No Return to Apple’s Glory in Cars

Recently, Neil Cybart got a lot of attention on Hacker News for an article claiming that Apple would “pivot” into cars.  This is a very, very stupid claim.

The reason it’s very, very stupid is that Apple isn’t going to “pivot” into anything.  Pivoting has a meaning, and that meaning is not “introduce a new product.”  It’s changing your focus.  Apple is not some small agile startup with nothing to lose and everything to win.  It’s the most valuable company in the world, and if the iPhone and iPad lines are past their peaks, they are none the less incredibly valuable properties that will continue to produce gigantic profits for Apple for many years to come, and obviously Apple, while interested in finding another big product or two, will continue to focus the majority of its organizational weight behind the iPhone until the iPhone is doing much, much worse than it is now.

Okay, you say.  But you’re just poking at the sensationalist headline.  The meat of Cybart’s claim is that Apple will make a big bet in cars and has a chance to resurge from its current doldrums on the back of a big play in cars.

That claim is not very, very stupid.  But it’s still wrong.

The car industry simply isn’t big enough to compensate for a (let’s say for the sake of argument) rapidly weakening smartphone market.  Not even if driverless cars are coming.  Not even if the ownership model for cars changes.  In fact, especially not in that case.

First, to be clear, let’s look at the Apple of 2015.  Apple of 2015 had revenue of $234 billion, with a gross margin of nearly 40% (!!!) and a net margin of about 20%, meaning it racked up somewhere in the vicinity of $50 billion in profit over the course of the year.  Holy shit, guys.

Toyota is the most valuable auto company in the world, with a market cap of $150 billion.  So just to be super clear, Toyota’s market cap is less than 2015 Apple’s revenue, and right around 3x of 2015 Apple’s profit.  It’s market cap is around 1/5th of 2015 Apple’s.  Its gross margin hovers around 20%, or half of 2015 Apple’s.  In fact, even today, the somewhat diminished Apple’s market cap still exceeds Toyota’s + Ford’s + Honda’s + GM’s.

So what does that tell us?  It tells us that even if Apple is wildly successful in the car business, it would have to fundamentally change the car business to support a valuation that comes close to the height of the smartphone wave.

Okay, you say.  But maybe Apple can make such a change.

How?

I think it goes without saying that you can’t overturn the car industry with a car that looks cool or has a really nice entertainment system or extremely clever rear-view mirrors.  No amount of design that Apple brings to the table is going to change the auto industry from a capital-intensive, low-margin, hyper-fragmented industry to a extremely high-margin, unified one.

So what else might happen to cars soon?  Obviously, cars might go electric (or hydrogen-powered, I suppose) and they might become driverless.

The size of opportunity of cars going electric is more or less the value of fuel savings.  A 20mpg car that drives 15,000 miles per year uses about 750 gallons of gas.  At $4 per gallon, that’s $3,000.  So far, even a pretty compromised electric car costs at least $6,000 more than a comparable gas-powered one — there’s no way we’re getting from there to Apple convincing everyone to plunk down an extra 20% margin to support a smartphone-like business.  The market for people who’ll pay lots of extra money for the dubious environmental benefits of an electric car just isn’t that big: if it’s overall a big waste of money to avoid gas, people aren’t going to avoid gas.  If it’s not a big waste of money, you can’t support Apple 2015-style profit margins, and that means you can’t support Apple 2015-style valuations.

A move to full-on driverless cars is potentially a much bigger revolution.

Before we go into that, though, let’s take a realistic view of Apple.  Apple is not an AI titan.  Probably the biggest AI play that Apple has ever made was Siri.  And Siri was an acquisition.  And Siri has been, I think it’s fair to say, pretty disappointing.  Even if Apple has somehow built a world-class AI team with relatively their (characteristic) secrecy, you can’t bring a self-driving car to market without testing it on real roads in real driving conditions, and to do that lawfully, you need to notify the government, and Apple hasn’t done that (I also don’t believe that Tim Cook’s Apple just decided to cowboy it without the necessary permits).  You have to believe a real series of improbabilities to imagine that Apple has best-in-class driverless cars up its sleeve.

But let’s say that against all odds, Apple comes to market with driverless car technology that’s much better than all the known players in the market, in a similar way to how iPhones were so much better than any other smartphone in 2008.

Even then, how does Apple get to the high margin, high volume business that would support a circa 2015 valuation?  Cars are expensive.  I think it’s reasonable to say that people just can’t pay afford to pay a massive premium on the cars they already have, even if those cars are really, really, really cool.

Going to an Uber rides-on-demand model is even worse.  The entire point of driverless cars + rides on demand is that it increases the utilization of each vehicle and lowers the cost that each consumer pays for cars by allowing them to share the costs of each vehicle with some number of other consumers.  Even if Apple swallows the entire auto industry (and just think of the capital costs associated with trying to produce tens of millions of vehicles — these things are way more expensive to manufacture than iPhones), the entire auto industry does not currently add up to the market cap of Apple, and the entire point of rides-on-demand + driverless cars is that the total market for vehicles would shrink!  If it wouldn’t — if the market would grow instead — that means that ipso facto, consumers are spending more on cars in the rides-on-demand world than they were on their cars today.  At which point why wouldn’t they just buy the cars?

In conclusion:

Might Apple be planning a foray into the automobile world?  Sure, it might.

Could Apple imagine that an Apple Car would become the main pillar of its business?  I very much don’t think so, but maybe they know something I don’t.

Would an Apple-as-principally-an-auto-company future be good news for Apple?  Not compared to the heyday of smartphones it wouldn’t.  If Apple were genuinely planning to in even the broadest and most loosest of terms pivot into automobile manufacturing, that suggests that they know some really unbelievably dire news about their personal electronics business.

Much more likely, any foray into the auto business would be a side venture for Apple, one where they’d stick to a small luxury market where they can have good margins at the cost of being a relatively small minority of their overall business.

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