This is the second part of our series looking at (i.e. wildly speculating) about how the economics of an Apple Car would work out. Click here for part one.
In our previous post, we postulated that Apple has three ways to redistribute the value of automobiles – their ability to leverage and scale their supply chain, their core competency around putting users first, and their focus on metrics that matter. Here we are going to think through a few ways that can shift auto industry economics.
For this, we are assuming that the Apple Car will be electric. They will likely position this as being good for the environment, which it is, but more importantly it brings the technology closer to Apple’s existing core competencies. They do not have a giant flying saucer building filled with mechanical and chemical engineers, but they do have one filled with some of the world’s best electronics engineers and supply chain professionals. Electric cars require a whole different set of suppliers, and we are already seeing this percolate through the supply chain. However, we are not assuming the car will be autonomous, or at least we do not see it as a requirement for Apple to change the industry. True autonomy is still far away, and Apple does not need to be the first to offer them.
The Supply Chain
The biggest tool Apple has is its supply chain. The shift to electric vehicles moves this firmly towards Apple’s strengths. From what we can tell, Apple seems to be reinventing the traditional auto supply chain, separating design and assembly. This is how almost all electronics are built today and how almost no cars are. The big automakers treat manufacture (at least final assembly) as a core competency and guard it closely. By contrast, Apple seems to be using Foxconn as its manufacturer. We should be clear that there is no ‘right’ answer here, both models have their advantages and disadvantages. But by separating (abstracting) design and manufacture Apple can change other parts of the process.
For starters, we suspect that they can compress the time required to take a car from design to first production. Most cars spend years going through this life cycle, but if Apple can get this down to a year they can iterate more quickly and respond more rapidly to consumer demand. This matters because it allows Apple to increase the perceived value of their cars, boosting consumer interest. Hard to quantify, but meaningful.
Apple is also likely to start with a single model, greatly increasing their economies of scale. They can hone that model and keep their production lines simple and consistent across multiple sites, if needed.
Moreover, Apple has demonstrated that they can squeeze their suppliers in a highly effective manner. With many of these suppliers eagerly (some would say desperately) seeking entry into the auto sector, Apple has a good negotiating position. Apple is also likely to do a significant portion of R&D work in-house, handing suppliers semi-custom designs. For example, Apple has long been designing special batteries to fit into their laptops; that sort of expertise will be very important in squeezing more batteries into every nook of the car. And of course, Apple runs the world’s best semiconductor company, so already likely has designs for the key chips it will need. Adaptations such as this may give Apple the ability to offer better performance – longer battery life for instance – and attract buyers through this.
Apple has many ways to use the supply chain to reduce costs and/or increase performance. And they seem to be building that supply chain with a highly flexible model, all of which gives them value they can deploy as needed.
The Human Experience
When it comes to the User Interface of the car and the way the car will be perceived by buyers we are faced with the ages-old Apple Event Horizon – no one outside can really predict what the Car will look like and how it will feel to use it. When the launch gets closer, we will undoubtedly get pirated photos appearing on obscure Asian language web sites, but those will tell us very little about the total experience.
It is obvious that software will play the lead role in this experience. Apple has rolled out Car Kit on dozens of auto brands, and are gathering all kinds of data about its usage, but our guess is that Car Kit will not be a good guide to the Apple Car’s User interface. Car Kit is to the Apple Car what the Moto ROKR was to the iPhone – a test suite on their future competitors’ dime. Will the Car have apps? Probably. Will there be an app store? Probably but not at first. And to be blunt, no one knows.
The aesthetics of the UI will matter a lot (see Fake Steve Jobs), but our (highly non-professional) opinion is that the design language of the iPhone will not translate well to a car. In that setting it feels somewhat whimsical, and for whimsical consumers will perceive unreliable. So likely Apple will have a new design language. (We hope it looks like the 1980’s movie Tron.)
They will also likely have a new set of controls in the car – regulators and standards mandate certain features – normal accelerator and brake pedals, a steering wheel, a rear view mirror (required by law). But many other controls and the entire dashboard will likely be entirely re-imagined. Done well this will greatly enhance the brand value of the car as being something truly differentiated.
