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Meaningful Contribution

What if Apple did make a car? How significant could their products be? What would it take to influence the industry’s architecture?

The global market is forecast to reach 88.6 million vehicles in 2015 and there are many ways to segment it. One could look at geography or at product configurations or the emergence of new powertrain technologies.

One could also look at the participants.

In 2014 Toyota was the top selling automaker with a total sales volume of 10.23 million vehicles. The following graph shows the leading 15 producers and the percent of total production.

Screen Shot 2015-09-25 at 9-25-2.19.47 PM

 

One thing to note is the relative balance in market share. The top five vendors have volumes in a very similar range (9 to 12 million). Two vendors are at around 5%. Three are at 3%. To preserve this equilibrium the industry undergoes periodic merging and consolidation. Over the last half-century, there has been room for new entrants. Japanese brands entered between the 1960s and 1970s. Korean entries occurred in the 1990s and Chinese in the 2000s.

Screen Shot 2015-09-25 at 9-25-3.50.46 PM

 

Regardless of the entries, the industry has a high degree of centralization. Ownership is often more narrowly controlled through cross-ownership and licensing. French/Japanese, US/Italian/German, Indian/German/UK cross-over ownerships indicate a globalization of financing. Indeed, only a dozen countries account for over 80% of the production (less than 10% of nations produce significant numbers of vehicles).

This structure is driven by the cost structure of volume production. The production system dictates financing and location and time constraints which underpin all deals. None of the entries (Japan, Korea, China) did much to redefine the core industry architecture (resources, processes or priorities).

So how could Apple think different?

First, the model of production could be substituted with a modular approach. This would separate the engine/body/paint/assembly plant into a deeper supplier network where components would be sourced and tooling dependence would be reduced.This speeds up ramps, reduces capital expenditure, increases flexibility, and accelerates the cadence of product evolution. Essentially, the focus would shift away from manufacturing toward design, iteration, customization and experience engineering.

Second, Apple could change the distribution model. Controlling the relationship with the end user could allow a conversation which will reveal new jobs to be done.

Third, Apple could affect the vehicle’s lifespan and hence the financing/resale and inherent brand promise of car ownership.

These are fairly obvious business innovations and they are easily foreseen.But are they enough? Would they even “move the needle”?

To break into the top 10 brands would imply a production volume of at least 2.5 million units (about the same as Daimler ships today.) At 2.65 million and a price of $55k/vehicle Apple’s revenues from cars would total about $145 billion. This is roughly the sales value of the iPhone business today. Not bad. Maybe that would satisfy a financial analyst.[1]

Even so, would a top 10 rank in shipments change the industry’s structure?

When I first saw the iPhone I knew that nothing would be the same after it and that Apple was poised to dominate the phone business. For the Apple car to do a similar trick in transportation the product itself has to change the perception of what a car is. Today a phone is barely something one speaks into.

Approaching the operations side of the business with a clean sheet of paper allows a fresh and rational attack on the problem. But to really make a dent in the universe Apple also needs to change the product in ways that re-define what it’s good for. And this is supposedly why Apple gets into markets. To make a meaningful contribution.

Notes:
  1. Yeah, right. []
  • Luis Alejandro Masanti

    Good job trying to Think Different! Thanks.

    quote: ‘Second, Apple could change the distribution model. Controlling the relationship with the end user could allow a conversation which will reveal new jobs to be done.’

    Tesla —I think— is trying that with ‘factory sales’ and is having a hard time with dealers…
    The other idea that comes to me is a ‘leasing’ plan (do they need dealers in the USA?).
    Can the new iPhone Upgrade Program be a try-on on that idea?

    I think that it would be good idea to evaluate the value added by the platform (apps) to the car. In some sense, you can buy a $650- iPhone and then buy —say— $650- in apps. But it won’t happen in a car!

  • berult

    It’s not a matter of replicating the iPhone Story. It’s a matter of replicating the iPhone…period. Retrofitted to hit the road, …with a slight reconfiguring of its interior spacing to accommodate the end-user(s) as purposeful passenger(s). Outside-in, evolutionary-like mobility.

    Evolution once grew legs. It’s now on the threshold of growing, not reinventing the wheel. The millenium iPhone is, at this moment in time, on a single-gear roll; from now on, it is…ever more Homo sapiens sapiens-like…on an ever shifting role…

    • katherine anderson

      From a device that brings people together in digital space (from almost anywhere in the world and beyond), to a device that will bring people together in physical space. As you say, the AppleCar will be the iPhone replicated … period. From the Inside-Out to the Outside-In …. this is just the beginning of the growing evolution of mobility.

