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Soft Underbelly

Executives at car companies have suddenly had to answer questions about potential entrants into their business. This is a big change. I don’t recall a time when this was necessary for over 30 years. For decades the questions have been about labor relations, health care costs, regulation, recalls and competition from other car makers. To ask questions about facing challengers posing existential questions must seem terribly impertinent.

For this reason, Bob Lutz, in his dismissal of Apple’s entry, is not alone. The industry has a century of history and has seen little disruption in the classic sense. I wrote a long piece on the fundamentals of the industry titled “The Entrant’s Guide to the Automobile Industry” which explained why this industry has been so resistant to disruptive change. At best a massive effort over multiple decades usually leads in a small shift in market share.

However, one should read that post as a thinly veiled threat. Just because disruption seems hard does not mean it isn’t possible. Indeed, the better you understand the industry the more easily you can observe its vulnerability and the more rigid the industry seems the more vulnerable it may be to dramatic change.

The formula for successful entry is the same for all industries: compete asymmetrically. This means introduce products which change the basis of competition and deter competitive responses by making your goals dissimilar from those of the incumbents. This is classic “ju-jitsu” of disruptive competition.

Here’s how it would work.

Bob Lutz suggests that there is no profit to be gained from selling cars on the premise that costs are very high while pricing will be held down by competition. That may be true but entrants could deploy new processes that lower the costs of production. Traditional car making is capital intensive due to the processes and materials used. There are however alternatives on the shelf. iStream from Gordon Murray Design proposed switching to tubular frames and low cost composites.  BMW has an approach using carbon fiber and other composites. 3D printing is waiting in the wings. All offer a departure from sheet metal stamping.

With new materials, costs for new plants can be reduced by as much as 80% and since amortizing the tooling is as much as 40% of the cost of a new car, the margins on new production methods could result in significant boosts in margin.

There is a downside however. What is usually compromised when using these new methods is volume and scale of production. So that becomes the real question: how many cars can Apple target? 10k, 50k, 100k per year? Could they target 500k? That would be 10 times Tesla’s current volumes but only a bit more than the output of the Mini brand.

Now consider that the total market is 85 million vehicles per year. For Apple to get 10% share would imply 8.5 million cars a year, a feat that is hard to contemplate right now with any of the new production systems. On the other hand selling 80 million iPhones and iPads in a single quarter has become routine for Apple and that was considered orders of magnitude beyond what they could deliver. Amazing what 8 years of production ramping can offer.

So the answer to the operating margin might be in a combination of new processes and new ramp strategies.

But there are more levers of change. Car making can be revolutionized through modularity: divide the car into subsystems and act as integrator. Electric cars have the benefit of few moving parts, smaller motors, fewer points of failure and wear, lower heat signatures and more interchangeable systems architecture. This allows companies to enter without needing to design their own engines or many other parts.

The fact is that engineering cars is actually fairly easy. Building them is the hard part and the costs of engineering new models that are cited as so extraordinary are because most of the effort is in engineering for production (The maxim is that it’s far harder to make a Ford than a Ferrari). You can see this in the proliferation of “boutique” supercars which have hyper performance but low volumes. McLaren, Bugatti, Pagani and dozens of others are all recent hypercars which show the power of engineering and design without worrying about volumes.

Apple could combine new production methods with modularity in engineering to bring design, integration of experience and iteration to the industry. Not to mention what software could add to that. Couple that with the brand value and Apple’s entry will very likely be hugely successful. I just don’t know if they can manage production at the level of demand that I expect them to create.

  • Luis Alejandro Masanti

    I think that ‘modularity,’ maybe your second love after disruption, is already taken in the form of ‘platforms’ in several auto maker.

    What —in my opinion— is missing in all Apple’s car analysis is what would it make it ‘different,’ Apple ‘enters a market when it can put something different in ti.’

    For me, it is still unclear what this difference will be. But I’m sure that it exist.

    Another ‘detail’ that usually call my attention is production volume.
    The Mac never reached the volumes of iPods/iPhones. We can say that the device are an order of magnitud apart (in size/weight).
    So, how many orders of magnitud apart are an iPhone (143 gr) versus 1,5 tons…
    This would help imagine the complexities of building 10% of world cars!

