Apple is apparently getting serious about cars. It came out this week that building an electric car is now a “committed project” at Apple (Apple Targets Electric-Car Shipping Date for 2019, Wall Street Journal, Sep 21). But that raises the question of who would actually build it for them. It’s not that Apple has never made stuff before, but recent years they have generally leaned on the likes of Hon Hai Precision Industry (aka Foxconn) to assemble phones and laptops and such on their behalf.
That got me thinking about a quote from Carlos Ghosn, who runs both Nissan and Renault, that appeared last week in Automotive News (Ghosn sees tough time ahead for industry disruptors, Sep 18).
Renault-Nissan CEO Carlos Ghosn said aggressive hiring of auto industry executives by software companies shows how vital it is for new players to understand manufacturing and vehicle design. …
The complexity of cars means it will be tough for new players to enter the auto industry. ..
“That is one of the reasons you are seeing the outsiders massively hiring engineers from our industry. Why? Because they need to understand the product more in order to make the transformation they think they can make,” Ghosn said at a press conference here Wednesday.
Ghosn is not the only one thinking about what it would take for a tech giant like Apple or Google to get into the auto business (Apple and Google Create a Buzz at Frankfurt Motor Show, New York Times, Sep 17).
“What is important for us is that the brain of the car, the operating system, is not iOS or Android or someone else but it’s our brain,” Dieter Zetsche, the chief executive of Daimler, the maker of Mercedes vehicles, told reporters at the car show. IOS is Apple’s operating system for mobile devices.
“We do not plan to become the Foxconn of Apple,” Mr. Zetsche said, referring to the Taiwanese-owned company that manufactures iPhones in China.
So how could Apple go about actually making a car? They could partner with an existing carmaker but one has to wonder what carmaker would want to play second fiddle to Apple. Zetsche is probably right that Mercedes is best off not just making hardware for Apple. Currently, electronic controls are a significant part of the customer experience with the car. That should only increase over time, and for an Apple car it would likely be the dominant part of the customer experience (as least in the eyes of a non-trivial part of the market). Zetsche wants to serve people who really value the star on the grille and partnering with Apple would really erode that.
Alternatively, Apple could find a non-branded assembly partner. There are firms out there that do essentially private label assembly — building vehicles that are sold under establish marques. Magna Steyr, a division of Canadian auto parts giants Magna International, is one example. It has worked with the likes of BMW, Audi, and Mercedes-Benz so has an experience producing high-end vehicles (I’m going out on a limb assuming that an Apple car would not be a budget-oriented econobox).
A point here is that one of the benefits in relying on independent assemblers like Foxconn for smartphones may not be as relevant with cars. Foxconn allows Apple to ramp up for new product launches very quickly. They are going to ship millions of new phones in the coming weeks as the iPhone 6s hits the market. Things will then settle down to a slower rate until the next model comes out and the cycle repeats. Cars don’t work quite that way. It is impractical/infeasible to ramp up production so quickly with cars. If Apple doesn’t have absorb large swings in demand as it does with smartphones, doing things in-house may be easier.
An additional consideration with this approach is how they will sell the cars. Not partnering with an established maker means having to develop your own distribution channel. Tesla has done this, and Apple already has stores in many of the same malls in which Tesla has showrooms. Of course, local dealers have fought to keep Tesla from selling directly to customers in many states (which we have discussed here). One has to think they would only double down on those efforts if Apple got into the game.
This distribution issue would also remain if Apple were to build the car on their own much as Tesla has done. Is that worth doing? Check out this quote from Fiat Chrysler CEO Sergio Marchionne following FCA’s signing a new deal with the United Auto Workers (Is there a side door into Fortress GM?, Automotive News, Sep 21).
The industry’s capital consumption “is something which remains unsolved,” Marchionne said, “and it almost — it makes the labor side sort of pale in comparison given the magnitude of the potential synergies and the benefits that we would be deriving from an intelligent approach to that issue.
As it stands now, the auto industry is capital-intensive and arguably not particularly efficient. Note that I am not referring to what happens on the factory floor but rather the decisions that are made upstream in setting the product portfolio and designing individual cars. Marchionne, for example, has asserted that half of the proprietary equipment and technology carmakers focus on is immaterial to customers.
Does Apple want to get into that game? They could avoid the worst of what Marchionne is talking about simply by having a narrow product line (certainly in line with what they have done in their existing markets). But it would still take a pile of cash (which the folks in Cupertino certainly have) and likely take a long time to payoff. (Tesla claims that they won’t be profitable until 2020.)