Here's Why Apple's Car Project Is Going in Reverse

Image source: Getty Images.

Rumors that Apple (AAPL -0.57%) is going to build its own amazing electric car have been floating around for years now, but never seem to go anywhere. In fact, interest in the project seems to be slowly and quietly dying out on all fronts.

In this clip from Industry Focus: Industrials, Motley Fool analyst Sean O'Reilly and senior auto specialist John Rosevear explain what potential upsides Apple might have been interested in with the Apple Car. Then they explain a few of many reasons the project has never come to fruition -- from manufacturing difficulties to stiff competition and more.

A full transcript follows the video.

This podcast was recorded on Oct. 20, 2016.

Sean O'Reilly: Now, I have to ask you: From the auto experts you know, industry insiders and everything, why do they think Apple was doing this? Was it just because they have $200 billion in cash lying around and there's only so many things they could do with such a big pile of money that would move the needle? Were they threatened?

John Rosevear: There's been this popular idea kicking around Silicon Valley and investors and so forth for the last few years that the auto industry is ripe for disruption...

O'Reilly: There's that D-word.

Rosevear: Right. That's what they love, opportunities to disrupt. As technology advances, as cars become more automated, it's really like a big device. A company like Apple is better positioned to optimize a device than Ford. That was the thinking in Silicon Valley. But what they're running up against is a few different things. There have been a few hints about why Apple might have backed away from this.

First of all, it's just the challenge of making something that's "Apple" special. They can build a great car that requires a human driver, but so does BMW, so does Mercedes. So does even Cadillac now. These are great premium vehicles that are terrific.

O'Reilly: (coughs) Tesla (TSLA -3.55%) (coughs) excuse me. (laughs)

Rosevear: Yeah, Tesla, too! But they're not going to out-Tesla Tesla. It doesn't bring Apple's advantages, its unique specialness to this, necessarily. Now, they could make a great autonomous mobility pod that's routed by an Apple ride-hailing service. But then, Uber is already way ahead on building the infrastructure for this. Lyft is way ahead. Lyft has GM (GM -0.05%) as a huge partner. Didi in China, and various others around the world. Baidu is getting in on this. The opportunity to be special isn't necessarily there.

There's also a hint in the Bloomberg report that the automotive supply chain daunted them, which is interesting because we hear that Tim Cook is the supply chain master with devices. But those are places where Apple can bring its scale. They can go to a chipmaker and say, "We're going to ship a trillion iPhones next quarter, give us 18 months lead time right on your latest technology, where only we can use it, and Samsung and other competitors can't use it." They can't do that in cars. They go to an auto supplier -- first of all, for some of these parts, the cost to tool up is much higher than to tool up to build Gorilla Glass or whatever. And also, Apple's not proven. We don't know how many Apple cars they're going to sell. They may go to a supplier and the supplier says, "We can't give you that kind of advantage."

O'Reilly: Not only that, but they've had a 100-year history, GM and all these guys.

Rosevear: Yeah. When GM comes in and says, "It's a six-year program, we're going to sell 80,000 a year"...

O'Reilly: You trust them.

Rosevear: You can trace that. GM's been at this a while. Toyota, likewise. Any of these companies. We don't know that the Apple car is going to sell. Especially at first. You may issue the Apple Car 1.0 and it doesn't sell all that well. And then you get a 2.0, and maybe you don't need our part anymore, maybe it needs to be different. So, there's no guarantee they'll have the sales volumes. There's no track record to look to.

Then, the last thing -- this is what I always say, what I've always said all along: Making cars is really hard.

O'Reilly: (laughs) It goes without saying, but it bears repeating.

Rosevear: It does. I can't tell you how many times I've typed this sentence: "Profitably mass-producing cars to global standards of quality is extremely hard."

O'Reilly: You've said that on multiple podcasts.

Rosevear: It's kind of my mantra in the last couple years when talking about tech. It's not impossible. It's not a problem Apple couldn't solve with enough money and enough experts hired from outside. But it's not a problem that plays to Silicon Valley's strengths. It's not a problem that plays to what Apple can bring to bear. They would have to do what Tesla has done, which is throw money at it, hire auto industry veterans. Tesla has people from Audi, from Ford, from Volkswagen, and so forth, now working for them, working on their manufacturing, because that's where the expertise is. The expertise isn't in Silicon Valley. Apple is a great manufacturing company. They're great at manufacturing devices. But the scale and expense of auto manufacturing may have just proven daunting. They're watching Tesla just like everyone else. Tesla has whiz-bang software, and they have some good designs and intriguing technology. But scaling up the manufacturing has been a problem.

O'Reilly: They miss deadlines all the time.

Rosevear: They miss deadlines all the time. Things are up and down. The falcon-wing doors on the Model X took them months to get manufacturing that right, and there's questions as to if they still have it figured out...

O'Reilly: Those help it fly, right?

Rosevear: I don't know what they help it do. (laughs) They make it look cool, they're definitely cool. Also, this is why [Alphabet's] Google backed away from the idea of making its own car. It's just hard. And profitably is a key word here. Operating profit margin in a good year, a lean, well-run auto maker, it's like 10% -- like BMW is 10%. Net margin is going to be down even considerably lower. That's not what Apple wants.

O'Reilly: 10% is a fraction of their margins on the iPhone.

Rosevear: The tech answer to that is, "Well, Apple will be able to command a higher price." Well, OK, but if Apple is offering a car at $70,000, that limits the audience. They're not going to sell this to one in three people on Earth at the kind of price they'd have to charge to get the kinds of margins they and their investors are used to.