(TNS) -- It was just over a year and a half ago that the consumer technology and auto aficionado communities became jointly engulfed in a tizzy over a single rumor: Apple was going into the car manufacturing business.
If you’ve read this far, you probably already know the punchline: Apple is getting out of the car manufacturing business. More precisely, according to Bloomberg, it appears it was never actually in the car manufacturing business.
Hundreds of members of Apple’s once 1,000-strong car team, dubbed Project Titan, are gone. The program has been redirected at building self-driving programs that can be sold to existing carmakers as an Apple add-on, the way Pullman sleeper cars were sold to railroads more than 100 years ago as a branded luxury enhancement to transcontinental train travel.
It’s not my purpose to say, “I told you so,” although I and many other observers predicted from the outset that the Apple Car was likely to end up exactly where it seems to have landed. But it’s proper to revisit what experts said about Apple’s car venture in February 2015, when rumors of Project Titan first surfaced on the website 9to5Mac. That’s because the arc of the Apple Car bears important lessons for anyone seized by the impulse to declare a speculative venture a world-changing success before the rubber, so to speak, meets the road.
We can start by outlining the arguments that presaged spectacular success for the Apple Car. Apple was not merely going to enter the automaking business, but would reinvent the business. Although auto manufacture was by nature a low-margin business, Apple would transform it into a high-margin business. (Matt Yglesias at Vox: “If Apple makes a car, it will be a high margin car because Apple only makes high margin products.”)
To those who doubted that Apple could upend the car business by producing something revolutionary, the standard comeback was: Remember the iPhone? The iPad? The iPod?
There were just a few problems with these notions. Begin with the hype environment. As I observed at the time, Apple then was living in a PR sweet spot. The company had just recorded blowout quarterly financial results, driven by the successful iPhone 6 launch, with the new Apple Watch lurking on the horizon. Apple CEO Tim Cook was said to have a magic touch — never mind that his ability to emerge from the shadow of Steve Jobs had been initially in question. The euphoria didn’t last: The Apple Watch has been a relative yawn, and the company’s stock lost 30% of its value between early February 2015 and mid-May this year, before recovering some of the slide.
More importantly, the optimists underestimated the challenge of creating a car company from scratch, while overestimating the potential market.
There was no dearth of skeptics. Dan Akerson, ex-CEO of General Motors, reminded listeners that making a car was a burly undertaking: “We take steel, raw steel, and turn it into a car. They have no idea what they’re getting into if they get into that.” Carmaking couldn’t be outsourced to contract manufacturers, the way Apple hires China’s Foxconn to make its phone. For one thing, contract manufacturing capacity didn’t exist on the necessary scale.
Henry Blodget of Business Insider calculated that the entire worldwide automobile market of about 88 million vehicles a year wasn’t big enough to generate more than a modest boost to Apple’s annual sales and profit, which stood last year at $234 billion and $53 billion, respectively. Unless, that is, the company managed to seize enormous market share in autos while making vehicles with 50% profit margins. As Blodget pointed out, achieving either goal required superhuman skill and luck, but combining the two was well nigh impossible: You could build either niche products like Porches and Ferraris with sizable margins, or mass-market vehicles with razor-slim margins. Not both. Since Apple’s operating margin is about 30%, it must breach a high bar to match that in cars.
What the Apple fans also missed was that, traditionally, the really profitable technological advances in the auto industry were not in the vehicles themselves — every one is, after all, four wheels and a drive train — but in the manufacturing process. Henry Ford didn’t invent the car; he pioneered the assembly line. “If you want to find the next ‘big thing’ in automobiles,” observed technology analyst Horace Dediu, “look for a new production system.” (This is a challenge, by the way, also facing Tesla Motors.) Apple, whatever its virtues, is not a production company.
None of this means that Apple couldn’t contribute significantly to the automobile business and make money doing so. But the likelihood from the inception was that its involvement would be as a supplier to the industry, not a competitor.
The current rumors about Titan being retooled as a source of automated driving systems fits that expectation. Nor does it have to stop there. Apple’s CarPlay, an integrated automotive entertainment and communications system, could evolve into a desirable option for, say, your BMW. A luxury automobile with “Apple Inside”? That could be hit, and a profitable one yet.
©2016 the Los Angeles Times Distributed by Tribune Content Agency, LLC.