These two words had the newswires buzzing frantically last week, as rumors flew that Apple (AAPL) is getting into the automotive game. Yes, Apple!
The company has hired hundreds of auto engineers for Project Titan. And in our Digital Fortunes update last week, Louis Basenese reported that auto industry spies spotted an Apple minivan equipped with camera gear cruising around the Bay Area.
Now, we’ve seen some bizarre coverage on the topic. Rumors have even surfaced, claiming that Apple is buying Tesla (TSLA)!
In reality, we can only confirm that Apple is up to something. It hasn’t hired those engineers to make sure the executives’ cars are properly tuned up.
Apple probably isn’t going to make cars. And it’s certainly not going to buy Tesla.
But here’s the most likely route the company is going to take…
Profit Wars: Apple vs. General Motors
“I would be highly suspect of the long-term prospect of getting into a low-margin, heavy-manufacturing business.”
Those are the words of former General Motors (GM) CEO, Dan Akerson.
You can bet that Apple is smart enough to heed that advice.
You see, Akerson was the CEO that the government brought in to clean up the mess after GM’s massive bailout.
But he wasn’t a “car guy.” Since all those guys at GM failed miserably, the government wanted a different approach. Akerson made his reputation in the telecommunications industry, so he knows a thing or two about high-margin and low-margin businesses.
And when it comes to Apple versus the car industry in this area, there’s no contest.
Apple’s gross margin (the profit percentage on goods production before selling and other costs not related to manufacturing) is a hefty 38%.
By contrast, GM’s gross margin for 2014 was just 7%.
If you’re counting at home, Apple makes products that are over five times more profitable than GM. And after other expenses, that difference grows further. Apple’s total 2014 profits were over 20% of sales. GM made less than 1% net profit.
Even apart from the actual dollars that those profit differences represent, the profit percentages give Apple’s business leeway that doesn’t exist in the auto industry. For example…
Exploding Batteries… But Not Profits
In 2011, Apple learned that the iPod Nanos it shipped in 2005 and 2006 had a significant problem. Its battery manufacturer had made an error and a small number of the batteries were exploding as they aged.
Brings a whole new meaning to “death metal”!
So what did Apple do? Simple. It offered to replace the devices. All of them… no matter whether they had a problem or not.
In fact, to this day, if you have an old iPod Nano, you can check to see if it’s covered by the recall. If so, you can exchange it. When Apple ran out of old iPods to ship to recall customers, it shipped current-generation ones.
Apple was able to perform this impressive feat of customer service because the company is so profitable, and the business had grown so much since the devices were first released.
But things don’t work like that in the car business. Not even close.
Even the most profitable automaker in the world can’t afford an open-ended, full-replacement recall like Apple did.
Not to mention the fact that an exploding iPod battery would do far less damage than an exploding car battery. Given the inevitable injuries, and perhaps deaths, the headlines would be taking over the internet.
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To put it bluntly, there’s no chance in hell that an Apple car business would be as profitable as its computer business. The cost structures are simply too different between the two products.
By the time it had bought all the materials to make a car, pounded it into shape, paid the hours of labor required to assemble it, and complied with the extensive regulations necessary to put a car on the road legally, there’s simply no room to make a car affordable enough for people to buy and still turn a 40% profit. Even the most profitable car companies only have profit margins of 7% or so.
No, Dan Akerson has the right idea.
And as for Apple buying Tesla, this speculation makes no sense. It would simply give Apple the same problems, but at a much higher cost than it could create for itself!
So does that mean there’s no iVan in your future? Not necessarily…
Apple’s Auto Strategy: Profits Without the Pain
Apple could pursue a strategy not dissimilar to what it does with products now. You see, Apple designs the products, but does very little manufacturing itself. It outsources that to companies like Foxconn (2354.TW).
So Apple could be planning to do everything except actually making and selling the car.
Many car companies already “sub-brand” some of their cars with other companies. For example, Harley-Davidson (HOG) for a more rogue image, or Eddie Bauer for a preppy touch.
Companies making a smart car would welcome the opportunity to co-brand with Apple. For Apple, that would also give it the chance to introduce innovations in stages and across multiple models.
Imagine an iPrius or iCamry with an Apple infotainment system and electric drive. Or an Apple-branded iLexus that comes equipped with semi-autonomous driving capabilities. Or a future iToyota that’s fully self-driving.
Under a model like this, Apple can keep its money invested in the area in which it excels. And, more importantly, it can maintain its customary high profit margins, avoid auto industry regulatory hassles, and have the world’s best automakers clamoring for its auto designs.
To living and investing in the future,
|P.S. No matter what Apple’s ambitions are in the auto industry, there are plenty of automakers looking to disrupt this traditional area with some incredible new innovations themselves. I’m talking specifically about the dual trend of connected cars and driverless cars.Believe me, these fast-growing technologies are only set to accelerate in the coming years, as companies battle for that critical “first-mover” advantage and get their innovations on the market before anyone else.We just dedicated the latest issue of Digital Fortunes to the topic – and highlighted two companies in a perfect position to profit from it. The recommendations are hot off the press, so don’t miss out. Our research team will give you all the details. For more information, just call 877.242.1730 or 443.353.4501.|