  • Bernard Desarnauts

    Great grounding data.

    Still puzzling to me to say the least.

    We know now thanks to Uber disruption that many (majority?) of us do not want car ownership and would be happy with a subscription to “on-demand” transportation. We also know that younger cohorts (e.g my 16 year old) has lots less interest in a car vs our generations.

    So why would Apple go and build a car even if it was 5 x better than Tesla etc? Rethinking the model, the key vectors are ownership/asset utilization and productivity/efficiency – aka if I am stuck in a car how can that time be more enjoyable/productive etc?

    I am not sold that they’re working on a car. I am sold that they’re working on transportation as key area of time spent which could be better used.

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

      The car market continues to grow. http://www.thestar.com.my/Business/Business-News/2014/04/16/Car-ownership-in-Msia-third-highest-in-the-world/?style=biz
      The Nielsen Global Survey of Automotive Demand found car ownership is relatively low across South-East Asia: 47% of Filipino households do not own a car, and the figure is 46% for Indonesian households.
      Malaysia, however, bucks the trend, with 93% car ownership, placing third in the world. The country also has the highest incidence of multiple car ownership globally with 54% of households having more than one car.
      Despite the overall low ownership, the region’s purchase intent is high.
      Indonesia, Philippines, Thailand and Malaysia all rank in the top 10 countries globally in terms of intention to acquire a car within the next two years. Around four in five Indonesian and Thai consumers (81% and 79% respectively) intend to buy a car within the next two years, as do three-quarters of Filipinos (76%) and seven out of 10 Malaysians (71%), compared to just 65% globally.
      More than nine in 10 Indonesian car owners (94%) intend to upgrade their vehicle when they are financially able, as do 89% of Filipino car owners, 88% of Malaysian car owners, and 86% of Thai car owners, compared to a global average of 78%.
      Only Singapore fell below the global average, with 74%.

      Many South-East Asian car owners also believe their car is an important symbol of success. Car owners in Thailand were more inclined than any other nation globally to view their car as a status symbol (79%), as were Filipinos (72%) followed by car owners in, Indonesia (67%), Malaysia (62%) and Singapore (54%).
      This compares to just 52% of consumers globally.

      • Steve O’Dell

        Maybe it’s Jony Ives, maybe it’s the whole team, but Apple is really good at finding the right process guys to do the heavy lifting and actual production. Sometimes it’s finding the right combination of price and capacity, like Foxconn. Sometimes it’s finding the right technical experts, like the metallurgical skills Watch needed. Reports are the Watch taptics came from two different manufacturers. Meanwhile, they’re assembling MacPros themselves in California. Seems like everything they build, they build in a slightly different way and in a manner appropriate for that particular widget.

        (I said maybe it’s Ives because I recall reading that as a college student he impressed his professors with his understanding of how the final product would be built, not just prototypes.)

        This could be the secret sauce in an auto line with goals of global sales. Switching from gas to electric makes the old factory and assembly line, which is then dependent on shipping final products, not necessarily the right way to do it. Car guys are saying, they’re not just going to walk in and figure this out. (Where have we heard that before?) But in the age of 3D printers, mastering the old ways isn’t always an advantage.

      • normm

        Maybe Ives just wants to design a car, and Apple wants to keep him.

    • Steve O’Dell

      Friend visiting from Alaska. Staying at my house while i was out of town. Texted her, how are you going to get to my house? Bus or Uber ? She said, WTF is an Uber? Is it like a Segway?
      Point being, I love the idea of on-demand cars, autonomous cars, shared vehicles, but they really only fit in the major metros. We are still a nation where folks drive a Ford F350 to work every day because once a year they tow an RV.

      • Space Gorilla

        Yep. Our rural area is chock full of trucks, mostly white Fords. Why are they all white?

      • Steve O’Dell

        Because the auto industry is awash in data and does nothing with it.

        One year they run short on paint and a certain region only gets certain colors. So they sell a ton of white trucks there. They just happen to have a right-out-of-college marketing guy who sees this and thinks, they must like white trucks there, so that’s all they order for the next decade.

        Wife was in an accident, bad back, had to replace both cars (the totaled one and the other one because the seats caused excruciating pain.) So I’ve been doing some intensive car shopping for four months now. Lordy, Detroit doesn’t know what it’s doing. I mean, engineering and design-wise, they’re fine. But data-wise, they’re clueless. Other than not selling pick-ups in NYC and knowing to ship 4WD to places where it snows, they have no idea what customers want and how to get it to them.

