This is a bonus fourth installment of our series of wild speculation about the Apple Car. Here are links to Part 1, Part 2 and Part 3.
So far in this series, we have assumed that Apple is going to come out with a Car and that it would be an incredible product. These are by no means guaranteed, and in this post we want to look at some of the many ways an Apple Car could fail.
First, we should not assume there will ever be an Apple Car, it certainly looks like they are working on something, but this is a company that has as part of its culture “The Importance of Saying No” to things that do not work. They could literally spend billions of dollars on design,
force encourage their suppliers to jump through all sorts of hoops, and actually build working prototypes – and then decide to cancel it.
There is a good precedent for this – the Apple TV. Not the $99 box they sell now, but an actual television set. Ten years ago everyone “knew” they were working on this. One Wall Street analyst had been loudly predicting it for even longer. From what we have heard, they were in fact working on this. And when all the design work had been done, the bill of materials that Foxconn brought back to them proved to be far too expensive for the TV market to bear. At that point, you could buy a 70-inch HD TV for under $1,000, and the Apple TV came in several multiples more expensive. It was a great, intuitive product that people would enjoy using, but no one would be able to justify its purchase. So Apple killed it.
It is all too easy to see that happening with the car. This is exactly the point that Benedict Evans made with his tweet that sparked this whole series. Our thesis here has been that Apple can leverage the supply chain and its other tools to get the price down to reasonable levels, but maybe they cannot.
One big area of concern with us is materials. Apple takes materials very seriously, probably too seriously. Sit through one of those Jony Ive videos talking about burnished aluminum and you can get a sense of what we mean. We understand that materials matter and work magic for the brand, but every time we hear a senior Apple exec extolling the virtues of something like this and the word that comes to our mind is “Precious”, in all its various connotations. That can be made to work for a laptop or a phone or a watch, but for a car the risk is that some interior finish alone can blow the entire budget for the project. Again, we have precedent here. The original AirPods were incredibly expensive to produce. The process of finishing the cases – with their rounded corners – spiked production yields so badly that not only was the product out of stock from the beginning, but for a long period Apple was losing money on each one. It is easy to see that happening with the car. And while Apple eventually fixed their AirPod production problems, the kind of repair could be prohibitive when done at automative scale.
The same could be said of many other aspects of the car. Whenever we think of the Apple Car we are reminded of the episode of the Simpson where Homer is given carte blanche to design a car for the “every man”, the result (pictured above) is a car with too many useless features. Apple is really good at paring down that exact problem of feature bloat, but as they are in such uncharted territory there is still risk that they have too many features, or too few features or the wrong ones.
Another big problem will be their reliance on Foxconn. Quality matters immensely for cars and for car profitability. We could get into the intricacies of warranty reserves and profitability, but will spare our readers any more cost accounting. Put simply, one minor glitch in production can result in costly recalls. Apple can afford those financially, but the perception of the car may not. So a lot depends on Foxconn being able to build a car. This poses so many problems we cannot list them all here, but to name a few – Foxconn has never built anything this complicated, they will have to deal with a unionized workforce (and let’s just say this company does not have a great track record with human resources), integrating a huge number of suppliers many of whom may be new to them. Apple and Foxconn both have ample experience in designing manufacturing lines, but a car is so new to both of them that there is a real risk of something breaking here and not being discovered until we are a few hundred thousand units into production.
Tesla has gone through exactly these problems, but they are still a relatively new company, early in the process of establishing its reputation, not an established giant from whom everyone expects high quality. Tesla seems to overcome some of these growing pains with their very adaptable (some would say chaotic) culture. They now seem to have a model built on maximum flexibility, which is a problem for Apple in that their biggest perceived competitor is very much an X-Factor who could respond in unpredictable ways. Apple may struggle to respond to such randomness given their culture, and the expectations built into their brand.
Indeed, one of the biggest problems Apple will face is the very high expectations that come from their brand. Consumers are going to expect magic and anything less may be disappointing, the Street is absolutely going to take this view.
Finally, we have no idea how Apple will provide service for the Car. Will they have a network of car lots for pick-up? Will those locations provide maintenance? This requires a massive organization. Apple has built an incredible retail operation with its Apple Stores, but those have struggled in recent years as Apple’s user base exceeded the ability of the stores to provide support resulting in crowding and long waits. These issues are going to be multiplied with a car. Apple will need to recruit and train a significant workforce, possibly in a very tight timeframe. Maybe they will come up with some clever solution that we have not predicted, but it is a problem that will require a complex solution.
We could go on. There are many more issues the company will have to contend with ranging from minor to killers. This does not mean they should stop the project, but they will ultimately weigh heavily on the company’s decision to proceed. Or not.
I wonder if Apple’s focus on materials could allow them to meaningfully increase range by using lighter materials without sacrificing safety. That would be huge. Something like a 1000-mile car would be a game changer.
That’s a smart take.
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Great series, appreciate your insights. I’m wondering what you think of Ben Evans’ original take, which is that it’s much easier to go from $200 to $600 to buy a phone, but much harder to go from $20k to $60k to buy a car.
Even assuming prices will fall over time due to efficiencies in production and diversifying the line up, I don’t think Apple will ever have a “mass-market” priced car. If that’s the case, are they satisfied with making a high-end niche product?
Also there is a long-term trend in developed countries of people moving to cities, not getting drivers’ licences, etc. With the iPhone they grew/created a new market. It seems like with the car they are entering a market that is shrinking at worst and stagnant at best, and I have trouble thinking how they can revolutionise it with a high-end niche product.
In terms of “will Apple be satisfied with making a high-end niche product” – yes, I think Apple has demonstrated they are very disciplined about chasing meaningful targets. In this case, they could produce a highly profitable car, and if they only end up with 3% of the market, but make double the profit/car of everyone else that will be a success in their minds.
I think the real challenge for Apple will be convincing people in the market for a $50k to upgrade to a $60k car (or whatever the actual prices are). That is what they did with the iPhone, and it would work well for them in autos. Then the second question is can they produce that car at sufficiently high profits despite their smaller scale – and again, I think they have the supply chain chops to pull that off. Taken together, this would be a huge win for them.
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I think that charger network is an asset that Apple will have to address. Tesla charger network puts the hurdle for Apple too high: will people need to download the garbage app of Electrify America to use the Apple Car? This piece of vertical integration that Tesla (and its shareholders) are willing to do is something I wonder how Apple will address. Is this a core competency of EV? Also, it’s possible that in the EV world value will accrue for the charger network. No one knows and that’s why Tesla is totally vertically integrated: wherever the value accrues, it’ll accrue for Tesla. Apple is by far the less capital intensive FAAMG and I think the Street wants it this way.
Nonetheless, will Foxconn build cars in China and send them through the ocean to America? The iPhone has lots of value per m³, it’s harder to tell for cars.
The charging network is a good point. That’s probably one way Apple could innovate in service. Fancy charging stations around the country. But it’s going to be a obstacle at the start.
In terms of geography, I think Foxconn will probably open a plant in the US, at least for final assembly. How they will get on with the UAW, is a whole issue in itself.