The rumors about Apple building its own branded car continue to run rampant, but they revved up even more this week when The Wall Street Journal reported that the company had committed itself to building and selling a car and was significantly growing its auto team with the goal of having a car ready for the market in 2019.
How likely is Apple to build a car?
But while Apple’s brand is one of the strongest in the world, taking the top spot in many brand surveys, would it be able to survive the addition of a car? In other words, would the company be biting off more than it could chew by moving into the auto business?
In a report dated Sept. 21, UBS analyst Steven Milunovich pondered the Apple car rumors and whether they might be true. The analyst had assigned a probability of about 40% that Apple would release a car, but he remains concerned about it even though he reserves judgment until the company actually releases anything official. He certainly understands the draw of the auto market, as a $200 billion company like Apple has to look for large markets to move the needle just a little bit on revenue.
Why Apple may enter the auto market
The analyst gave several reasons Apple might get into the car business. First, he noted that global auto sale reached almost $2 trillion last year with about 85 million units sold. Such a huge market would provide a behemoth like Apple a place to grow its business.
Second, he said the best time for the tech giant to sell cars is nearing because of the two big disruptions that are happening right now: electric vehicles and driverless cars. Indeed, Apple management has expressed interest in an Apple car, with CEO Tim Cook saying they want to see “iOS everywhere” and Jeff Williams calling the car “the ultimate mobile device.”
The UBS analyst also pointed out that Apple has continued to get premium margins from PCs and smartphones—two markets which are becoming highly commoditized for most of its competitors. And finally, Milunovich said Apple will probably continue to outsource the building of a car just like it does with all of its other products rather than following the traditional automaker route of building its own cars.
Why Apple should stay out of the car business
Despite all these reasons Apple could enter the car business, the analyst is also understandably concerned and said the company could be “overextending its brand” even though its brand is “fantastic.” Margins in the auto industry are notoriously low, and even if Apple could manage a premium margin, it would probably still be dilutive even though the company could increase its profit dollars.
Further, Milunovich said Apple has plenty of electrical engineers but not enough mechanical engineers and pointed out that replacement cycles on cars are much longer than they are on all of Apple’s other products. Also regulators keep a much closer eye on the car business, making it a difficult industry to be in.
And finally, the analyst said electric cars are mostly software and batteries, and while Apple has plenty of expertise in the area of software, the company doesn’t have much experience in batteries. He thinks 2019 may be too ambitious of a target year to have an EV on the road, especially because of the many delays Tesla Motors has experienced with its cars.