    • art hackett

      I’m not sure the Car is particularly complex, but what is the subset of jobs to be done in transport that Apple intends to target? I can’t imagine they’ll be going down the 1.5 tonnes route as that sets them up for symmetrical competition like Tesla, but most likely from the golf buggy end as has been postulated. This is a mind bending concept that makes the world wide redefinition of “phones” and it’s uses already achieved seem trivial. Will it seem small at first like the Watch, which I still have trouble seeing how it will change the world, or virtually immediately revolutionary like the phone?

  • mithlond

    There are two things that stand out here. The first, as you said, is innovation in the production process. I suspect Apple will be the breakout player to first nail this – to be the one who “gets it right” that everyone else will then see the obviousness of and rush to copy.

    But the other is the software. This is where Apple’s unique strength in this area will be difficult to copy. The integrated design of an experience that includes software will be what differentiates Apple’s car from the “good enough for some, at least for a while” automotive equivalent of Android.

    Many will learn to make fire and wield torches. Apple’s software and “integrated modularity” will be their proprietary propellant. The long-unchanged business models are so much dry kindling. And sparks are flying.

  • Kris S

    Would be very interested to hear your take on the regulatory barriers to entry that Apple will face as well. Offhand I can think of dealership resistance to the direct-to-consumer sales model, outdated safety requirements based on combustion engines and weight assumptions, software update schedules being handcuffed by EPA, and other design constraints like bumper or light requirements that may require the Car to look less like an Apple product than might be ideal. Are there areas in which you expect Apple to drive disruption in regulation, similar to how Tesla and other electric car manufacturers have done in California?

    • Boudica

      Seems like the Apple stores serve as “dealerships” and can handle most problems short of body work. And EPA will not handcuff Apple since all electric cars don’t have emissions so software updates wouldn’t require their approval (production plants are a different issue). Yes, they would have to be safe to operate, especially since there will still be 18-wheelers operating on the same roads – but I imaging advanced sensors and software can minimize the risks.

      • tmay

        I’d speculate that Apple could have “pop up” dealerships for a few days bimonthly in the parking lots of the smaller stores, but is there anything to prevent Apple from having a floor model in the larger stores? Likely nothing except state and local laws.

        Routine troubleshooting and repair based on onboard diagnostics could take place in either Apple or third party facilities certified by Apple.

        What I would like to see is a modern adaptation of the Land Rover Defender, where body and structural components could be easily replaced by a trained third party at low labor cost for all those little urban fender benders that will happen with or without autonomous control.

        This to me would how I envision that the BMW i3 evolved (it looks modular but probably less so than I imagine}.

        Finally, how close is the industry to having viable hub motor designs? This to me seems the sweet spot of a new design.

      • http://twitter.com/LunaticSX Lun Esex

        You’re forgetting about test drives. Any way they do it, Apple’s going to have to have a handful of cars available somewhere that people can hop in and drive around in themselves. That means having a garage (Apple’s not going to leave their cars out in a parking lot, exposed to the sun/rain/snow, and possible vandals or thieves). Along with that comes a few attendants to make sure each car is as clean and prepped as possible before the salesperson brings out a prospective buyer for a test drive.

        So there’s a lot more to it than just having a single showroom model on display in the middle of a few of Apple’s biggest stores. (They might do that anyway, but customers will directed to a proper nearby Apple Car dealership to do any more than ogle it.)

      • tmay

        Good points; I was thinking more of a tractor trailer rig purpose built as a transporter, as in motorsports.

      • http://twitter.com/LunaticSX Lun Esex

        That’s certainly a way that pop-ups could be done by *someone*… Imagine the amount of interest and excitement though when people find out that *Apple* is going to show off some cars at a pop-up like this in the parking lot of a mall containing an Apple Store. They’d have to bring at least a dozen cars for people to test drive; probably more. I could imagine them taking up a significant portion of that mall’s parking space while they’re there. Of course you’d reserve a spot for a test drive online or via an app, which would probably get fully booked up within minutes.

