How can Apple Differentiate an Apple Car?

A couple weeks back, Benedict Evans posted an interesting thread on Twitter, starting here:

And it is fair to say we have been thinking about little else since.

Benedict’s point is that the iPhone fundamentally changed the entire telecom landscape, and shifted so much value that consumers would eventually become willing to spend $1,000 per phone. This would have seemed laughable in 2006, but everyone laughing then is out of the phone business now.

So the question today is what would an Apple Car need to do in order to bring about a similar shift in value in the automotive ecosystem. Benedict seems to be skeptical that this is possible, or is at least posing this as a difficult question.

Neil Cybart, who does great work on Apple on his Above Avalon blog, recently published a piece on this theme. He is more upbeat, as this thread demonstrates:

His take focuses largely on some fairly high-level topics: “personalized rooms on wheels; and mass “car sharing”. And while we would defer to Neil on most matters Apple, we think there is another way to think about this problem that bridges Benedict’s tough questions and Neil’s thematic approach.

We are preparing a series of posts on this topic. First, here, we will look at what makes Apple different, at least as we see it. Then we will look at what this may mean for the Apple Car, and taking a stab at answering Benedict’s question. Finally, we will wrap up and look at what this will mean for the rest of the auto industry.

Think Different

As much as we all celebrate the mystery that is Apple, at heart they have always been incredibly open about how they think about products and do what they are good it. First, Apple knows how to leverage and scale a supply chain better than anybody else. When it comes to design, they put user experience first and work from there, this is where everyone else struggles. Finally, they focus on what matters, ignoring vanity metrics for other goals.

Let’s look at each of those a bit deeper.

How Apple Selects Components

One thing that really stands out from our years of experience working with Apple suppliers, is that the company knows how to maximize their extraction from those suppliers. In many design areas, Apple has a really small team making design and purchase decisions, each with very deep domain knowledge. When designing a new component requirement, these people will start with first principles and then build from there. And when we say first principles, we mean Maxwell’s equations and basic physics.

Apple then send those engineers to visit a supplier of the component in question. The visitor from the supplier’s biggest customer merits a penthouse boardroom, filled with executives. The Apple expert starts asking questions, then keeps asking questions, going down a layer. Fairly quickly, the supplier’s executives have run out of answers. So they move to a conference room somewhere down the building and get the mid-level managers. The Apple procurator keeps asking questions, going down more layers, until these managers have run out of answers. And so they move to the windowless shoe box conference room in the bowels of the building. The supplier digs up the technician who designed the component. The Apple inquisitor has more questions. The technician holds up well for a few hours, but by now it is very late and eventually exposes a flaw. The technician likely warned about this flaw in a design meeting, but got overruled by all those people with fancier offices. The Apple dominion now asks for the flaw to be addressed in way very specific to what Apple needs. At this point the supplier has little choice but to agree to the change, and in this way Apple has secured a custom part that benefits itself and probably offers no value to its competitors. The next day, the visitor from Apple goes to the supplier’s biggest competitor and starts the process all over again. And once the product is designed to Apple’s liking, the operations team comes for a visit. The ops team has a briefing document that contains the supplier’s financial position and bank balances, to the penny. They then proceed to negotiate a price, a process that is only interrupted when the ops team goes to visit the competitor. And so Apple arrives at a custom part, priced below what anyone else can obtain. With this process, Apple uses its suppliers’ R&D as a force multiplier for its own fairly lean R&D team. This used to be readily apparent in Apple’s financials, albeit in recent years the R&D budget has gotten much bigger as they company has taken on so many more initiatives.

Apple goes through a similar process with the companies that produce and assemble their products, albeit sweetened with capital for tooling and volume commitments (sortof). And through this they can build hundreds of millions of phones a year to fairly high quality standards.

Put simply, Apple knows how to get the most out of its supply chain, and this is an immense source of value.

We Start with the Ads

Another, probably the most important, way in which Apple differentiates its products is through a ruthless focus on User Experience (or Human Experience as they call it in their documentation). It is easy to dismiss this as “just design”, but we believe strongly that it goes much deeper.

When Apple first launched the iPhone, most other phone vendors were focused on bringing down the cost of their phones. They took all the value of software and Moore’s Law and applied it to building the cheapest phones possible for any given price tier. They were essentially capturing the value of Moore’s Law for their own margins. Apple turned that around and used their chips to build a more capable phone. Nothing about the original iPhone’s hardware was proprietary. Anyone else could have built that phone, but everyone else was focused in a different direction. This allowed Apple to make a much more intuitive, easy-to-use device, with crisp-scrolling graphic, a touch screen interface, and a viable software platform (although that took another year).

All this meant a more expensive phone, but users quickly proved willing to pay that premium, all the way up to today’s $1,000+ models. (In fairness, they also got the operators to subsidize it heavily.) As we will explore in our next piece, this means that Apple may be able to redistribute value in a similar way for autos, albeit along different avenues.

At the other end of the user value spectrum is Apple’s brand. Fake Steve Jobs did a great job of laying this process out years ago, and as much as that piece is snarky and unfair, it also contains some truths. It is easy to dismiss this as overblown (Nokia and Motorola certainly did), but today that brand value is as immense as it is obvious. In some ways, this will be a double-edged sword with users wiling to pay up for an Apple Car, but equally they will approach it with very high expectations.

What Matters Most

Finally, Apple knows how to set its priorities. For years, everyone in the phone industry focused on market share, but Apple ignored that as a vanity metric and focused instead on its own product and its share of industry profits, a trend that continues to this day.

This will likely play out differently in autos, with a much wider array of pricing and profit tiers, but the same logic is likely to hold true. What do car buyers really care about? Probably not the things that the industry focuses on today.

Putting all this together, we think Apple has numerous avenues to extract and redistribute value. Just as they turned around the assumed logic of Moore’s Law and gave that value to its users, Apple can use the supply chain and its focus on users to hone in on whatever it is they determine is of the most value to them and their customers.

Photo by Drew Beamer on Unsplash

One response to “How can Apple Differentiate an Apple Car?

  1. Pingback: This is a bonus fourth installment… – The Hypocrilist·

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