In early 2015, as Apple (NASDAQ:AAPL) was basking in the massive success of the iPhone 6, investors started to learn about the next market Apple planned to disrupt: the car. Details began to leak out about "Project Titan," an Apple product development team that was working on an electric -- and possibly autonomous -- car to rival Tesla Motors' (NASDAQ:TSLA) vehicles.
However, Apple executives finally seem to have recognized the inevitable: It probably doesn't make sense for the tech giant to get into auto manufacturing.
Apple is still working to develop an autonomous driving platform. The difference is that now, executives are leaning toward partnering with traditional automakers to bring it to market. This represents a much more promising opportunity for Apple and one far better aligned with its strengths.
A failure of leadership?
Last week, Bloomberg's Mark Gurman and Alex Webb broke the story about Apple scaling back its car ambitions. They painted a picture of upheaval among the Project Titan team, with various managers bickering about how to proceed. "It was an incredible failure of leadership," according to one of Bloomberg's sources.
Longtime Apple executive Bob Mansfield made the final decision to turn the project's focus away from bringing a car to market and toward developing autonomous technology. Mansfield returned to full-time status and took control of Apple's automotive efforts a few months ago, after several years of semi-retirement.
Whatever the backstory, hundreds of people from the roughly 1,000-member Project Titan team have left in the past few months. Some left voluntarily, while others were cut because they were working on auto development activities that don't fit with the group's new focus. However, the team's size has stayed roughly constant as Apple hires new talent to help it develop autonomous driving capabilities.
Building a car never made much sense
A year and a half ago, I warned investors that the Apple car hype was mostly wishful thinking by Wall Street analysts. Automakers tend to have very low profit margins, despite enjoying an average transaction price of more than $30,000 in the U.S.
An electric, autonomous car meeting Apple's high quality standards would clearly cost a lot more to build than a traditional vehicle. To generate a healthy profit margin for Apple, it would likely have to command Tesla-like prices of close to $100,000, at least initially. That means the addressable market was never as big as some Apple bulls seemed to think.
Apple's only real competitive advantages in auto manufacturing would be its strong brand and ability to offer deep integration with the rest of the Apple ecosystem. Yet premium automakers such as Tesla, BMW, and Mercedes have very strong brands of their own. Meanwhile, Apple could offer a lot of the ecosystem benefit just by partnering with automakers, rather than wading into auto manufacturing itself.
On the flip side, Apple would have remained at a disadvantage relative to traditional automakers in terms of purchasing scale and manufacturing expertise. Even Tesla will have a few years of high-volume production under its belt by the time an Apple car would have hit the market.
Software is one of Apple's biggest strengths
If Project Titan suffered a failure of leadership, it was that executives weren't quicker to reject the idea of building a car from scratch.
Superior software and user interface design is what sets Apple apart from its competitors. By working to develop an autonomous driving platform -- a combination of sensors to provide data about the external environment, software to decipher that data, and a clean user interface -- Apple is now playing to its strengths. If Apple can deliver a good system, it won't have trouble lining up automaker partners.
Even with its new focus, Apple may never develop a commercially viable platform for autonomous vehicles. After all, Apple's long-acknowledged interest in building a TV -- a much simpler endeavor -- has not borne fruit.
However, Apple has a much higher probability of capturing a portion of the multitrillion-dollar automotive value chain with its new strategy. And if its efforts fail, the financial ramifications will be a lot less significant than if Apple had tried to develop a car from scratch.