        This would of course generate whole a lot of publicity, at least!

      • http://www.asymco.com Horace Dediu

        Distribution is an important question. The simple answer is that Apple Car Stores will be a sustaining alteration to the Apple Stores. The Apple Watch is the most important data point to observe how distribution is altered for new categories. The only question for car distribution via retail is the same as the question for production: how quickly will they propagate?

      • mithlond

        Fueling will be another important question. Home fueling is obvious, but a compatible fueling network is also a propogation speed question.

    • http://www.asymco.com Horace Dediu

      I don’t think Apple will face regulatory barriers that other car manufacturers don’t face.
      I don’t expect Apple will attempt to “drive disruption in regulation”. Tesla has tried to change dealership franchise laws but I’m not sure that there is any automaker which wishes them to remain the way they are. My conversation with people in the auto industry suggests that they would love for the rules to change. They were imposed during the great depression specifically to remove power from Detroit.
      Apple will not concern itself with changes in regulation.

  • ptmmac

    The real question is not whether Apple can build cars. The question is can Apple build a new type of car. The iPhone was an extremely portable computer, rather than merely a better cell phone. Can Apple do the same and make a new category of transportation vehicle? Elements of electric car design that Apple already has experiance developing are battery technology, glass manufacture, low weight structural materials, electrical systems design, software, AI technology, minimalist design, and most crucially willingness to compete against themselves. If I were betting I would expect an electric car that is much lighter(1500 lbs?), offers AI controlled driving, and lowers fuel costs, insurance costs and raises the gross margin to Apple’s standards.

    I think that many people really don’t understand what makes Apple so successful at design. Their real strength is a willingness to pay for development of 3 different design teams at the same time (note that Apple is tripling the number of people working on the car project according the WSJ). The secret here is killing your own nearly good enough designs off so you can take a 1 to 2 year lead in design. Those designs that don’t make it provide incentive and fodder for the next round of design. The dog eat dog battle at Apple is not to be the best on your team, it is to make your team the best. You can’t win year after year if your competition is the other guys. You can if your competition is within your own company. The genius here is the recognition that nothing is more expensive than producing a product that is not the best it can be. Build fewer products, but design more products so what you are selling is strong enough to sell itself.

    The other thing which Apple involves itself with from the beginning is control over the manufacturing system. Apple uses it’s huge cash pile as the lever to move manufacturers onto more expensive and higher quality production methods. By buying the equipment necessary for the new production system, Apple insures that the risk it is bearing for the new product is not pushed onto the manufacturer. This makes the manufacturer able to offer a lower price because lower risk means lower cost. When it’s iPhones go into production, Apple sends it’s engineers to China and audits each production facility for quality of product, efficiency, and safety. High quality design makes bets like the purchase of aluminum milling machines offer high return on capital.

    I am not saying that Apple could not fail at making cars. They are stretching their design and development system to challenge an automotive market worth $2.3 trillion. This is where they have to go to grow the company. Looking at their success in the cell phone industry it is hard to just brush them off. Even Microsoft and Intel are being sucked into Apple’s orbit by the size of the mobile market Apple controls. What will be the financial effects of Apple controlling just 15% of the Automotive market world wide?

    • http://www.asymco.com Horace Dediu

      Think Different isn’t a contradiction of Think The Same.

      Think Different is a contradiction of Think Better.

  • http://twitter.com/matthewwanderer Matthew

    “but only a bit more than the output of the Mini brand”

    500,000 Apple cars would be significantly more units than MINI has ever sold.

    MINI sold 305,050 cars in 2013, 302,183 cars in 2014, and they’ve been on a very rocky road to bettering that number for 2015, even with their fully redesigned-for-reviewers-and-JD Powers F56 Hardtop.

