Apple Car – Some Math

This is another article in our seemingly never-ending series speculating about an Apple Car. Here is Part 1, Part 2, Part 3 and Part 4.

We always welcome comments on our posts. We try to respond to all of them, but sometimes in writing a response we realize that we missed something in our original post, and we spend so much time crafting that response it occurs to us that the reply should be a post itself. This is one of the posts.

The impetus for this series was Benedict Evans’ tweet a few weeks back in which he noted that getting people to upgrade from a $200 feature phone to a $600 iPhone was possible, but questioned whether Apple could get people to upgrade from a $20,000 car to a $60,000 Apple Car, a much bigger jump given the size of the purchase. Here, we want to put some numbers behind our response.

First, some background numbers. The US auto market in 2019 was about 17 million cars (2020 was only 14 million but let’s set aside that year as an outlier). According to statistics from the National Automobile Dealers’ Association the US market in that year broke down as follows:

Small Cars12.4%
Large 1.2%

We have no idea how much Apple will charge for its Car, but if we had to guess we would say it is around $60,000. That falls firmly into the “Luxury” bucket above, but there is a decent chance that they may be able to pull off buyers from some of the other categories. We imagine there is a huge overlap between iPhone/Mac users and buyers of Crossover and SUVs. So let’s say the initial target is Luxury buyers (5.9%) plus two points each from SUV and Crossover. For a grand total addressable market of 9.9% of the market or 1.7 million vehicles. For comparison, Tesla delivered 500,000 vehicles in 2020, which seems like a reasonable target for Apple in year 2 or 3 of sales.

As a side note, recall our speculation as to how many models Apple may launch. Common sense would say just one model to start, but we called the possibility of them launching 3 models the stuff of auto executive nightmares. The numbers above show why that is true. If they launch a sedan, an SUV and a pick-up their addressable market goes from 10% to 70%.

Recall our core thesis that Apple is going to chase product and profit, not market share. If they can profitably attract 0.6% of the US auto market or 100,000 vehicles in year one that will already be a huge success. The average mass market car in the US attracts something like $2,000 – $5,000 in gross profit per car (we cannot vouch for the source of that link, but the figures look similar to what we have heard elsewhere). Through some combination of supply chain efficiency, software and services – let’s say Apple can end up at the high end of that range around $5,000. If Apple can sell 100,000 cars in Year One and 200,000 cars in Year 2 that works out to $6 billion in revenue and $500 million in gross profit in Year One and $12 billion in revenue and $1 billion in gross profit.

(Side note on accounting: when we say Apple can make a few thousand dollars per car, we are speaking strictly in terms of when they are producing at volume. They are almost certainly going to lose money on each car in their first year and probably the second. We do not want to get bogged down in cost accounting, so we are simplifying things here.)

On their own, these numbers are enough to make any new company proud. That being said, for Apple this may not be sufficient. At these levels, gross margins come in at 8%, which is about a fourth of Apple’s corporate gross margins today. Now maybe someone at Apple says you cannot take % to the bank, and we are happy to take that many $ to the bank instead. However, we suspect they will want more. If Apple has a sufficiently differentiated product (software + service) they may want to raise the price on the car. If they can produce a $60,000 car for $55,000, do they charge $90,000 for it and capture the rest as profit? That works out to 40% gross margins, above corporate averages. Remember, this is the company that sells $5 in memory for $100. If they follow this model, they may just launch a sports car first, as Tesla did. It would sell in tiny volumes, but allow them to iron out the kinks in their supply chain, and remember they do not care about market share. If they could follow this quickly (say 2 years) with three models running on top of an ironclad supply chain, the upside potential for them in immense.

What stands out to us in this analysis is how achievable this all is. Apple can hit these numbers. So it really comes down to how they choose to go after the market. Apple has two types of buyers to attract – people who are in the market for a $60,000 (or a $90,000) car, and people who may upgrade up a tier. Part of Apple’s potential here is grounded in their ability to attract that upgrade category. In Part 2 of this series we list a variety of ways they can trigger that upgrade. They can attach services, financing, Apple TV+ and iTunes subscriptions, etc. Apple has proven incredibly adept in provoking this type of buyer response, and ultimately the success of the Apple Car will depend heavily on their ability to transfer that magic from electronics to autos.

Photo by Drew Beamer on Unsplash

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