they can execute on the user experience in the cabin, they could inspire other companies to make a more serious effort on improving there own user experience, although they are already going down that path by incorporating CarPlay and Android Auto. Also, based on what I’ve been hearing from people working with Apple CarPlay, there is no guarantee that Apple will be able to offer a reliable user experience in their car. Apple may be better off just focusing on building from CarPlay first.

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