Last month, Apple CEO Tim Cook signaled “significant changes” in the automobile industry in the next several years. The highly secretive Apple car project has been in the works for more than a year under ‘Project Titan.’ The Cupertino company has hired hundreds of automobile engineers, battery technology experts, and AI experts in the last few months.
Why should Apple bother?
Now former Apple executive Jean Louis-Gassee takes a look at why the Apple car makes sense. In his weekly column for The Monday Note, he points out that the automobile is a $2,000 billion industry. But it’s a low-margin business. For example, Ford reported a meager 3.9% operating margin in 2014 compared to Apple’s margin of around 40%. Apple takes pride in its profit margins, and it is unlikely to enter an industry where it can’t command higher margins.
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Why should the tech giant bother? A possible answer could be found in the history of iPod. When Apple introduced the music player in 2001, many experts mocked the company’s entry into the MP3 player market that was already saturated and commoditized. But the iPods went on to become a money machine, thanks to Apple’s superior design, the iTunes store, and its distribution. Apple earned much higher margins on iPods than competing MP3 player makers.
How Apple car could fetch higher margins
Jean Louis-Gassee believes that Apple has all the reasons to do better than Ford or Toyota in the auto industry. Cars today are highly customizable. For example, a Volkswagen car has 341 choices for front seats and 117 choices for a steering wheel. If Apple were to offer the same options, it would lead to chaos in the company’s product line, says Jean Louis-Gassee. The Cupertino company had initially launched the iPod in just one color and 5GB storage.
The Apple car’s software could be designed to be the same throughout, instead of offering all the unnecessary add-ons and features. Further, Apple’s might and cash position could help it secure critical components from suppliers at favorable rates. With proven success with suppliers and a simpler product line, Apple car could produce higher margins than legacy automakers.
Since the Apple car is expected to be an electric vehicle, it wouldn’t require much maintenance. Apple could outsource specialty maintenance to auto body shops, while selling the vehicles through Apple stores instead of dealerships.