Much of this is unanswerable right now, but a lot rests on it.
Metrics That Matter
That being said, there are some things that we can make educated guesses about.
First, we think that Apple can re-design the car buying experience. They did this with laptops and phones via the Apple Store, which was once a great retail experience. This could play out in a number of ways for the Car:
- Seems fairly obvious that Apple will entirely eschew dealerships, focusing instead on direct sales with buying points in their considerable retail footprint. (A good leading indicator for Apple actually getting ready to launch the car is when someone discovers they have bought up hundreds of car lots across the US.)
- We would bet real money that Apple will have rigid, fixed pricing. No negotiation or hours of sitting around the dealership haggling.
- High-margin option packages that appeal to consumers. Traditional auto OEMs, and especially their dealers in the US, make a considerable amount of margin from sales of option packages which are often a hodgepodge bundle that are never clearly explained to buyers. Apple will make this much cleaner. Think of their iPhone pricing – $100 for the next level of memory. This looks really simple to consumers who probably do not realize that Apple pays a few dollars for that. The equivalent in the Car could likely be software based, with some form of low-level autonomy priced at a nice margin. How much would you pay for a software feature that parallel parks your car? There are a lot of possibilities in this vein.
- Financing – Apple has a few hundred billion dollars on its balance sheet, and it would love to lend that to you to buy their car. Apple does a little of this today, but the big automakers earn a lot of their profits from this, no reason Apple could not replicate it.
- Service & Insurance – Apple Care is very lucrative for Apple today at $99 per device. Apple could easily offer a service bundle that costs $1,000 and up. We lack the knowledge to get too deep into car service economics, but how much would an Apple Car customer be willing to pay to have an improved service model? A few thousand dollars to have a service concierge and on-time appointments. Similarly, Apple could also offer an insurance program structured in a way to be easy for buyers to sign up and lucrative for Apple.
As a side note, some will point out that Tesla already offers many of these things. Apple is not shy about copying good features (looking at you Xerox PARC), so this is not shocking. And since many view Tesla as Apple’s competitor here, consider how different Tesla’s early years would be if they started with hundreds of billions of dollars in the bank and a highly optimized supply chain.
We still think that the traditional auto makers will remain meaningful competitors, but here Apple has other advantages.
First, they may have a better feel for what car buyers want, or at least a certain highly lucrative segment of car buyers want. Those buyers are increasingly interested in electronics and relatively less interested in driving performance. Not all buyers, but many, especially younger buyers. Apple can appeal to people who care more about GB than Horsepower.
Secondly, traditional auto makers, especially in the US, have a cost accounting problem. (We recognize that most people fall asleep at the mere mention of cost accounting, but bear with us, we will be brief.) Having grown up with highly vertically integrated industrial models, they care a lot about keeping factories full to maintain utilization. Apple does not have that problem. In part, because they have offloaded much of their fixed costs to Foxconn. The mantra we often hear is that companies are what they measure. Apple has demonstrated time and again that they do not measure the same things as their competitors. Apple is not going to chase market share or factory utilization, they will chase user demand in the belief that profits will flow from that.
Pulling it All Together
There is a lot going on here. By using the fairly large levers it has at its disposal Apple can re-distribute big pieces of the economics of the industry. By eliminating dealerships, Apple can recapture much of the margin that rests there. They can move around pieces like insurance and finance to tap into various profit pools. If they can build a user interface and interior design of the Car in some Apple Magical way, then they can command a premium price. Another plausible scenario is that Apple offers the car for a less-than-premium price and through a combination of lower build costs via their supply chain, and cleverly priced options/insurance/finance package still garner something like a premium margin.
Apple is going to re-segment the market. With all the other features Apple can offer inside the car and other services they may be able to charge a “Luxury” price for the Car. At the same time, their supply chain prowess may allow them to build that Car for less than what other Luxury cars cost to build. Ultimately, the Car does not have to be magical, it just has to be sufficiently differentiated to attract some segment of the market, and then through all the tools at their disposal Apple will be able to capture a healthy margin, likely surpassing that of many other cars.