  • Bernard Desarnauts

    I am still not sold that they are really working on a complete car project. I remember for the last several years being told repeatedly by people in the know that next year they would ship the magical TV. Long term trend w/ personal autos (on-demand, generic electric systems) are not in sync with Apple entering this market. I wonder therefore if this is not just a brilliant strategy to get a ton of people on wild chase, while they remain focused on execution and total domination of the personal computing space (e.g iPad pro to me is one more nail in the Windows coffin)

    • http://twitter.com/LunaticSX Lun Esex

      The differences between the car market and the television market are vast. It also wasn’t so much “people in the know” who kept claiming Apple was on the verge of releasing a TV set, it was *one* person who kept saying it, over and over (and over, and over, and over…).

      There’s a *lot* more signal smoke visible around Apple when it comes to them working on building a car.

      • Bernard Desarnauts

        Thanks Lun. I still don’t get it .. oh well, that’s not the first nor last time 🙂

  • http://twitter.com/LunaticSX Lun Esex

    “the total market is 85 million vehicles per year. For Apple to get 10% share would imply 8.5 million cars a year, a feat that is hard to contemplate right now with any of the production systems”

    Consider that Apple’s sales target for the iPhone when it was introduced was not 10% of the phone market, but only 1%, by the end of 2008. At the time, that was 10 million phones, out of a total market of 1 billion. Note that since the iPhone was first released at the end of June 2007, they also actually had 18 months to hit their target (not, as was frequently cited, “in the first year”).

    In the end, Apple greatly exceeded their 10 million iPhones goal, by selling 12.9 million by the end of 2008.

    With a similar initial target in the car market of only 1% share, that would be 850K, which is still a huge amount for car production and sales, but an order of magnitude less than 8.5 million.

  • RichardinMelbourne

    Asymmetry in electric cars might mean the car makers look at a new product and say “that’s not a car”. There are two electric cars of this type already; a golf buggy and a mobility scooter for the elderly. Disruptive innovation is when the new product improves over time to meet most people’s needs. A golf buggy goes 20kph and drives 5km around a golf course. I guess similar for a mobility scooter. For $1,000, Apple could make something that could take you 5km to work, or the supermarket. But not something that would take you 500km (or more) at 100kph (or more) on holiday. An asymmetric electric car could aim to satisfy the need of the first user scenario rather than the second. Of course, other asymmetries such as self-driving, self-organising are also possible, and only limited by the imagination.

    • http://twitter.com/LunaticSX Lun Esex

      “I guess similar for a mobility scooter.”

      A mobility scooter that can manage 20kph would be pretty darn zippy. 😉

  • Christopher Dungeon

    The question is whether or not Apple will need to team up with a auto manufacturer at some point. Why? Because they need visual space to display them, have test drives available, and be able to service them. Since these locations already exist for companies like BMW, Apple could set themselves up to have a relatively expansive initial roll-out.

    Another thought, and I know this is stretching it, but Tim Cook owns a BMW 5 series, so I’d image he probably already has a soft spot for, an iclination and maybe even a desire to work with BMW. We’ve already seen precedence set with Apple & IBM working together in the enterprise area, so it’s not entirely far fetched that Apple & BMW could team up to sell an AppleCar. And if the relationship goes further than just dealership privileges, BMW could very well be Apple’s German FoxCon.

  • http://sumocat.blogspot.com Sumocat

    “Not to mention what software could add to that.” — I’m surprised you would not treat software as the main attraction of an Apple Car. Apple’s big advantage in tech has always been software. Even today, software is what grants iPhones a noticeable edge in responsiveness and user friendliness vs. premium Android phones that load up on processor and ram just to keep up. Apple’s hardware design catches the eye, but their software is what keeps customers coming back. If Apple enters the car building race, I expect them to deliver smarter cars, not just smarter car production.

  • Fran_Kostella

    I think that the last paragraph of this piece captures the essence of what we are seeing, if indeed Apple is about to do what we all think they are going to do. The thing that makes Apple exciting to watch is the brilliant way they’ve managed to integrate high quality software and hardware and build a manufaturing system that not only scales and meets their world class industrial design work, but which meets their objectives so well. I don’t see anyone even trying to keep up with this new model of producing consumer goods.

