(Bloomberg Opinion) – If Apple Inc. intends to succeed with its car project, it needs to reach the $ 230 billion luxury car market. Doing so may be the only way to keep investors happy. But displacing 125-year-old companies like Mercedes-Benz will not be a simple task.
The iPhone maker has rekindled efforts to build its own vehicle, Reuters reported last month, although it is at least five years away from production, Bloomberg News revealed on Thursday. Since the project started in 2014, Apple has gone through several false starts, laying off hundreds of employees in 2016 and 2019, as costs increased and the focus shifted from electric vehicles to autonomous driving technology and vice versa. If CEO Tim Cook proceeds, he will face difficult choices on how to enter a market with notoriously low profitability.
Despite all of its recent stock market success, Tesla Inc. has demonstrated the pitfalls that come from a lack of automotive experience, repeatedly enduring manufacturing confusion and missing production targets. So there is little doubt that Apple would hire to manufacture 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 about 100 employees working with Apple, helping to guide the technology company through the engineering process. But working with Magna was never about finding out how or where to build a car.
This time, Magna is not the only option. Foxconn Technology Group, which makes iPhones under contract to Apple, is also entering the automotive industry – established a joint venture last year with Fiat Chrysler Automobiles NV, a Milan-based automotive giant that is merging with the French group PSA . And, perhaps more pertinently, established automakers are now very serious candidates.
In fact, on Friday, Korean Hyundai Motor Co. appeared to confirm a local report that was in talks with Apple, before turning back the statement. This link can help resolve some of the previous issues that Apple faced with components.
In the consumer electronics segment, the Californian company is used to getting the first notes of the best technology. After all, it is the biggest player in terms of generating profit for suppliers. If Apple wants exclusivity in the latest 3-D sensor technology, for example, suppliers give themselves up 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 visibility into how many vehicles it expected to ship in the first year, or when that could happen, there was little incentive for a supplier to supply any components exclusively when a customer like Volkswagen AG would sell about 10 million vehicles that year.
So it makes sense for Apple to partner with one 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, A Hyundai’s partnership with Korean manufacturer Kia Motors Corp. All developed platforms for electric vehicles with sufficient scale to lead suppliers to bid for contracts. Some expressed a desire to build vehicles for other brands – VW is already working with Ford and GM with Honda.
However, while the partnership keeps its fixed costs low, it presents a challenge when it comes to profitability. A third-party manufacturer usually costs about 10% more than making the vehicle yourself, according to Eric Noble, president of automotive consultancy Car Lab. And the profit margins in the auto industry are already lower than on the iPhone. Tesla probably enjoys a gross profit margin of around 30% on Model 3, Bloomberg News reported in 2018. Apple’s gross margin on the iPhone is almost double that.
The biggest expense in electric vehicles is with 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 represents more than a third of the total manufacturing cost, about $ 13,000 each. If, as Reuters suggests, Apple can find a way to reduce that cost with new battery technology, car manufacturing becomes a more attractive proposition. But even a 50% cheaper battery would likely fall short of the profitability of Apple’s iPhone if the price were similar to Tesla’s.
Price is the obvious way to fill the gap. Apple is not going to make a car for the mass market. It has to be a luxury vehicle and should probably cost more than $ 100,000, especially if it has autonomous driving capabilities that use sophisticated LIDAR technology. In theory, this would be a pricing strategy similar to the iPhone, but in practice it would target a completely different spending range, which would not be easy. Vacuum maker Dyson abandoned the efforts of his own vehicle after realizing that he would need to charge 150,000 pounds ($ 200,000) each.
Apple is more likely to become a serious car maker. It has an advantage over competitors in terms of software and design and may even make a leap in battery technology, although those advantages did not last forever. The best way to proceed would be with a price closer to a Ferrari than to a Fiat.
The race started again.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a columnist for Bloomberg Opinion covering Europe’s technology, media and communications sectors. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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