      • Space Gorilla

        Interesting. Growing up on a farm and having worked on many different vehicles, rebuilt engines, etc (as well as heavy equipment) I’ll add that I think the auto industry is pretty clueless on engineering and design as well. Cars could be far more reliable, far better built.

      • tmay

        White is the standard for fleet sales, and many dealers also sell the same vehicles to small businesses at a comparatively low price. The public is also happy with the utilitarian interiors if the price is right, so there are lots of sales to them as well.

        White is a great answer to a lot of SKU’s on the lot. but the margins are lower for the dealer; they want you to buy the metallics’ and model upgrades.

    • neutrino23

      We’ll see. They could be thinking of a boutique business, something that would sell maybe 100,000 cars. They could have fun, learn a lot about the business, test out new forms software products for transportation.

      Or they are playing the long game and are aiming for a very different form of product. Already many, if not a majority, of new cars are leased and not purchased outright.

      Leasing arose as a way to move more of the existing product. What if Apple designs a product to fit the financial model? They could make a car with the idea that it is coming back in 3 to 5 years. At that time various parts come off, new ones go on and the vehicle is released as a refurbished, “like-new” model. The electronics would be updated, perhaps some body parts replaced and the carpeting and upholstery replaced.

      It will be interesting to see what happens.

      • Bernard Desarnauts

        Hearing again Horace point on the humanization of Apple and the “torso” analogy, maybe it is in the end the ultimate product category to play in and prove that theory !

  • http://nmuppala.wordpress.com Nalini Kumar Muppala

    And this is what supposedly is why Apple gets into markets in the first place.

    typo?

    And this, supposedly, is why Apple gets into markets in the first place.

  • http://Marcos.Kirsch.mx/ Marcos

    “At 2.65 million and a price of $55k/vehicle Apple’s revenues from cars would total about $145 billion. This is roughly the sales value of the iPhone business today.”

    In terms of revenue, yes. What’s even more incredible is the margins Apple has been able to sustain on the iPhone. I know little about margins in the car industry, but I imagine they are low although not as much as the margins in the phone industry ex. Apple.

    I wonder what sort of profit margins Apple would be able to get for a car…

    • jameskatt

      145 Billion in revenue. 10 Billion in profit.
      Theses are slimmer margins than Apple is use to.
      But profits don’t drive Apple. Creating the best product to improve people’s lives drives Apple. So if creating the best car will do so, Apple will do a car.

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

      Profit is unique value creation.

  • jameskatt

    Note that Apple can simply buy BMW for 49 Billion and make it a subsidiary.
    Then Apple would have everything it needs to create cars.
    It can improve on BMW’s supply chain to improve productivity and profits.
    BMW makes 11 Billion in profit a year. So buying BMW pays for itself in a short time.

    • Space Gorilla

      I don’t see it happening, I’d say it’s more likely Apple is going to start from scratch and do most things differently. Buying an established player works against that. Unless BMW is about to move into methods of design and production that align with what Apple is planning. Then it would make sense. But how likely is that? Every car manufacturer today is doing a half-assed job of making cars. When I buy a vehicle I choose the least worst. It actually isn’t going to be hard for Apple to improve on the product.

      • Steve O’Dell

        They have said they’re going 100% electric in X years. Might be significsnt alignment there. And since BMW is next in line in this diesel scandal, they might get real cheap real fast.

      • Space Gorilla

        Maybe. But the How of building a car is what needs to change. Is BMW doing much on that front?

      • jameskatt

        If Apple owned all of BMW Apple can do what it wants with it including dismantling its gas car units.

      • Space Gorilla

        Yes of course, but why go to all that trouble? I absolutely could be missing something, but I don’t see what BMW has that Apple would need. And I don’t see why Apple would buy something they don’t plan to use, or something they’re only going to dismantle.

      • normm

        According to the original study over a year ago that said VW was cheating, BMW’s results were very accurate.

    • DarwinPhish

      BMW’s enterprise value is over $127 billion, so I doubt Apple could buy them for $49 billion.

      • jameskatt

        BMW’s market cap is $49 billion and falling with the Dieselgate scandal. Value is not the same as raw price.

  • Walt French

    Horace wrote, “Indeed, only a dozen countries account for over 80% of the production.”

    Roughly 70% of global GDP is accounted for by the top dozen nations. The auto industry’s concentration is not terribly different from global income, or manufacturing, I would presume.

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

      That may be true but that does not mean it’s right and should or will stay that way.

