Excerpts from a conference call with Morgan Stanley clients that landed on my desktop Monday:
“What we know for sure… is not much.” Apple has acknowledged that the company has potential to add value in the auto market and that they are definitely willing to put capital behind that belief. Apple recently announced that Dan Riccio (Apple SVP Hardware Engineering) became head of an internal project at Apple and is reporting directly to Tim Cook. We think that it is fair to assume that he’s probably leading the car project. This comes after a fair amount of turnover (according to the press) on Project Titan. Beyond that, we would not expect Apple management to comment directly on its car project going forward. We may need to rely on the press and supply chain data points from here to understand how Apple may enter the market.
An Apple car can leverage the ‘halo effect’ of its vertically integrated ecosystem. Apple is most successful (and most interested) in markets where there is a benefit from integrating hardware, software and services to improve the consumer experience. There’s also a ‘halo effect’ when Apple enters new markets. Apple has >1 billion live iPhone users in the market today and there is an increased tendency for these consumers to migrate towards other Apple products and services. So putting the Apple brand on a vertically integrated product is typically the way that they would enter a new market. Apple may also be able to leverage their innovation in financing, distributing and leasing products (and trade-ins) and this could prove effective in disrupting the car retail market. Apple currently has the most productive retail on a per-square-foot basis. Apple is also seen as highly innovative in how they service their product.
Apple has a history of using its balance sheet to support suppliers in their early development. Despite its vertical integration, Apple will leverage suppliers and manufacturers to quickly scale a business, thus taking advantage of the supplier’s manufacturing expertise and component differentiation (leaning on hundreds of suppliers). They have also demonstrated a willingness to fund the capacity build-out to ease the burden on suppliers who typically have to add capacity well before the production ramp. Before the iPhone, Apple was spending $1bn/year on capex… but at peak, reached $13bn annually on capex, the majority of which was spent on purchasing manufacturing equipment for suppliers.
My take: Morgan Standing is plowing ahead with the Apple Car theme, Hyundai’s demurrals notwithstanding. For Apple investors, the most relevant part of Huberty’s remarks — at least in the near term — may be this:
It’s interesting to see the auto supplier stocks shoot up on Apple Car media reports, while Apple’s share price has remained largely unchanged despite the TAM [total available market] opportunity. It suggests to us that investors don’t price in future innovation at Apple… it begs the question whether we are at an inflection point where Apple investors are being forced to ‘price in’ the future impact of a market that is so significant.