The Wall Street Journal practically lit the Internet on fire last week after posting a report that Apple Inc. (NASDAQ:AAPL) has hundreds of engineers working on a top-secret project that it hopes will be the next iPhone: an electric Apple car.
On the surface, the concept is easy enough to brush off. A computer-company-turned-consumer-electronics powerhouse taking on the likes of Toyota Motor Corp (ADR) (NYSE:TM) with electric vehicles? Good luck with that.
Google Inc (NASDAQ:GOOG,NASDAQ:GOOGL) — another high-tech company that seemingly has no business dipping its toes into the automotive world — has been experimenting with driverless cars for years. That effort still seems like proof that the concept is years (if not decades) from ever having a shot at reality.
Tesla Motors Inc (NASDAQ:TSLA) has successfully launched electric vehicles, but so far its model lineup consists of luxury cars and mass market success remains elusive. Toyota’s Prius is the closest thing to a hit in the industry, but it’s a hybrid — plug-in electric cars have yet to hit the mainstream.
AAPL is a very different company from Google, Tesla or any of the automotive giants and that’s why an electric Apple car could come out of nowhere to be a category killer.
AAPL Already Has Tech That Could Be Part of an Apple Car
Apple has been hard at work over the past several years on automobile-related technology. The culmination of that effort to date is CarPlay, an effort to supplant often messy and confusing in-dash entertainment/navigation systems.
CarPlay uses Apple’s Siri personal assistant, Apple Maps, iTunes and an iPhone to provide an advanced, hands-free user interface that’s integrated with a car’s physical controls. With a CarPlay-equipped vehicle, navigation, music and communications (including voice and texting) are handled by AAPL.
Other car manufacturers have gone further, using the iPhone to lock and unlock vehicles. You can even remotely start a car with an iPhone.
While all of this is interesting, there’s a lot more to building your own electric vehicles than designing a better entertainment system. CarPlay doesn’t equate to an Apple car, but it’s a good way to get your foot in the door.
The iPhone, Apple Watch and the Need for the Next Big iThing
AAPL has had a remarkable run with the iPhone, but despite having a killer holiday quarter, fears remain that the iPhone will eventually run out of gas. Even with the prospect of China, eventually the demand for new smartphones will settle into a more moderate upgrade cycle, at which point the massive quarterly sales increases will shrink. AAPL investors will be looking for the next big thing.
That could be the Apple Watch, but at this point no one really knows if the whole smartwatch thing is going to take off or turn out to be a false start.
It’s not unreasonable to think that AAPL is working on something else to keep that iPhone momentum going — an Apple car could be just the thing.
AAPL’s Pattern of Invasion, Improvement and Disruption
If electric vehicles seems like s stretch for a company like Apple, consider the pattern the company has established over the past decade and a half.
It identifies a new market where proven players are struggling during a time of technological transition, then swoops in with a product that’s innovative and free of the hangups that plague the established leaders. AAPL doesn’t invent a new category — it studies mistakes the incumbents have made then swoops in and disrupts everything, coming out on top and leaving everyone else scrambling to catch up.
It did this in 2001 with the iPod. As digital music started becoming the format of choice, Sony Corp (ADR) (NYSE:SONY) stumbled with the Walkman portable stereos that had dominated the industry for decades. Apple didn’t invent the portable MP3 player, but the iPod came out of nowhere (Apple was a computer company) to seize control of the market.
In 2007, the iPhone disrupted the mobile phone industry, kicking off a wave of smartphone adoption that pushed the “dumb” cell phone off shelves, prompted carriers to upgrade networks and decimated market leaders like BlackBerry Ltd (NASDAQ:BBRY) and Nokia Corporation (ADR) (NYSE:NOK).
AAPL didn’t invent the tablet, but after a decade of the faltering Tablet PC promoted by Microsoft Corporation (NASDAQ:MSFT) and PC manufacturers such as Hewlett-Packard Company (NYSE:HPQ), AAPL released the iPad. Apple’s version proved so popular it was credited with launching the tablet category.
The current market for electric vehicles is in a state that could be compared to portable music players in 2001, smartphones in 2007 and tablets in 2010. The technology is there, but manufacturers have failed to ignite consumer demand — whether that’s because of cost, unrealistic expectations, difficulty of use or a reluctance by auto companies to disrupt their existing, profitable product lines.
In other words, the automotive market is ripe for a classic AAPL disruption in the form of an electric Apple car.
Could an Apple Car Happen?
We know Apple has been loading up on automotive talent. It’s been poaching R&D leaders from car companies and mysterious minivans loaded with AAPL equipment — possibly disguised electric vehicles — have been spotted recently on California streets.
As Tesla’s Elon Musk will attest, starting up a car factory is expensive, a billion-dollar proposition. But at last count AAPL had $178 billion in cash. Cost of entry is no barrier if AAPL really wants to produce an Apple car.
With 80 million new vehicles expected to be sold in 2015 and manufacturer profits averaging $2,284 per car this is the kind of category that could quickly rival the $450 or so AAPL makes on each iPhone. Especially if Apple is able kick-start the move to electric vehicles and produce a cool new Apple car, priced for a wave of mass adoption but with the premium its brand commands.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.