Why Apple isn't likely to compete with Tesla

The idea that Apple would enter the electronic vehicle business is preposterous.

REUTERS/Brendan McDermid

With nearly $200 billion in cash on its balance sheet, Apple can do almost anything – including buying Tesla at a relatively affordable market cap of just $25 billion. But Elon Musk's swashbuckling electric vehicle and reusable SpaceX rocket depend on technological breakthroughs and big capital investments over long periods before seeing a payback. That just isn't how Apple rolls.

The abbreviation for research and development at Apple should be r&D (small r, big D) because the company keeps the riskier research small and invests big in development. The battery breakthroughs needed for mainstream electric vehicles are still on the horizon, and Apple doesn't have the cultural disposition to put its battery patents in the public domain to stimulate innovation as Tesla did. Nor does Apple have the stomach to make big investments to achieve speculative economies of scale needed for a mass-produced electric vehicle like Telsa has in its battery Gigafactory. No one at Apple has ever said anything like JB Straubel, Chief Technical Officer and Co-founder of Tesla Motors, has said:

"the Gigafactory represents a fundamental change in the way large-scale battery production can be realized. Not only does the Gigafactory enable capacity needed for the Model 3, but it sets the path for a dramatic reduction in the cost of energy storage across a broad range of applications."

Apple is the Prometheus of high-tech business. It takes others' ideas, combines time-tested technologies with fantastic design, and stamps out branded luxury consumer products with even more luxurious 40% gross margins. For example, The Verge said this week that Apple wanted to build a smarter watch but couldn't find the technology and scaled back the project. Apple could have built a more amazing watch than The Verge reported, but to do so it would need to invest in advance and more expensive components with the confidence that the company's designs would result in unit volumes affecting economies of scale and reducing costs. Or, Apple would need to invest in a breakthrough technology. But Apple doesn't operate that way. In the end, the company avoided development risk and put a price tag one third or greater than Android Wear and Pebble watches to ensure its 40% margins.

More revealing is the untold story of Apple's success capturing the lion's share of the 64-bit mobile processor device business. Almost every Apple mobile device ships with a 64-bit microprocessor since the iPhone 5s, while Android mobile devices still predominantly ship with 32-bit microprocessors. But there's no magic about how Apple won the lead in the 64-bit mobile processors that will become industry folklore. Apple bought the intellectual property from ARM, modified it, and handed the design over to TSMC and arch-rival Samsung, which have the semiconductor fabrication expertise to build its 64-bit A6, A7, and A8 mobile processors. Apple doesn't invent and doesn't build.

And don't forget the Mac. Up until 2007, Macs were used by graphic designers, schools, and eccentric wealthy luddites. It wasn't until Sony's supply chain and manufacturing lessons combined with Apple's shift to the Intel architecture and OSX forked from FreeBSD Unix became single-user Unix-certified that the Mac become a mainstream success.

Apple doesn't take big development risks, doesn't yield on margins, or make huge investments a long time in advance of a payback. In other words: no speculative investments, no moonshots like Google and Tesla. In this context, Apple's true interest in the auto industry can be deduced from the news reports.

The Wall Street Journal reported (subscription) last week that "[Apple] has several hundred employees working secretly toward creating an Apple-branded electric vehicle, according to people familiar with the matter. The project, code-named ‘Titan,' initially is working on the design of a vehicle that resembles a minivan, one of the people said."

On the same day, the Financial Times expanded (subscription) on the WSJ report with more anonymous confirmation of an automotive unit. FT also reported that Johann Jungwirth, president and CEO of Mercedes-Benz Research & Development North America, had joined Apple and that a person familiar with Apple said that Steve Zadesky, VP of iPod and iPhone Design, had made a number of visits to their one automotive supplier, Magna Steyr, in Austria.

A few days before, Business Insider reported receiving an unsolicited email from an Apple employee claiming, "I think it will change the landscape and give Tesla a run for its money."

Apple is not building a car. The company must ensure a fantastic user experience when its iPhones are integrated with increasingly intelligent cars using the company's CarPlay because smartphones are the hub of most people lives. But drivers won't pay $25,000 or more for a car that is compatible with their smartphones; rather, they'll spend $300 to $600 on a smartphone compatible with their cars. Integration between smartphones and dashboard head units that manage the instrument panel, communications, entertainment, and navigation systems is crucial. 

But the onus for integration also weighs heavily on car makers because the useful life of the average car is about 10 years, and a smartphone about 2. The hypothetical iPhone 16 that ships in 2025 has to work with the head unit of a car made in 2016 for both the car and phone makers to succeed.

Ninety percent of the requirements for a head end don't change from car maker to car maker. The last 10% is specific to the car maker's brand and luxury level within a brand. It makes sense for a tier-one automotive supplier like Magna to invest in electronic and software design instead of a car maker because the supplier can sell the head units to multiple car makers, recouping the investment over a greater number of units.

Replaying the news reports with a little context gives a more likely scenario. With 80% worldwide market share and superior Android maps and navigation and self-driving car technology, Google has a strong position with auto makers that could undermine Apple if its CarPlay technology fails. Investing in understanding and influencing the development of head-end dashboard computers running software from multiple vendors to ensure that CarPlay succeeds is a much more likely explanation for Apple's involvement in the automotive industry.

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Hiring Johann Jungwirth from Mercedes doesn't mean that Apple is going into the metal bending and drive train business. In fact, Jungwirth's resume depicts him as a telematics engineer who has worked on automotive communications, navigation, and entertainment systems – experience that is consistent with a strategic Apple CarPlay role.

Steve Zadesky's trips to visit tier-one supplier Magna were likely to discuss iPhone head unit integration. After all, he is responsible for iPhone design.

Apple is content shipping iPhones, iPads, Macs, a few iPods and Apple TVs, and a couple billion dollars of media and apps per quarter through iTunes. So content that the company hasn't capitalized on the 25 million Apple TVs that, if tied together into a television network using iTunes and existing over-the-top internet broadcast technology, would have more subscribers than any cable company.

Elon Musk won't lose any sleep over competition from Apple. except for a space in the dashboards of his cars.

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Copyright © 2015 IDG Communications, Inc.