There has been another rumor last week about a possible “Apple Car“ spread by the Financial Times and Wall Street Journal.
First I guess we could expect higher journalism standards from these two highly regarded media. Let’s be clear: the investigative work seems pretty light (for such big media shops) and the proofs are pretty much inexistent. My preferred one: “an anonymous email from an Apple employee.“
When you get to the point of writing that many Apple executives love cars to somewhat try to prove that they want to build one, this is – at best – laughable. I guess we can probably find car fans in 99% of Fortune 500 boardrooms, does it mean these companies want to build cars?
This does not mean Apple is seating idle with regards to the automotive market: CarPlay is a good example of that. So Apple is probably investigating further what it can do in the automotive arena and putting resources to that effect; however it does not mean at all the Cupertino company wants to build a complete, Apple-branded car.
Follow the money…
The biggest problem for a company like Apple to enter the car industry is not about making it happen it is about not hurting the profit of its current business.
Clearly Tesla and Qoros have started to prove (future will tell if that works) you can build a car company from scratch with enough investment. Apple surely has that war chest to make this happen. But transforming it into generous profit is a complete different story.
Today the EBIT (earnings before interest and tax) margin of most if not all car companies is under 10 percent. And Tesla – which is probably the most disruptive company today in terms of automobile products – has been until now losing money ($294 million in 2014 for a revenue of $3.2 Billion, up from a $74 million loss in 2013).
A leading premium car manufacturer such as BMW has a “target corridor“ for EBIT margin of 8 to 10% and many car makers are satisfied with 5 to 6 percent.
In comparison, the EBIT margin of Apple is nearing 30%. Consumer electronics companies can afford far larger margin than automakers, that’s a fact of life. The size of the product (manufacturing cost, transport, etc.), the ratio between hardware and software/services and many other elements play a role in this difference which would be too long to investigate here.
If Apple was to become a car maker, this would inevitably and seriously hurt its margin. There is probably enough room for growth in unexplored, adjacent consumer electronics markets without sacrificing its margin and dissatisfying its investors.