This Is How Apple Inc. Disrupts the Auto Industry

By now, it's safe to say we're past the point of speculating about Apple's automotive ambitions. As we found out earlier this week, Apple has in fact accelerated the timetable for its much-discussed Project Titan to a degree some automotive executives view as ludicrous.

Case in point: Former General Motors Vice Chairman Bob Lutz offered a blistering critique of Apple's disruptive aims within the auto industry on CNBC last week:

Source: CNBC.

However, as one of my favorite analysts recently outlined, a number of genuine production innovations could enable Apple to shatter the status quo in the truly massive market opportunity that is the global automotive market.

A blueprint for disrupting the automotive industry
The analyst to which I refer is Horace Dediu, whose blog, Asymco, is regular reading among tech analysts and enthusiasts. For those unfamiliar with Dediu or Asymco, I highly recommend you subscribe to his email list (a personal, not paid, endorsement). In a recent post, Dediu debunked a number of perceived impediments to Apple possibly producing an electric car with his typical eloquence.

In short, Lutz and other auto industry veterans cite the industry's high production costs, which rings particularly true at present with all-electric automobiles, and its aggressive price competition as mitigating factors that Apple fails to properly appreciate. However, as Dediu shrewdly notes, Apple could introduce any number of potential innovations to the automotive supply chain that could markedly lower its production costs, an approach that seems very much within Apple's long-standing proclivity to radically rewrite the rules of the industries it enters.

Specifically, Dediu argues that Apple could leverage a modular production process in which it sources significant subsections of its cars and, either on its own or more likely through a contract assembly partner, acts as the "integrator" of those disparate subsystems. Such a tactic would effectively mirror Apple's fabrication practices with its current consumer electronics lineup. Apple purchases the various components from a host of suppliers for devices like the iPhone and then contracts Foxconn to assemble the end device to Apple's exact design specifications.

Similar approaches have been proven to lower costs and reduce production waste in automobiles when compared to the integrated assembly line approach favored by virtually every automaker today. However, this kind of modular production techniques has only been used among boutique carmakers. Whether Apple could procure suitable supply at the scale it desires would require significant investment, and it isn't even entirely clear whether any such assembly partners exist to whom Apple could outsource its smartcars' fabrication.

Worth the risk for Apple?
Unfortunately, we'll only be able to tell in hindsight whether auto upstarts like Apple and Google can fundamentally disrupt an industry that hasn't undergone any fundamental paradigm shifts in decades. However, Apple enjoys a long track record of beating the odds and successfully revolutionizing industries few believed possible. The potential market opportunity certainly seems justified for Apple.

The global automotive industry shipped 85 million vehicles in 2014. And even using some baseline assumptions about Apple's prospects in this space, the numbers become attractive rather quickly.

Source: Asymco, author's calculations. 

Assuming Apple maintains its high-end pricing practices, which little evidence exists to contradict, it becomes clear quickly that the automotive market represents one of the few markets large enough to offer Apple a genuine growth opportunity, given its sizable current revenue base. For instance, were Apple to achieve the 5% market share in the middle column above, it would scale to a production rate to rival Japanese giant Honda. And although the bottom-line profitability of such an achievement clearly remains a matter of heated debate, it would effectively double Apple's revenue from the $233 billion in sales it's expected to yield in its current fiscal year.

Additionally, Apple's Project Titan is reportedly being designed as an electric vehicle, so from a "dent in the universe" standpoint, the potential to help push through a positive social change also likely appeals to Apple's corporate ethos. So although the specific unit economics of Project Titan remain hugely unclear to the investing public, the numerous positives it could gain from upending the auto industry certainly appear worth Apple's effort.