Katy Huberty: Why it is ‘quite likely’ Apple does a car

Excerpted from the transcript of a Morgan Stanley investor conference call that landed on my desktop Wednesday:

Q: Why would it make sense for Apple to enter the car market?

Huberty: Most cite Apple’s strong brand and an impressive balance sheet. But this is not reason alone to enter any market. But we see several other reasons why it is quite likely that Apple does a car. One is the size of the market. Smartphones are a $500bn annual TAM. Apple has about 1/3 of this market. The mobility market is $10 trillion. So Apple would only need a 2% share of this market to be the size of their iPhone business.

Q: How would Apple approach autos in terms of outsourcing supply?

Huberty: Apple really only succeeds when it’s vertically integrated. This means designing the components and designing every part of the product… how it looks and feels to the consumer, the software and the ecosystem that surrounds those products.

Remember that Apple has also built an extensive financing and trade-in service program as well as exceptional support through AppleCare. Financing and leasing and trade-in programs are incredibly important to a successful auto strategy. We don’t think partnership with another automaker is a real path for Apple.

Q: The auto industry is a low margin/low return business — why would Apple be interested given the poor industry margins?

Huberty: With respect to margins, investors frequently say that the current auto industry margins are highly unattractive compared with Apple’s current mid-20% EBIT margins today. But I would remind everybody that when Apple entered the PC, handset and wearables market, the margins of competitors were razor thin. And through vertical integration, as well as driving significant scale on a small number of SKUs, Apple has been able to enter industries with low profitability and earn very strong margins. I don’t see why autos would be any different.

Maintains Overweight rating and $144 price target. 

My take: More certain than I expected.

13 Comments

  1. Warren Zimmerman said:
    People throw around percentages of 1 or 2% like it is easy to do. It is so hard to get a percent of any market although perhaps not for Apple. It just bothers me to hear that you only need one or two percent. Those are huge numbers. Never happens to most companies.

    2
    January 6, 2021
    • John Konopka said:
      I think her point was that Apple has roughly 33% of smartphone revenue and therefore has a track record of making substantial profits and 2% is much smaller than 33% though it is equivalent revenue.

      Horace on a recent podcast had an interesting point which I’ll badly summarize. He had a metric that electric vehicles will be roughly 2% of the market around 2024 and that that was a propitious time for Apple to enter a market. They would enter with something to gain a foothold and then develop that to the vehicle they really want to make. Think of Apple coming out with the iPod as a way to gain experience with small, portable electronics then they made a splash with the iPhone six years later.

      If Apple introduced “something” in 2024 they might make the real thing in 2030.

      It is an interesting take. Maybe they are looking at the technology (hardware and software) needed and the supply chain they need to develop and they are thinking they should put out something with “training wheels” and develop that to a real “racing bike” some years later. Better that than trying to jump in with a fully formed product as many pundits seem to be expecting.

      3
      January 7, 2021
      • David Drinkwater said:
        There is at least one point to consider here:

        Automotive vs iPods and iPhones are a very different set of Quality requirements.

        AECQ is a PITA, and each revision only gets worse. I’m not actually saying that this is a bad thing (it’s good that quality and safety and reliability are ratcheted up), or that Apple would not knock it out of the park, but it does require a whole lot of extra labor to keep the documentation clean. And then, of course, the Products actually have to work!

        Of course I think Apple could do it. It would be very exciting to see.

        How about a racing hang-glider! … Oh, sorry got lost for a minute there.

        1
        January 7, 2021
  2. Robert Paul Leitao said:
    How would Apple fully control the user experience if the company didn’t control development, design, the quality of the components, assembly and distribution? Apple thrives when all things are vertically integrated. Apple’s approach to development and design will be vastly different than the antiquated and inefficient processes used for IC cars today. There are far fewer moving parts. Additionally, the inefficiencies of distribution through independent dealers will most likely not be deployed. Apple will figure out margin if the company chooses to produce a car.

    2
    January 6, 2021
  3. Michael Goldfeder said:
    “Apple has been able to enter industries with low profitability and earn very strong margins. I don’t see why autos would be any different.” Just as the iPhone has its entrenched ecosystem of users, as opposed to the “Android” market, it does seem transcendent for Apple to sell a niche iCar based on its goal of enriching and enhancing the lives of consumers with new and innovative products.

