Rumors about an Apple (NASDAQ:AAPL) car have been buzzing around the tech scene for years, but they never seem to materialize beyond vague allusions.
In this week's Industry Focus: Energy and Industrials, Sean O'Reilly and Motley Fool contributor John Rosevear talk about what happened to Apple's Project Titan, a few of the many reasons the tech company seems hesitant to break into the auto manufacturing market, and how likely we are to see an Apple car in the foreseeable future.
Also, John shares why General Motors (NYSE:GM) could be a great long-term buy for investors who want some more exposure to the auto industry.
A full transcript follows the video.
This podcast was recorded on Oct. 20, 2016.
Sean O'Reilly: This Motley Fool podcast is brought to you by Tommy John. Tommy John makes underwear that keeps everything in place, whichever way a man moves. For 20% off your first purchase, go to tommyjohn.com/fool and use the promo code FOOL. That's tommyjohn.com/fool, promo code FOOL.
Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today is Thursday, Oct. 20, 2016, so we're talking about energy, materials, and industrials. I'm joined today, first time, in studio by the Motley Fool's senior auto specialist John Rosevear. John, cannot thank you enough for being here.
John Rosevear: It's so great to be down here, at the epic Fool HQ. I don't get down here enough.
O'Reilly: Yeah, you were saying, a year and a half ago? You were here for a conference, Toyota asked you to come down?
Rosevear: My dear colleague Rex Moore, who some of our listeners may know --
O'Reilly: We passed him in the hall. (laughs)
Rosevear: Yeah. Rex and I had, for a while, a video series called Motor Money. We were invited by Toyota, which was having a big gathering of executives in D.C., to come do Motor Money for them for an hour and talk about the future of the auto business. It was an exciting opportunity. The Toyota people were great. It was a lot of fun.
O'Reilly: And with that, you are clearly the person to talk to about today's topic, which is -- Dylan Lewis over on the Tech podcast is going to be mad, we're talking about Apple, but not about iPhones or computers. We're talking about their plans to build a car, or lack thereof.
Rosevear: Yeah. Here's what we know. Apple, of course, has said nothing about this officially, except a couple little hints from people like [CEO] Tim Cook. But, what we know from reports is that Apple, for a while, has had a team called Project Titan, which is pursuing the idea of building an Apple car -- or, maybe an Apple car service, it's never been completely clear. Bloomberg came out with a report on Monday confirming some other things that have come out of Silicon Valley in the last few months, saying Apple has scaled this thing way back. Initially, they planned to build their own car, which might have been a futuristic electric car, sort of to out-Tesla (NASDAQ:TSLA) Tesla.
O'Reilly: It would look like a Mac mouse, probably.
Rosevear: No idea. A lot of the Apple senior execs are car enthusiasts. Eddy Cue is on the board of Ferrari. These people are into cars. There's kind of been this project for a long time, even Steve Jobs had talked about it. Tim Cook said last year, "The auto industry is an inflection point for massive change," which was kind of a big hint that the car is going to be the next device and Apple's going to play. The hint was they were working on this revolutionary new high-tech electric car, or possibly a premium Apple-branded ride-hailing service, something fully automated. Like robot Uber, only it's fully integrated with the Apple device ecosphere, so it knows your iPhone and your iPad and your Mac and everything else, and it all works the same way. This project had over 1,000 people on it at one point.
O'Reilly: Which makes one's eyebrows pop.
Rosevear: Right. Even for Apple, that's a big crew, it's something serious. They're spending a good amount of money here. But something changed at the end of last year or the beginning of this year. It looks like senior management decided to scale the thing way back. Steve Zadesky was a former Ford (NYSE:F) engineer who had been with Apple for a while, leading the project, he left early this year. It was taken over by Bob Mansfield, who's a longtime Apple veteran, has held all sorts of roles in the company for many years --
O'Reilly: But, obviously, no auto industry experience.
Rosevear: Right. It was sort of like, OK, the old Apple culture is bringing this back in. The team was told, "We're not going to build a car now. We're going to work on an underlying self-driving program," which is a big shift.
O'Reilly: This reminds me of what Mobileye doing, they're trying to build the brain and offer it to everybody. 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?
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 (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 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 (NASDAQ:GOOG) (NASDAQ:GOOGL) 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.
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So, Mr. Rosevear, what is Apple going to do if they're not going to throw $200 billion at building a car?
Rosevear: Well, it would probably only take about $15 billion.
O'Reilly: Oh, well, sorry. (laughs)
Rosevear: Bloomberg reported that Apple has refocused Project Titan on the idea of developing an autonomous driving system, an Apple-branded autonomous driving system. This would allow Apple to either partner with an existing automaker, or at some point in the future, if it looks good, to go back to building their own car. So here's a problem with that. Everybody else is already attacking that problem, and they're already well along. We've talked about this on past podcasts. Ford says it will be mass-producing fully Level 5 self-driving cars, no steering wheel, for ride-hailing services by 2021. That's a little over four years out. Delphi and Mobileye, we talked about this, too, they will have a full self-driving system that will be available to any automaker in 2019 --
O'Reilly: I'm going to build my own in my garage. Just kidding.
Rosevear: Yeah, good luck getting the Feds to approve it. (laughs) There is that guy, I don't recall his name, who has built one in his garage, who says, "Mobileye blah blah blah." But, it's one thing to build something in the garage that mostly sort of works. It's another thing --
O'Reilly: To mass-produce something that works.
Rosevear: Right, that passes and automakers test for, "This will be perfect for 200,000 miles." And it's not just the traditional automakers. NVIDIA in this, Baidu's in this, Uber is throwing a lot of money in, they want their own system, self-driving vehicles are a key to their business model in the future --
O'Reilly: We have the Volvos in Pittsburgh.
