Next Up, iCar?

According to Wall Street Journal, Apple Inc. is accelerating efforts to build an electric car, designating it internally as a “committed project” and setting a target ship date for 2019.

As foreign as cars may be to Apple, the company’s new venture is not entirely beyond comprehension as Apple’s doctrine has always been finding breakthrough technology products where Apple had no presence in and subsequently become the industry leader. We have seen this in smartphones with iPhone, in tablets with the iPad, and Apple is attempting to do it again with the Apple Watch.

However, given the differences in the supply chain of a car from Apple’s existing products, it is doubtful if Apple can replicate the same success story that it had with iPhone and iPad when Apple car launches. Apple captured the smartphone market when it was still a fledgling industry and its current biggest competitor, Samsung, was just developing the smartphone technology as well. On the other hand, the car industry already has very established strong competitors such as BMW, Mercedes Benz (the higher end market that Apple is likely to target) and Telsa which has been focusing on developing cutting edge car technology for decades. Apple’s late entry will only hinder its momentum to find the breakthrough product. Furthermore, by entering the car market, Apple is transiting from a technology focused operation to a heavy manufacturing one. It’s indisputable that Apple’s forte lies with technology instead of heavy manufacturing. Hence, Apple is essentially giving up it’s comparative advantage when it produces cars.

Although the choice of making car may not seem wise, it is not without good reasons. One of the key propeller of Apple’s move towards the car industry could be the promises of finding a new revenue driver. With USD $182.8 billions revenue in 2014, Apple is a giant corporation that is threatened by stagnating revenue as there are very few sectors that can move Apple’s revenue significantly. The car sector is huge, especially for Apple because more and more differentiators in future cars are coming from IT. However, a good reality check for Apple would be that although car industry has high revenue, the margin is much lower than its current revenue driver, iPhones, accounts for 56% of the total revenue in Q4 2014. Hence, the profits that the Apple car can churn out may not be that attractive.

Perhaps a smarter move for Apple would be seeking a partnership with automobile industrial leaders, to leverage of Apple’s software expertise and the industrial leader’s hardware experiences to best position itself in a growing “smart car” market. The market is likely to respond positively to this strategy as more than two dozen auto makers are already planning to use Apple’s CarPlay service (WSJ, 2015).

Lia Wei