    I assume that this is what was like to see the new industrial production systems arise a full century ago. There must have been a period of time when the old companies and investors were looking at the new systems and just not seeing them, just as so many now seem to have a confused view of what Apple is actually doing. Their ability to use their cash horde to dominate components of the world system as needed is breathtaking. Who else can reserve entire fleets of shipping transport, or buy every machine tool being made for months/years on end?

    So, the question is not if they can design or engineer or sell cars, but if they can extend and scale this new kind of system up to meet the demand. Are the existing shipping and production systems adequate? Will they have to build new capacity from scratch? It looks like 2019 is rather aggressive, but I imagine that they are thinking that they only have to produce a limited number the first year and will scale year by year until they can start to meet demand.

    It will be interesting to watch the existing market respond as this evolves!

  • Steve Vogt

    Lots of typos / editing needed here. Unusual. Surprised.

    • http://www.asymco.com Horace Dediu

      Can you offer specific examples?

  • Bert Vanderveen

    A little voice in my head keeps telling me that the most disruptive thing Apple could do to the (auto)motive business, is taking the ‘ownership’ out of the equation. A subscription model like they just launched for the iPhone would certainly convince me to get rid of my 17 years old Smart (with still less than 75k km on its counter).

    I would even be willing to share an(y) Apple Car with others if the conditions were favorable (eg a clean up between users and a auto reset to my preferences, etc.).

    There are a lot of positives: No capital outlay, no maintenance issues, rates tailored to specific use, no roadtax, none of the stuff that makes owning a car so unattractive. Add a smart system to reserve a car on short notice, drop off spots within walking distance, super smart integration with wearables and the web, and this is a winner!

    (As a business model it could be great for Apple. They have a lot of capital, especially off shore, that is not doing much for the bottom line now.)

    • http://www.asymco.com Horace Dediu

      I don’t think removing ownership qualifies as satisfying a manifest job to be done. Apple’s craft is to build things which are valued intrinsically.

      • psiberaktiv

        This line: “The has a century of history and has seen little disruption in the classic sense”.

  • 程肯

    As much as I’d love to imagine an Apple-made car, I’m just not quite seeing it. Something about Steve Jobs’ reaction to the Segway keeps getting in my way.

  • Ben

    One argument I still haven’t read is the potential for the new entrant to build an efficient organization to design cars and their production system. Having worked as an engineer for two major car manufacturer, the disorganization is so huge that they lose millions over this. And it is because it is impossible to reform such sluggish dinosaurs with their countless battling smaller companies inside the company. The lack of vision and leadership to eradicate a lot of useless steps in the development of a car (over and over the debate around design versus camera implantation for example) is blatant and the new entrant has this advantage over the incumbent to compensate the lack of experience (which can be also compensated by hiring a lot of talented people). Even if it is impossible to calculate, I think a good organization (and Apple should have the talent to do that) could help a new entrant make the same amount of car with at least half the staff.

  • sizuco

    It’s hard to see Apple entering and disrupting an industry as complex and heavily regulated as the automobile industry, with no prior experience, as it did the phone industry. Not that they couldn’t with time but it would take a lot of time. Just consider the regulatory issues alone in terms of safety, emissions, fuel, delivery and distribution, etc. Unless they buy an existing car company of course (VW pretty cheap right now).

    • Joe90

      Apple has a lot of experience with all aspects of the car industry they just haven’t built a car.

    • BMc

      Well, the majority of rumours (all of them?) are indicating an electric vehicle, so that would address some of the regulatory issues (emissions, fuel, SW update restrictions, etc). No doubt it is still a large hill to climb. Though to Horace’s point, designing & engineering a car (including safety) is not rocket science any longer. That is what bringing in some specialists will provide.

      I don’t see Apple buying into this market with an existing car company (though a partnership is possible) – that just brings a lot of baggage, as what Apple wants is expertise. Apple may buy smaller companies that bring either technology or expertise.

      As is pointed out in the article as well as some comments, there are numerous inefficiencies and costs in the incumbent model that a new entrant could avoid, thus able to achieve higher margins. Apple could easily bring in a model that appeals to the demographic of iDevice ownership, that is “premium but affordable”, and with much higher margins than a current vehicle in that price range.

