This is part 3 in our Series of wild speculation about the Apple Car. In Part 1, we looked at the sources of Apple’s differentiation. In Part 2, we thought through how those would play out in the car itself.

Part of our interest in the Apple Car is that this pre-launch phase is highly reminiscent of 2006 when everyone knew Apple was working on a phone, but no one knew what it would look like, let alone what it would become. And there are some important similarities beyond that. Notably, the established incumbents are all making dismissive noises, albeit there is considerably less skepticism from the auto OEMs now than there was from the phone makers in 2006. However, the set up is similar. Apple seems to hold the promise (threat) of some massive form of disruption. And just like the big phone makers back then, the auto makers have massive fixed costs that could become an anchor around their necks if Apple delivers on that promise (threat).

A bit of history first. For the first few years of the iPhone, Apple’s new competitors all dismissed them. There are many now infamous quotes that haunt the executives who voiced them. Apple’s approach was so different, so far out of the mold, that it took years for the incumbents to fully understand what was happening, by which time it was too late. The best example of this was Nokia, who went from global, dominant market share leader to out of the business in three years. True – they had other unaddressed problems that were chipping away at them (e.g. denial that the Mediatek ecosystem existed), but Apple took away their ability to respond to those threats. What really sank Nokia was the loss of a big source of profitability – the high end of the market. Without those profits, their installed base of manufacturing plants became that anchor.

That is a real risk for auto companies today. Their fixed costs are huge and Apple looks poised to take a big piece out of the Luxury (i.e. high profit) segment. In fairness, the auto market is very different from the phone market. Phones back then were much less differentiated. The difference between a high end phone and low end phone was fairly small from a product standpoint. By contrast, the various segments of the auto market are very different. To name just one example, the US automakers make a lot of their profits from pick-up trucks and SUVs. We think the most likely scenario is that Apple starts with a sedan. They may eventually get to those other categories, but by then the US automakers will have some time to respond. Of course, Apple could surprise everyone and launch all three categories at once, maybe one built on a common chassis, to maximize their supply chain leverage. Likely? Probably not. Possible? Yes, and if we were an auto executive that is something that would keep us up at night.

As we have highlighted in this series, a big part of the Apple Car story will be its supply chain. We cannot yet assess how this will look in comparison to what exists in autos today, but it is safe to say that whatever Apple brings will look very different from today’s model. In itself, this is a massive challenge to the auto OEMs. Even if the Apple Car is a commercial failure, the mere process of them bringing it to market will blow open the supply chain, and there are already many other companies riding that wave, and they may be able to succeed where Apple fails.

From where we stand, we think the most likely target for Apple initially is the Luxury market. As noted above, this is less of a problem for the US automakers, but it is a problem for the German and Japanese OEMs. BMW and Audi, in particular, look highly vulnerable given the demographic group they target. The US automakers have struggled for years in luxury and thus look less exposed, but what share they still have is definitely vulnerable.

The impact for Korean and Japanese car makers depends a lot on what price point Apple ends up for its Car. In our previous post, we wondered if Apple might price below the luxury market and instead drive its profits from ancillary services sales and option packages. If they end up priced here, they would likely be able to eat into some of Toyota, Honda, Hyundai and others’ share. Another big factor will be the geographic reach of Apple’s ambitions. Our best guess is that they will start in North America, exclusively for a number of years. If true, the scale of the East Asian OEMs will provide them with considerable buffer and thus time to adapt.

Perhaps the biggest change will come for the many emerging electric vehicle (EV) makers in China. Apple would obviously be a big competitive threat to them, but it is very unclear if Apple would enter the China market. There is obvious political risk involved, which at the very least would require that Apple open up a production facility in China. This is likely much more viable than it would seem because of the new nature of EV production, but also hard to quantify given the state of the world. Regardless, one of the biggest historical obstacles for new entrants to the auto market has been tapping into the broad industry supply chain. This is why the incumbents still do so much work in house. Building a new supply chain is incredibly expensive, but Apple is footing the bill for much of this initial work, and in doing so makes it easier for new entrants. Already Chinese car makers are moving in this direction, for instance take a look at what Xiaomi has already announced, it looks very similar to how we envision Apple’s future.

This is likely a mixed bag for the nascent US-based EV makers. There are a lot of them now, and they will also benefit indirectly from Apple’s contribution to the broad supply chain. On the other hand, they would now be competing directly with Apple. Again, this comes back to the question of how broad a product offering Apple starts with. There may still be many lucrative segments and niches which Apple does not initially address.

And then there is Tesla. We have been reluctant to write much about Tesla in this series, and in general. Judging from the comments we have received so far in this series, many people think Tesla is Apple’s biggest competitor. We do not think that is entirely accurate, we suspect Apple has a broader target horizon. Nonetheless, the two will be fighting over many of the same customers. Tesla already has multiple models (with a pick-up coming soon, right?), providing them some buffer from an initial Apple sedan. They also have a loyal following. That being said, Tesla has many ongoing growing pains. For instance, as much as their buying process is superior to that of the incumbents it is still very fragile (and we can say that from direct experience). They have software that differentiates from the incumbents, but it is hard to see Apple having an inferior User Interface, and quite possibly having a far superior one. Apple also has an entire ecosystem to help it out, but how much that matters is unclear. We are not saying that Apple will wipe out Tesla, only that they are vulnerable, but Apple will still have to deliver. Tesla is doing so many things at once which is a double edged sword – they may very well be able to outmaneuver Apple, but since they are working on so many things there are many gaps in their quality of implementation. Intriguingly, the two companies’ corporate cultures are so different, that the oncoming battle between the two will generate a whole generation of business school case studies.

Ultimately, we think Apple absolutely has the potential to up-end the entire auto market. We say this with no certainty as we still know essentially nothing about the Apple Car. Nonetheless, their work with the supply chain has already pried open Pandora’s box, boosting many other EV makers’ ability to draft on their progress. Regardless of the ultimate fate of the Apple Car, this change alone is likely to alter the industry in dramatic ways, most of which no one fully anticipates.