Technology

Here Is Why Apple Is Not Building A Car

The most recent speculation surrounding Apple is the possibility that it would acquire Tesla Motors for $75 billion over the next 18 months to enter the car manufacturing space.  Other reports suggested that Apple is developing its own electric car under the project called “Titan,” and it is aggressively recruiting experts in the auto industry.

Here Is Why Apple Is Not Building A Car

The billion dollar question is; will Apple enter the car manufacturing business?  It is a known fact that Apple does not comment on any rumor or speculation.  Market observers, however, are quick in giving their perceptions about the issue.

The rumors about Apple’s entry into the car manufacturing business started since the tech giant introduced CarPlay, an in-dash infotainment system. Apple partnered with 29 automakers to integrate the service, and it is expected to be integrated in 24 million vehicles by 2019.

Positive views about a potential Apple Car

A number of analysts from various equity research firms expressed positive views about the rumor. Analysts at Cantor Fitzgerald suggested that an Apple Car would be the “iPhone of the future” in the auto industry.

On the other hand, analysts at Barclays said it makes sense for Apple to enter the car manufacturing business because $16 billion all-electric car segment is worth considering. They added that the company has enough cash to invest in such project, which could create further opportunities to develop services.

Apple could face several hurdles

On the other side of the coin, some market observers opined that the rumor that Apple will enter the car manufacturing business will never happen due to several reasons.

Brad Cornell of the California Institute of Technology commented that Apple could face hurdles particularly competition. He emphasized that the auto industry is “simply too competitive,” and Apple is not immune to competition.

The tech giant needs to keep out competition in order to create value. Cornell added that the “future of the automobile industry looks great from the standpoint of consumers, but not necessarily from the standpoint of investors.”

On the other hand, Lance Ulanoff of Mashable shared his analysis and identified several reasons why Apple will never build a car. The first reason is manufacturing complexities.

Ford Motor Company told him that a regular car has around 5,000 to 6,000 parts. Tesla Motors managed to reduce the number of moving parts on its electric car, but the manufacturing process is remains complex.

Apple still needs to source parts from suppliers and build a car through assembly lines. If the tech giant enters the car manufacturing business, it is likely that it would partner with any of the existing automakers.

The second reason is workers’ union. Apple is an American company. People will definitely expect the tech giant to build its car in the United States if it decides to enter the car manufacturing business. Obviously, the company will have to deal with the United Auto Workers union to build cars. Take note that Apple has limited experience with unions.

The third reason why Apple will is unlikely to build a car is the fact that it lacks pure-play automotive expertise. It had been reported that the tech giant is aggressively recruiting engineers from Tesla Motors and other automakers. The company recently hired Johan Jungwirth, head of R&D at Mercedez Benz, which led some people to believe that Apple is building a car—a self-driving car.

Ulanoff pointed out that hiring auto experts do not mean that Apple is actually building a car. However, the move is perfectly rational because of CarPlay, and it very possible that it currently working on other in-car-technology.

Another hurdle to Apple’s entry to the car manufacturing business is the dealership structure. The law requires automakers to sell their car through franchised dealerships. Take note that Tesla Motors has been fighting in different states against auto dealers to be able to sell cars directly to consumers.  Perhaps, Apple does not want to go through that situation.

In addition, Apple will need to build expensive and exquisite showrooms at a very strategic location and well-trained sales staff to sell Apple Cars.  However, it might end up selling only a dozen or fewer cars in a month compared to selling millions of iPhones in just hours. It is obviously impractical for Apple to invests huge amount of money producing cars and end up selling hundreds or few thousands a year.

Take note that Apple is used to generating high profit margins from its products particularly the iPhone.  For example, it had been reported that the company spends between $200 and $247 in manufacturing the entry-level iPhone 6 and sells it for around $650. During the fourth quarter, the tech giant reported 39.9% gross margin.

On the other hand, automakers generally deliver unimpressive or low profit margin. General Motors Company recorded a gross profit margin of 11% while Tesla Motors posted 27% for the quarter ended December 31.

Based on the above reasons, one may conclude that it is unlikely for Apple to enter the car manufacturing business in the near-future.  The $16 billion all-electric car segment may be worth considering, but the potential challenges require even greater consideration.

Former GM CEO says Apple needs to “think carefully”

In a recent interview with Bloomberg, former GM CEO Dan Akerson warns Apple that entering the car manufacturing industry may not be worth it given its low-margin.

“The car industry with regulatory and safety requirements, is harder than people realize. They’d [referring to Apple] better think carefully if they want to get into the hard-core manufacturing. We take steel, raw steel, and turn it into car. They have no idea what they’re getting into if they get into that.”