    Tesla produced just under 500,000 vehicles last year. I’m wondering what Rolls Royce, Bugatti, Lamborghini, and Ferrari produced? I don’t see Apple partnering with just an ordinary auto manufacturer. But wouldn’t it be interesting if an extraordinary car company wanted Apple to integrate their M1 chip technology and iOS into a flagship vehicle?

    Just as Tim Cook has said when asked about buying a studio or film library for Apple tv+, his response; We want to produce original content by creating great stories from renowned producers and directors.

    1
    January 7, 2021
    • Rodney Avilla said:
      Worldwide tesla sold 142k, which was more than the next 8 competitors, combined, 130k (EV-Volumesdotcom). Disclosure- I own no Tesla stock. Too wild for me.

      0
      January 7, 2021
    • Bart Yee said:
      Ferrari limits production to ~7000/yr to maintain exclusivity and very high prices. I would expect similar from Rolls Royce and Bugatti. Lamborghini maybe a bit more as they also make SUVs. Between these 4, doubt more than 40K units combined. But that’s why they can charge astronomical prices for the performance and exclusivity.

      Porsche delivered 280,000 vehicles in 2019 for comparison. Best sellers were the Macan and Cayenne SUVs.

      0
      January 7, 2021
  4. David Drinkwater said:
    A BMW M1 Apple M1 Convertible would be a hell of a lot of fun to drive around town!

    (Maybe even better than my 2004 BMW M3 Convertible. … Maybe.)

    1
    January 7, 2021
  5. Romeo A Esparrago Jr said:
    From Jan. 4th:
    “ BEIJING (Reuters) – Apple assembler Foxconn and the Nanjing Economic and Technological Development Zone have agreed to start building electric sport-utility vehicles in 2022 for cash-strapped Chinese startup Byton, Foxconn said in a statement on Monday. “

    Honhai practicing for something later, mayhaps, hm?

    2
    January 7, 2021
  6. Peter Kropf said:
    Maybe, it’s all a competition between assembly lines and supply chains…

    https://www.washingtonpost.com/business/energy/an-apple-tesla-showdown-will-happen-on-the-factory-floor/2020/12/22/627e437e-4431-11eb-ac2a-3ac0f2b8ceeb_story.html

    We have Foxconn already offering to build EV cars for everyone. That reminds me of TSMC and how it build chips for everyone.

    Is Foxconn Apple Car’s “TSMC”?

    Perhaps Apple biggest strategic advantage is to double down on the factory tech/robots/AI required to build cars.

    I think it’s Tesla et al vs Apple/Foxconn, in the end.

    0
    January 7, 2021
  7. Jerry Doyle said:
    I’m firmly convinced now that Apple plans to build a car. It will be an Apple car from start to finished, vertically integrated with Apple controlling the entire experience. Apple selects auto suppliers already within the industry and draws up the specs relative to Apple strict requirements to build. Apple sets-up its own manufacturing plant using its abundant resources to attract and hire individual experts to assist with the project. Those cars will roll off the assembly line and be available for distribution outlets placed strategically across the country. Little doubt Apple will have its own Apple iCar dealership stores. I only can imagine the design and layout arrangements of those Apple iCar stores. Talk about a fun place to go visit!

    0
    January 7, 2021
    • Peter Kropf said:
      Agreeing with you, Jerry.

      Apple will have the Apple One Ownership experience eventually:

      Car, Insurance, Apple Car Care, Personal Security (See SolarWinds of Russia) all sold by the Apple Car Store site under one monthly payment.

      1
      January 7, 2021
      • Jerry Doyle said:
        Correct Peter. One stop shopping. Everything made logically easy. In a few clicks, I select my iCar. Add Apple Car Care Protection/Insurance. Select Apple financing. Voila! No need to haggle with the sales person over a plethora of options and amenities to select that runs the car price ever higher. No need to seek financing elsewhere from my bank, credit union, etc. Apple will have the most competitive rate for me anyway. No need to call my insurance company who raises my premium every six months even though I can’t remember how many decades past I had a fender bender. Apple is there to service it all, with a premium product, high quality service and relaxing experience. And, you know that all my existing Apple devices will work seamlessly with my new Apple iCar and will continue to do so in the future as new software updates for the car roll out. I cannot wait.

        1
        January 7, 2021

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