In recent days, the speculation that Apple, Inc. has embarked on an effort to develop and produce cars has blown up all over the internet. If indeed Apple is doing this, they come at this market segment as the industry may be entering the most transformational period in its near 130 year history. I believe Apple can do some very interesting things in this field in the near term, but it’s not at all clear if the company behind the Mac and iPhone has the traits to succeed in the long run. Even if Apple does succeed in the near-term, Tesla is likely to be the first automaker to feel the pain.
The era of personal vehicle ownership may be coming to an end
The forces pushing the industry toward fully autonomous control are safety, urban congestion and energy efficiency. By letting algorithms manage acceleration, braking and steering, they can all be optimized to reduce energy use and keep vehicles from running into each other while running closer together. If and when we get to this point, the need for individual ownership of automobiles is likely to come to a close. Let’s look at why.
In the eight years since Steve Jobs stood on a stage in San Francisco and revealed the iPhone, smartphones have become virtually ubiquitous. There are now approximately 200 million smartphones in use in the United States and more than 2 billion worldwide. Those phones have perpetual wireless connections to the internet, they have our calendars, our email, our contacts. Our entire lives are contained within the 5-inch slab of glass, plastic, metal and silicon.
Now imagine a world where all of the vehicles need nothing more than a destination to get you where you need to be. These vehicles have the same perpetual connection. When your phone sees that you have an appointment at the dentist at 10 am and sees that your home is 20 minute drive away, why should it not be able to automatically summon the nearest available self-driving vehicle to be outside your door at exactly 9:40 am.
The phone can provide you with an alert at 9:35 to go put on your coat and step outside. The dentist’s office address has already been transmitted to the vehicle so you don’t even have to interface with the vehicle. You get in, listen to some music, watch a couple of videos and then step out on the dentist’s doorstep at exactly 10:00 am. The vehicle rolls off to pick up someone else and you may never see the same vehicle again.
Today, if you drive you car a couple of hours a day to get to work, pick up the kids, buy groceries, the vehicle might be utilized 10 percent of the time, sitting idle, parked somewhere the rest of the time. Imagine a world where we all share a fleet of autonomous electric vehicles that are available on demand, 24 hours a day. These vehicles probably need to park somewhere and charge for a few hours every day but the rest of the time, they might have 80 percent utilization instead of 10 percent. Now all of a sudden you need far fewer vehicles on the road to provide the same or even reduced mobility for the population. It takes you less time to get places, you aren’t wasting time trying to find a place to park and dramatically less energy is used.
Sounds great! But…
The User Experience Conundrum
The auto industry was built on the idea that the car is a very personal item and provides a certain kind of user experience. Every brand tries to tailor that user experience for their customers through styling, performance and features. Sound familiar? That’s also exactly what consumer electronics companies like Apple and Samsung do.
In fact creating an amazing user experience has been at the core of what Apple has done ever since the first Macintosh computer debuted in 1984. Over the last 18 years in particular, Apple has ridden that idea to an unprecedented wave of success. Since the launch of OS X, Apple has had stronger growth in personal computers than any other brand. During the period of greatest success for digital media players, Apple grabbed three-quarters of the market with the iPod. With the iPhone, Apple quickly went from zero to selling more phones than any other company.
Along the way, outstanding execution in manufacturing, supply chain management and distribution has enabled Apple to accumulate more profits than any other company in human history including the oil industry. As of its most recent quarterly results, Apple has $178 billion in cash and securities despite one of the biggest share buyback programs in history.
Apple wasn’t first to market with any of the products it has produced. It didn’t invent MP3 players or smartphones with touchscreens and grids of icons. It didn’t invent multi-touch displays or tablets or tapping to pay with a smartphone. What the team at Apple did was sift through all of the available technologies, pick out the best and refine it all in search of a solution to a problem. Along the way, they packaged everything into devices that look great and at least for the most part work really well for the people that buy them.
It’s all about the total user experience and overall Apple has executed that better than anyone else in the markets in which they have chosen to compete. They aren’t perfect by any means, but they have an amazing track record.
So we have an industry where user experience is critically important but the incumbent players have done a decidedly haphazard job of executing. On the other hand, we have a company that believes that executing on user experience is an absolute necessity to maximizing profitability.
Now Apple wants to enter this entirely new field of endeavor at the same time that the market is changing in a way that may well make its entire user experience-centered model, utterly irrelevant.
Financial analysts have frequently claimed that Apple needed to offer less expensive iPhones in order to expand its market share relative to phones powered by Google’s Android operating system. Rene Ritchie, editor-in-chief of the Apple-centric website iMore regularly responds that “Apple has zero percent market share in the sub-$450 smartphone market but it dominates the market for more expensive phones.” In the process, Apple earns upwards of 90 percent of the profits in the smartphone business.
In the near-term to mid-term as we still drive our own cars Apple has a tremendous opportunity to improve the user experience, especially inside the cabin. However, we can reasonably assume that Apple will continue to follow a path where it can generate huge profits and Apple is a company that has become accustomed to profit margins of 35 to 40 percent.
Average transaction prices for new cars hit nearly $34,000 by the end of 2014 and the auto industry can be hugely profitable in dollar terms. However, the margins are far thinner than what Apple is accustomed to in its existing businesses, rarely hitting 10 percent. Even those margins come from having a broad mix of premium-priced products and more affordable offerings that are typically much closer to break-even. Combine that with huge capital expenditures and R&D costs and huge profits can turn into huge losses with startling speed.
With $178 billion in cash, Apple can undoubtedly afford to enter and subsidize a car business for many years. Given the way Apple CEO Tim Cook has run the company, it seems likely that Apple will follow its existing model of only offering premium products where it can charge higher prices and earn some decent margins. In this scenario, the first company to feel the pain of an Apple car is Tesla Motors, followed by the German premium brands, BMW, Mercedes-Benz and Audi.
How do you differentiate a commodity?
All of this comes in the next decade when we are still driving our own cars. Down the road, if and when we get to the self-driving car and shared fleets, things get a lot more fuzzy. If we are all getting around in vehicles that are part of a shared fleet, those vehicles will almost inevitably start to become commodities with little differentiation.
This is the problem that incumbent automakers are trying to come to grips with right now. How do you go about setting your product apart in a world where individual ownership is becoming increasingly rare and fleets are operated by some central organization that could be either publicly or privately owned? If the engineers actually manage to get autonomous systems to work on anything but sunny days with dry roads, the appeal of a premium-priced Apple car where user experience is limited to getting in and out could quickly evaporate.
I’m always glad to see someone enter the space with fresh ideas and with its enormous cash horde, Apple is better poised to succeed than probably any company in history. However, at this point, I think Elon Musk has much more to fear than either Mark Fields or Mary Barra.