The Wall Street Journal recently reported that Apple (NASDAQ:AAPL) is working on an electric car, and other media outlets are pointing in the same direction. Adding to the excitement, an article from Bloomberg Business claims that Apple intends to bring its electric vehicle to the market by 2020, suggesting not only that the Apple car is a very real project, but also that Apple could be on its way to entering the car industry sooner rather than later.
Is this a smart idea? What could an Apple car mean for investors in Apple stock?
Accelerating toward the future
There is no official confirmation or denial from Apple regarding the press reports. However, actions speak louder than words, and Apple is actively incorporating automotive experts to work in its secret research lab.
According to the Financial Times, Apple employees at a confidential Silicon Valley location are researching automotive products and actively meeting with car industry designers and engineers, in many cases offering them a job with Apple. Apple and Tesla Motors (NASDAQ:TSLA) are aggressively competing for top human talent, and Tesla CEO Elon Musk recently said that Apple is offering mouthwatering signing bonuses of $250,000 and salary increases of up to 60% to Tesla employees.
According to Reuters:
A search of LinkedIn profiles turns up more than 60 former Tesla employees now employed by Apple, including dozens of hardware, software, manufacturing, and supply chain engineers. There are also a variety of ex-Tesla recruiters, retail or sales specialists, attorneys, and product managers.
It´s not only Tesla. Apple is hiring employees from companies such as Mercedes-Benz, Autoliv, and EMCO Gears, a company that builds transmissions, axle systems, and other automotive products. Also, electric-car battery maker A123 Systems has recently sued Apple for poaching top engineers to build a large-scale battery division of its own.
Based on multiple sources of information, it seems Apple is clearly taking its Apple car project quite seriously and putting considerable resources behind it.
Money pit or cash machine?
The automotive industry is notoriously tough and competitive, and profitability is typically scarce. Tesla reached its target of 35,000 vehicles in 2014, even if production fell short of expectations during the fourth quarter, and the company is making considerable progress when it comes to gross margins. However, Tesla is still producing losses at the operating level, and it's planning to allocate $1.5 billion to capital expenditures during 2015.
Among traditional and well established automakers, Toyota (NYSE:TM) is generally considered one of the most profitable ones, and it still claims an operating margin in the neighborhood of 10% of sales. This level of profitability looks anemic in comparison with Apple and its stratospheric operating margin north of 32% of sales during the last quarter.
On the other hand, looking only at current industry conditions can be too short-sighted. After all, Apple makes tons of money in the smartphone business, an industry in which most competitors operate with minuscule margins. According to estimates by Canaccord Genuity, Apple produced a mind-blowing 93% of all mobile industry operating profits during the fourth quarter of 2014.
If Apple can extend its brand differentiation, superior customer experience, and operational efficiency to the car industry, the company could also generate far higher profitability than other players in the business. Apple has proved time and again that it knows how to rewrite the rules of the game in different industries, and there is no way to tell at this point what it can bring to the table in the electric vehicle business.
Besides, it's not only about margins and earnings. The iPhone is selling like hotcakes, and it produces tons of money for Apple. But the company generates 60% of total revenues from that single product, so overall growth could considerably slow down over time as the industry matures and markets saturate.
Apple is entering the digital payments and smartwatch industries with Apple Pay and Apple Watch in 2015. Leaving financial considerations aside, a successful entry in new areas would prove that Apple has what it takes to continue expanding into different industries and finding new growth opportunities beyond smartphones. A potential Apple car needs to be interpreted from a similar perspective.
It's too early to predict the financial implications of a possible Apple car, but the possibility still shows that Apple remains focused on innovation and disruption. Management is bold enough to think big and venture beyond its comfort zone. This speaks wonders about the health of the company and its culture.