Rosevear: Yeah, the Volvos and the Fords. They're all making huge investments. Just last night, Tesla came out and said, "We're going to start shipping our cars with available hardware that will enable fully self-driving software when we have it done," which is sometime, they hope, in the next year and a half or so, if they can get it past the regulators. Why would any of them need Apple? You might see a little company -- we've talked about this before, too -- the companies that might be natural customers for the Delphi-Mobileye effort, the smaller companies that maybe don't have the $100 [billion] to $200 billion to blast into this, companies like Subaru or Fiat Chrysler, some of the Chinese automakers.
O'Reilly: Let me ask you, correct me if I'm wrong, it almost seems like if Apple wanted to do this, they should have done it five years ago.
Rosevear: Yeah. There's another problem in this whole thing, too, and that's the problem that Google has bumped up against -- the automakers may not want Apple. I've talked to senior executives at some of the other companies. They know what happened in the phone business. They don't want to be making "dumb cars," like dumb phones, the self-driving equivalent of Android. They don't want to be HTC or whatever. They don't want that situation. They're mindful of that.
O'Reilly: You mean they don't want to break even at best? John?!
Rosevear: It's hard enough to make money in the car business, give me a break! (laughs) And, they don't want to give up control of the data, too. They know, you partner with Google, Google wants the data, Google will monetize the data. You're just a box the data is being collected from. They aren't going there. There have been hints, about a year ago, Google and Ford were reported to be in close conversations. Those talks reportedly broke down. Nobody officially ever said anything. There have been some hints that Ford said, "We're not giving you the data," and Google said, "Then we can't do business." It was all very mindful of the phone example. Like I said, there might be an opportunity with some company. [Fiat Chrysler Automobiles] is the one we always point to because they have a ton of debt and they're scrambling to keep the basics going. They might be willing to compromise to come in here. But then, Apple is in a position where, what is it offering that is special? Because, they're going to be competing with the Delphi-Mobileye effort, probably others, maybe Google even trying to get in here to offer the prefab solution to some automakers. What are they going to do that's special? This is the interesting question.
O'Reilly: It sounds like they're making the right decision here, unfortunately.
Rosevear: Yeah. Again, it comes down to the question, there are things Apple does really better than anyone else. When it crafts a special, gotta-have project with that Apple magic, it's a lot about user interface, it's a lot about how it works seamlessly with other devices, it's a lot about how it anticipates the user's needs. How to translate that to an automobile, I think, it's a question that they may be haven't answered yet.
O'Reilly: Yeah. I cannot thank you enough for your thoughts on this Apple thing. What was it, hinted at a year ago by Bloomberg, I remember getting a push notification on Project Titan, and I --
Rosevear: It was a Wall Street Journal report about a year-and-a-half ago. We all speculated over, "What is this?"
O'Reilly: Yeah. I can't thank you enough for your thoughts. Before we head out, I always like to have a little bit of an investor takeaway. What's an auto stock that you like these days? Since it's obviously not Apple. (laughs)
Rosevear: I am an Apple shareholder. I love Apple.
O'Reilly: Full disclosure.
Rosevear: This is my Mac, this is my iPad --
O'Reilly: Oh, here we go.
Rosevear: I actually got a gift for my 14th birthday many years ago, I got to share of Apple that's now over 100 shares because of all the splits that have happened in the '80s and the '90s.
O'Reilly: And you never sold?
Rosevear: I never sold, so I can still say, unless your last name is Wozniak, I've probably owned Apple stock longer than you have. Anyway, that said, I wouldn't buy Apple for a car stock right now. This market's slowing down. With that happening, it's a cyclical market, you have profits may be squeezed for a little while, but looking at a little longer term, I really like where General Motors is going. I like where [CEO] Mary Barra is going. I like that they are on top of this potentially disruptive technology. Their 200-mile electric car goes into production in a few weeks, it will be shipping before the end of the year. They're well ahead on the self-driving effort they're developing internally. They've bought Cruise Automation, which was a San Francisco start-up. They have this great thing where they let Cruise be Cruise, but they've given Cruise access to GM's resources and GM's deep opportunities. So, that's progressing really quickly, and the Bolt will be the platform for their self-driving stuff. And meanwhile --
O'Reilly: They're making money.
Rosevear: Yeah, they're making a lot of money right now. They're making money in China, they're doing well in Europe, and in the U.S., not only are they selling a lot of trucks and SUVs with $2 gas -- big profit margins -- but also, Barra has set rolling a number of initiatives to make sure that the margins stay fat as time goes on, as it perhaps becomes somewhat less profitable to sell trucks as you have to incorporate more technology to meet tightening regulations. Like, for instance, one of the things that we talk about a lot is they're ramping up Cadillac. Luxury brands are very profitable. Cadillac was a joke for years, tufted velour seats built for elderly Americans -- no offense to elderly Americans. Those were nice cars, if that's what you wanted. But now, Cadillacs are moving upscale. They're much better built. And there's this long-term effort to elevate the brand, as well. It's already starting to show success. That's just one example. There's other things going on where they're cutting costs, they're making better use of their global scale. On top of that, GM is cheap, which means the dividend that they're paying is a 4.5% yield, give or take. You reinvest that through the ups and downs in the next few years, and as we get price appreciation as Barra's plans really start to show up on the bottom line in 2020 or 2022, somewhere around there, and you might be really happy.
O'Reilly: Cool. All right, John, thank you again for coming to Fool headquarters, and thank you again for your thoughts.
Rosevear: Thanks for having me.
O'Reilly: You bet. That's it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Once again, that's email@example.com. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you on this program. For John Rosevear, I am Sean O'Reilly, thanks for listening and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Rosevear owns shares of Apple, Ford, and General Motors. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, Ford, NVIDIA, and Tesla Motors. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.