Apple Could Leverage Economy Of Scale For A Car

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The Apple car topic isn’t one that’s going away anytime soon, unfortunately, and it’s rearing its ugly head yet again. Analysts and market watchers have been debating the likelihood of the technology giant releasing an electric car until they’re blue in the face, but this certainly is a very complicated topic with many factors to take into consideration.

Apple to expand its platform

In a report dated March 19, Stifel analysts Aaron Rakers and James Albertine and their teams said they think it’s likely Apple is indeed working on a battery electric vehicle. They think this debate is going to escalate, noting that recently it was reported that Apple has a secret location at which it is working on a car.

They pointed to the long-running debate about whether Apple will enter the TV market more fully than with its set-top box. The company started by releasing the box several years ago, and now there are reports of a streaming TV service coming this summer. Most analysts believe an actual TV is the next logical step, and the Stifel teams believe the car debate could follow a similar multi-year development process.

Auto industry increasingly about technology

The reason they give for it being likely that Apple will eventually release a car is because of how much technology has become a part of auto development. They say the process requires companies to “utilize high-tech materials and high-tech manufacturing processes,” which they believe Apple does “very well.”

One thing that has been noted is that it takes a great deal of cash and investment to develop a vehicle, and Apple certainly has enough cash to do so. The company uses third-party manufacturers to build its products, which automakers do not do, however. Nonetheless, the Stifel teams think Apple has the manufacturing and supply chain “prowess” to get this done.

In fact, they point out that the scale of Apple’s capital expenditures is rather similar to that of automakers. Ford’s cumulative capital expenditures were $27.9 billion between 2010 and 2014, while General Motors’ was $33.1 billion during that same time frame. All graphs in this report are courtesy Stifel.


Apple compared to Tesla

Since the rumors about an Apple car started appearing many have compared the company to Tesla, suggesting that maybe Apple should buy Tesla Motors or that an Apple car would be a Tesla killer. The Stifel team agrees with this assessment, noting that it’s particularly interesting that Tesla CEO Elon Musk recently took a jab at Apple for its spending, saying that Apple “spend[s] money like it’s water” and that the company “still can’t get enough of it.”

A big barrier to entry into the auto industry is the costs associated with developing and manufacturing cars. However, the Stifel analysts think Apple can do this because over the last several years, its biggest investments have been in its supply chain.

This is demonstrated through the bar graph above that highlights how Apple’s spending on machinery compares to automakers and through the following graph that shows spending on property, plant and equipment.


All the spending on its supply chain has kept Apple’s return on invested capital higher than that of the average automotive industry.


Tesla, Apple push battery costs lower through scale

The Stifel team also explained an interesting distinction in the way Tesla aims to reduce the cost of batteries for its electric vehicles. They say the gigafactory will use economy of scale instead of breakthroughs in chemistry or materials. Tesla will see a more than 30% reduction in its battery costs in this way.

The reason this distinction is important is because Apple has the economy of scale already in terms of how it manufactures its consumer devices. The Stifel team believes Apple poached engineers from electric vehicle battery maker A123 because it is interested in doing the same thing. They add that Apple would probably be able to leverage its supply chain because it already enjoys an economy of scale.

Stifel continues to rate Apple as a Buy with a $150 per share price target. As of this writing, shares of Apple were up 0.16% to $127.70 per share.

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