  • mithlond

    To be a fly on the wall when the discussions of jobs to be done happen/ed at Apple… We’ll have to watch the keynote and then analyse the product, of course. But it would be fascinating to watch that particular design process. /dreaming

  • Steve O’Dell

    Speaking of headlines that write themselves …

    http://www.macworld.com/article/2985276/car-tech/when-you-assume-the-problem-with-saying-apple-can-t-do-something.html

    There are headlines you can see in one day: “Apple Poaches Car Industry Employees” and “Apple Knows Nothing About Making Cars.”

    Did they hire amnesiacs?

  • Sacto_Joe

    Apple can assist in the improvement of vehicles. In fact, it already does. But just like there’s no value for Apple in making a TV display, there’s no value for Apple in making a turnkey automobile.
    From this simple reality, we can conclude that Apple is doing things in the vehicle area that play to its core strengths of computer hardware and software. Those “modules”, let’s call them, will then be offered for licensing, and the margins will be commensurate with other Apple high quality products. Apple will NOT be taking in revenue of $55,000 per car, it will be taking in revenue on the order of a few thousand per car. But it’s products will become ubiquitous, and won’t be limited to ~10% of the total market.
    And should Apple actually be the company that finds the “holy grail” of vehicles, an electric system that is competitive to the energy density and low cost of the i.c. engine, then it will be incredible indeed.

    • berult

      It’s all in the timing. To kill two ostriches with one rolling stone… And believe me, it costs me plenty to lay out this nature-averse metaphor before an eco-friendly gentleman.

  • Childermass

    Disruption by intent is problematic, at best.

    What were the processes that Apple were going through as they planned to get into the pocket phone market? Were they planning disruption? Massive profit share dominance? The obliteration of the significance of their other lines?

    No; they wanted to make a really, really cool and useful phone that discerning people would buy. They were prepared to reconsider everything and take a punt on what they thought would be ‘insanely great’. The punt was on because they were planning to take their income due to pocket phones from nil to something. (Did Jobs say 5% would be OK? O! Tempora. O! Memoria).

    There are three key circumstances that predicate success.
    1 You make something genuinely better
    2 The rest of the guys are a bit crap
    3 There is enough money to make fighting over the edges worthwhile

    Item 2 is the easiest (surprisingly): most businesses are complacent, comfortable and resistant to change. In other words, a bit crap.

    So now we come to cars. Can Apple make something that is really, really cool that discerning people would buy? Are the rest of the guys a bit crap? Is there enough money that the edges are worth fighting over?

    Yes, yes and yes.

    Will they, though?

    • neutrino23

      Good points. Remember though that they had already produced several versions of the iPod which had explosive growth and confounded critics and competitors alike so they had some experience in developing new products like this.

  • kbr88

    I don’t think any of your proposed “solutions@ are any different from what is being done today. The large automotive manufacturers developed a modular approach to manufacturing more than 20 years ago when they are starting outsourcing component manufacturing to Tier 1 and Tier 2 suppliers. Today, as much as 80% of a vehicle is made by 3rd parties and delivered complete to the vehicle manufacturerr fo final assembly. The auto brands focus on engine manufacturing, vehicle assembly, and sales/marketing. Increasingly they are also outsourcing core battery technology (for electric vehicles) to Tier 1 manufacturers. The distribution model also varies considerably by country. In fact, most manufacturers sell their vehicles via franchised dealers or via multinational franchise groups, who actually have the “relationship” with the customer. Although the car buying experience is relatively painful, try building and controlling your own distribution network when margins are 5% and not 35%. Finally, a large part of the car ownership experience is financed by the manufacturers and/or dealers. 30% of VW’s sales in US were financed by the company. in fact, 44% of VW’s 374bn Euro balance sheet is now accounted for by its finance activities and that business generated 2bn+ euros of operating profit.
    Having said all that, it doesn’t mean that Apple can’t be successful in the automotive sector. Perhaps it’s just the brand–Apple branded Tesla cars anyone?

  • ptmmac

    Key ideas for the Apple car: Low weight, electric powered, apple computing will connect to car seamlessly, security plan from Apple’s current experience with the iPhone, and 3 competing design teams are going to be working independently of each other. It is the last part that will make the quality of the car hard to match. Apple’s obsession with secrecy is more tied to controlling employees and the intra company network of rivalry and jealousy then it is about keeping the public from knowing about the ideas they are working on. Accounting silos are the real destroyer of customer care. Idea silos, which is what Apple builds protects each gestating idea while is polished by it’s own creators, are a different animal. The competition does not start before the product is done being designed. This lets each team develop it’s own vision for where things are going without getting competing ideas mixed up and confusing the focus of the designers. This is how Apple has always managed to keep the next iPhone new enough without losing the focus on design. Managers can then control the flow of information so each team gets what it needs from the other teams without getting the whole idea.