A few more good arguments against the Apple Car -- and a lousy one in its favor

Just because Apple has good margins in smartphones doesn't mean it can make money in cars

The excitement and attention garnered by rumors that Apple is thinking of entering the carmaking business is almost entirely an artifact of the Apple-can-do-no-wrong mindset.

As I observed last week, there are a lot of problems with this mindset, one of which is that Apple can do wrong, and often has done wrong -- hardware that doesn't sell, software infused with bugs, customer policies that drive users nuts. Veteran technology- and Apple-watcher Horace Dediu and tech consultant Steve Crandall have posed some further doubts on the Apple Car. More on their arguments in a moment.

First, the worst argument in favor of the Apple Car, courtesy of Matthew Yglesias at vox.com. Yglesias hoists the infallibility flag to suggest that one of the frequently cited doubts about the Apple Car -- that automaking is a low-margin business and Apple relies on high margins -- "really doesn't make sense." He suggests that it's the "worst argument against the Apple Car." As Yglesias mentions, I cited the margin argument (among many others) in my take. 

Yglesias says it's a bad argument because Apple is very good at extracting high margins in low-margin businesses, such as smartphone manufacturing. That's true as far as it goes, but it doesn't go very far. Carmaking is heavy manufacturing; smartphone-making is light manufacturing. In the former, the only way to squeeze margins out of a product is to fill it with luxury bells and whistles.

The profit is in cabin accouterments and comfort add-ons, not in the basic technology that every car has, such as a drive train and four tires. The big automakers have slim operating margins -- 1.8% in the case of General Motors last year -- because their sales are weighted toward the basic transportation end. A manufacturer can expand margins by pitching sales toward the high end, but only in return for a shrunken market. BMW's margin is about 12%, but it sells only about 2 million cars a year, compared with GM's 10 million. 

So, sure, Apple can extract higher profit margins from cars than GM, but it's a steep climb. And even BMW-scale margins would look like a disappointment to followers of Apple, where the operating margin exceeded 30% last year. 

"The logic that says Apple can't have a high margin car business would also say Apple can't have a high margin smartphone business," Yglesias writes. "Making an Apple-branded car is a big risk with a high chance of failure, but it's not qualitatively different in that regard from making an MP3 player or a smartphone."

Of course, that's exactly where he's wrong. Making a car is qualitatively different from making an iPod or an iPhone -- in spades. That's where Dediu and Crandall come in.

Dediu focuses on how hard it is for new entrants to penetrate the car business. (See accompanying chart.) The incumbent manufacturers are big and protected by their domestic government. Though they're often derided as dinosaurs, they're also experienced at absorbing innovations developed by others. That makes it hard for a new company to preserve the uniqueness of its product for long.

Moreover, Dediu observes, car demand is fairly inflexible -- in the U.S., it has been stagnant since the 1990s. People don't trade in their cars every other year, as they do their iPhones. Among other factors, there aren't consumer companies willing to subsidize the constant trade-ins, as U.S. cellphone carriers have been willing to do. 

Dediu's most interesting insight may be that the most important innovations in carmaking have occurred in the production process, not in design. As he points out, contracted manufacturing in the auto industry is "nearly non-existent." This is exactly counter to the way Apple makes its products: The company does almost no production of its own and outsources almost everything. Is Foxconn, the company's big Chinese supplier, ready to gear up an auto production line? If not, then Apple would be getting into a business activity where it really has no home-grown experience.

Other areas where rumors abound about Apple's interest include such technologies as batteries. That's a crucial technology that must improve if the the electric car is going to thrive. As it happens, batteries are a known weak spot in Apple products, one of the few aspects in which the iPhone has fallen way short of its competitors. 

Crandall, who says he spent some time working with AT&T Research when it was talking to GM about some sort of joint venture, observes that "cars are enormously complex to deal with compared with what Apple is doing now. Dealerships, repairs, regional safety and emission standards, huge plants and so on. There are a lot of moving pieces to get right and it isn't clear the profit is there."

Crandall's guess sounds right: "No, it won't happen as a car. But there may be other connections through Apple's growing ecosystem." In other words, Apple will be a supplier to the car industry, not a competitor. And the profit margins from Apple-branded automotive options could, indeed, be enormous.

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