      I have no doubt that Apple could make a “better car with higher margins” than incumbents, should consider it strategic to do so. What I wonder is if they have something even more disruptive in mind.

  • Leon Speegle

    Horace,
    Have you ever heard of Elio Motors? (eliomotors(dot)com) I would love to hear some considered opinions about them from you and your readers.
    AppleCar, iStream, Tesla, Google’s self-driving car project, and 3D printed cars are all very interesting to contemplate, but isn’t transportation disruption more likely to occur from the low-end? You don’t get much more low-end than $7,000 for a vehicle.

    A few things worth considering in regards to the Elio Motors concept:

    Being three-wheeled, and thus technically considered a motorcycle, it sidesteps many automobile regulations designed to protect the established players. Example: Tesla is having to deal with some of this in regard to direct sales and company owned dealerships. Those regulations do not apply to ‘motorcycle’ manufacturers.
    Elio is going to voluntarily comply with other regulations for cars, such as crash testing (for obvious reasons) and emissions (which will generate carbon credits that they can sell).

    Elio is positioning itself as an ‘and’ vehicle. (Unfortunately, I think this will actually be the model name, the Elio “&”.) That is, it’s trying to be a supplementary vehicle, not a replacement for your general purpose automobile. It’s a more specific use case type vehicle. I know how you love a good “job to be done” discussion! Low-cost commuter. Fun, recreational transport. Young, single person’s first car. Dependable transportation for those unable to afford ANY OTHER type of new car.

    Customizable. They are not going to do the usual ‘package’ system. Everyone will be able to order only the specific options they want. Up to/including a connected car system (see infiniteskyz(dot)com) with sensors connecting to an iPad mini.

    Construction: steel frame with composite body panels. With many of the other parts being ‘off the shelf’, existing components… except the motor. (Their motor is one based on the old, efficient Geo Metro 3 cylinder. Updated and improved.)

    Startup capital: This has been the main problem with them getting to production. They are accepting pre-orders and currently have over 45,000. (I am #2373)
    However, recent changes are opening up opportunities to non-accredited investors. They are in the process of offering one of the first Regulation A+ solicitations… with over $37,000,000 in “non-binding indications of interest” from almost 10,000 people so far. (see startengine(dot)com/startup/elio-motors)

    But, back to disruption. While Apple, with its mountain of cash, immense talent, great leadership, and unique will, can obviously effect the automotive industry… and probably will in many positive ways… I suspect they will run up against the main problem Tesla faces: The number of customers able to afford such a groundbreaking product. Can the top 20% truly disrupt an entire industry? They could easily skim much of the profit. And because of this, all eyes are upon them. Does disruption happen in plain sight, with all of the potentially disrupted focused and watching… and wary? (see Apple’s attempts in the TV entertainment market)

    I ask again, have you even heard of Elio Motors?

    Clay Christensen’s micro steel mills example springs to mind. Will established manufacturers want (or be able) to compete with a vehicle like Elio? Or will they ‘correctly’ choose to move up the margin ladder? Having a dedicated ‘daily driver’ that one is constantly wearing out and replacing would allow the second car to be higher end and more specialized or luxurious, actually encouraging the incumbents to move in that direction for the higher profits. (Perhaps even into competing with an AppleCar.)

    I think this topic would make for an interesting discussion on your Asymcar podcast.

    • TWF

      Elio is a toy which won’t have any serious impact.

    • Raphael Tongoona

      You can buy a decent used normal car for the price of an Elio

  • lantinian

    If a dominant fossil fuel based cars are the equivalent of the traditional phones Nokia made, Tesla could be the pioneer of Electric cars like Blackberry was with smartphone

    Could Apple similarly chose to target 1% of the market in its first year? That’s about 600,000 vehicle a year, or about 1,700 cars per day or 71 cars per hour assuming a 24h production cycle in today’s’ market.

    Assuming Apple decides to use iStream like process, just how many factories would they need to build to achieve such a production rate?