Two decades ago, Apple (AAPL +0.11%) was a floundering technology company without much in the way of compelling devices. The iPod wouldn't be introduced until 2001, and the iPhone that made Apple what it is today was still nearly a decade off. But those products revolutionized technology and our everyday lives.
Saying that General Motors (GM 3.28%) is the next Apple may sound insane right now given how successful the tech titan's turnaround was, but I think we're seeing the early days of a massive transformation of the automaker. It's disrupting itself in ways that Apple did with the iPod and iPhone and in ways that auto manufacturers haven't ever done. And GM may be years, or even decades, ahead of the competition, and that could make it a great auto stock long-term.
Image source: Cruise.
The future of transportation
Let's start with what transportation looks like now and what it could look like in the future. Today, tens of millions of vehicles are sold in the U.S. and around the world each year only to sit idle in driveways and garages about 95% of the time. People spend hundreds or thousands of dollars each month on leases, loans, gasoline, insurance, and maintenance, and it's just part of our everyday life. The auto industry is starting to ask: Is there a better way?
Uber (UBER +0.06%) and Lyft (LYFT +0.34%) really changed the way we think about transportation by making it easy to get a ride in someone else's vehicle at a moment's notice. The services also made it possible in many cities to live without your own vehicle. And without a car, the idea of spending $10 to $15 per day for an Uber or Lyft is actually pretty economical. Ridesharing has been very successful, but the current model isn't the end game for any company.
Autonomous taxis have always been the long-term vision, and it may surprise you to hear that General Motors is leading the way. The company is the majority owner of Cruise, the autonomous ridesharing start-up that can now operate fully driverless vehicles in California. It recently got state permission to test five such vehicles in San Francisco. As the company launches autonomous ridesharing in the near future, it'll change transportation and GM forever.
The future of General Motors
GM's role in Cruise has been largely hands-off so far. It has funded the company, but it's kept Cruise separate and brought in outside investors rather than integrate Cruise into GM. This is likely to keep Cruise functioning like a start-up, rather than getting bogged down by the bureaucracy of a big company like GM.
The role GM is likely to play in Cruise's future is plugging its business units into Cruise's business model where it makes sense. The Cruise Origin vehicles were designed with GM and the plan is to build the vehicle at a GM plant, for instance. In that respect, GM is a contract manufacturer for Cruise. It's modularizing itself, disrupting its core business today.
Self-disruption was Apple's key to success
It's this self-disruption that was vital to Apple over the last two decades. The iPhone disrupted the iPod, which was no small feat given the iPod's success at the time. Then the iPad disrupted the Mac, making it possible to compute without a traditional computer. We're even seeing hints that AirPods and Apple Watches are building an even more mobile future behind the iPhone.
Apple's self-disruption was built on some overarching theses about what the world would look like.
Apple in 2005: Computers were getting faster, smaller, and more mobile, making it possible to envision a world with a computer in every home to one with a computer in everyone's pocket.
Building that vision was no small feat, but it's that view of the world and how it could make its business bigger through disruption that made Apple capable of making the iPhone.
GM in 2020: A century-old belief of a vehicle in every driveway needs to be replaced by a transportation model that gets people where they want to go on demand, anywhere, anytime, at an affordable price.
General Motors is witnessing multiple disruptions taking place at once and putting them together. It sees the transition from internal combustion vehicles to electric vehicles (EVs), the advancements in autonomous driving, and the rapid adoption of ride-hailing and delivery services around the world. So it's shifting from making cars and trucks for everyone to a model of transportation as a service. This will disrupt its own core manufacturing operations in order to build a larger, higher-margin business long-term in Cruise.
GM and Cruise can upend transportation
Let's go through all of the benefits of GM's transition to making itself a contract manufacturer and making Cruise the future of a business that will hopefully be much larger and more profitable. For GM:
- Cruise eliminates the reliance on and headaches of the dealer sales model that has contributed to making a transition to EVs difficult.
- As a contract manufacturer, demand from a ridesharing operator will be much more predictable and stable than the ups and downs of consumer auto purchases.
- GM could also be a supplier to multiple ride-hailing, delivery, or other transportation partners. Remember, Cruise's ridesharing service is only one of a number of potential models for autonomous vehicles coming to market in the next few years.
- GM has the financing arm to provide billions in financing to Cruise's fleet if it proves economical.
For Cruise, having a partner like GM is equally important:
- Cruise can lean on GM to design the automobile, allowing Cruise to focus on self-driving technology and building its customer base.
- GM is a manufacturing partner with a long track record of quality and delivery in the auto industry. This could take decades to build in-house.
- GM has a large network of service stations already in place.
- Incentives are aligned with its manufacturing partner.
Cruise and GM's opportunity is huge
If people start paying for transportation by the mile instead of buying vehicles, it creates a massive opportunity for a company like Cruise. This is a business with potential that's hard to quantify, but let's assume that Cruise can charge $1 per mile traveled and captures 5% of all vehicle miles driven in the U.S. sometime in the next 10-20 years. Based on the 3.3 trillion miles driven each year pre-pandemic, the opportunity could be worth $165 billion in annual revenue.
That may sound crazy, but even if we change the assumption to 1% of miles driven and lower the cost to $0.50 per mile, the opportunity is $16.5 billion in revenue. No matter how you look at it, Cruise has the potential to build a massive autonomous ridesharing enterprise, and in the process, it could disrupt GM's business. The fact that GM is allowing itself to be disrupted and leveraging the operations it has to build a potentially even bigger business at Cruise is what might make this the next Apple. And I think investors who get in now and hold on for the ride could have some big gains on their hands.
