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The Latest News Says We're Closer to an Apple Car Than You May Think

By Andrew Tonner – Aug 23, 2015 at 4:26PM

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A recent report claims Apple's automotive initiative Project Titan is further into development than nearly anyone expected. Could Apple's production model work with autos?

Apple (AAPL -3.00%) plans to make a car. Take it to the bank.

Amid concerns about its short-term growth outlook and the possible slowing of its current iPhone sales cycle, reports of Apple's automotive efforts recently resurfaced. A new report from England's The Guardian features a number of heretofore unrevealed details regarding the product that stands, unlike most other Apple new product discussions, as a legitimate potential driver of meaningful top-line growth for the world's largest publicly traded company.

So what is there to learn about Apple's budding automotive efforts, and what could it mean for Apple stock? Let's take a look.

More "Project Titan" details emerge
The Guardian's reporting lifts the veil on a project that Apple, despite some previous leaks to the press, appears maniacally intent on keeping as secret as possible. And for good reason: The article advances the idea that Apple's automotive progress, known as "Project Titan" internally at Apple, lies further along than many in the public realized.

According to The Guardian's report, Apple is either ready to field-test working prototypes of its self-driving car, or is at least close to it. Using Freedom of Information Act requests, the publication was able to obtain documented correspondence between an Apple engineer purportedly staffed on Project Titan and an employee of GoMentum Station, a massive and highly secured former naval base that caters to large carmakers seeking to troubleshoot their latest innovations away from the public eye.

The Guardian report also advances the claim that Apple's Project Titan will indeed be an electric automobile, citing a number of pieces of evidence that support this notion. Although not confirming it, the report highlights that Apple CEO Tim Cook might have toured the manufacturing plant producing BMW's electric i3 sedan last year. The report also cites Apple's hiring battery engineers from the now privately held electric-battery maker A123 Systems  and mentions by name a Project Titan engineer who previously worked for another Silicon Valley electronic car start-up.

So to recap: Apple is definitely building an electric automobile, and it has progressed further along in its development than virtually anyone realized. However, whether this makes financial sense for Apple remains a different matter altogether.

Top-line growth, bottom-line decay?
In one sense, the global automotive industry seems to offer exactly what Apple should seek as its sales base continues to swell in coming years -- namely, massive growth opportunity. Globally, the automotive industry generates sales of around $2 trillion, roughly equal to the entire annual economic output of India.  It's a mind-bogglingly large space and one that often gets depicted as bloated and inefficient, whether deserving or not.

So on the surface, the auto industry, given its massive sales base and apparent dearth of innovation, appears an ideal market for Apple's famous brand of disruption. But does that mean the Mac maker should indeed venture into the space?

I have my doubts, for a few reasons.

A central issue, which I also highlighted in an earlier piece, relates to the sector's profitability. Despite the massive revenue opportunity the industry presents, there is a frustratingly smaller share of profits to be had in the space. Here's a breakdown of the past 12 months' rolling profit margins for most of the global automotive industry. 

Company Name

LTM Net Income Margin

Daimler AG

 5.7%

Volkswagen AG

 5.2%

Peugeot S.A.

 (0%)

Fiat Chrysler Automobiles N.V.

 0.9%

Renault

 5.8%

SAIC Motor Corporation Limited

 4.5%

Nissan Motor Co.

 4.2%

General Motors Company

 3.6%

Honda Motor Co.

 3.9%

Bayerische Motoren Werke Aktiengesellschaft (BMW)

 6.7%

Average

 4.1%

Sources: S&P Capital IQ, author's calculations

Clearly, strong incumbents can indeed generate profits in this space, but those profits come with massive capital requirements. Of course, Apple can afford to buy its way into the automobile market, but it also prefers to outsource the low-margin business of making its products. The problem is, little third-party assembly capacity appears to exist in the auto industry, and that's something Apple would probably wish to change as it moves into the space. Apple has already been linked to talks with one of the few contract auto manufacturers, Magna International, which Morgan Stanley recently said could become the Foxconn of automobiles.  

This line of reasoning makes perfect sense for Apple. With its billions in cash and investments, Apple could easily help finance the construction of significant manufacturing capacity to support Project Titan, an arrangement similar to Apple's financing-for-production deal it signed with the now-defunct sapphire supplier GT Advanced Technologies. Constructing its supply chain in such a way would probably bolster the overall profit margins of any Apple automobile, but the degree to which it could support profits remains unclear.

It also bears noting that as a company that typically trades at a multiple to earnings, slight margin erosion might be an attractive trade-off if overall profits grow. But the key to understanding that trade-off isn't available. Either way, it appears Apple plans to continue progressing with its automotive efforts, so investors must hope Cook & Co. know what they're doing with what could be Apple's next great growth frontier.

 

Andrew Tonner owns shares of Apple. The Motley Fool recommends Apple, BMW, and General Motors. The Motley Fool owns shares of Apple. 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.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$138.20 (-3.00%) $-4.28
Morgan Stanley Stock Quote
Morgan Stanley
MS
$79.01 (-1.06%) $0.85
General Motors Company Stock Quote
General Motors Company
GM
$32.09 (-3.52%) $-1.17
Nissan Motor Co., Ltd. Stock Quote
Nissan Motor Co., Ltd.
NSANY
$6.44 (-4.87%) $0.33
Bayerische Motoren Werke Aktiengesellschaft Stock Quote
Bayerische Motoren Werke Aktiengesellschaft
BAMXF
$70.00 (1.45%) $1.00
Daimler AG Stock Quote
Daimler AG
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$12.59 (-1.95%) $0.25

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