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Forget the rumor: Apple will never build cars

Rick Newman

Wouldn’t it be cool -- an Apple (AAPL) minivan, bringing Cupertino chic to the otherwise dowdy world of people movers?

That seems to be the fantasy of Apple fanatics who are rather liberally interpreting the news that Apple has hired several hundred automotive experts and started something called Project Titan to supposedly develop an electric car. Among the rumors: Apple design chief Jony Ive has a passion for cars and thinks most current models are dreary. The company already has a secret testing prototype (which happens to be a minivan) outfitted with all kinds of funky gear. And since Apple has been hiring talent from electric-car maker Tesla (TSLA), it can only mean an iCar will be coming soon to revolutionize …. something …. about driving.

The prospect of the wondrous Apple taking on General Motors (GM), Ford (F) and other doddering relics of the 20th century is an irresistible storyline. It’s also insane, and if Apple ever confirms it’s getting into the auto manufacturing business, shareholders should sell immediately.

There’s no doubt Apple (like Google (GOOGL), Sony (SNE) and others) is deeply interested in the market for automotive software, especially the information and entertainment services that are becoming integral to the driving experience. The typical driver spends hours in the car each week, and that time is highly valuable to information providers that compete viciously for mere minutes of consumer attention. "This is a big opportunity for Apple and Google," says analyst Mark Boyadjis of IHS Automotive. "They're trying to gain access to that time and the user experience mechanism that keeps the driver engaged." 

Car buyers can already use Apple’s CarPlay feature on certain models from BMW, Chevrolet, Ford and others. But CarPlay, which only works when you plug an iPhone into the vehicle, is a sort of first-generation workaround compared with the integrated software some futurists think will be commonplace in a few years. Imagine an iPhone embedded in the car, operating everything from your lights and garage door opener at home to your trip planning on the road to the car piloting itself under certain conditions. 

As more cars offer Internet access, automotive software will become the gateway connecting drivers and their passengers to the outside world, and vice versa. At the moment, automakers are calling the shots because they build the cars, after all, and it's their software that controls most critical functions. Apple and Google see automobiles as the next huge prize for tech companies that specialize in connectivity, and want as much of that market as they can get.

Most Apple customers don’t realize that the ‘i’ in iPhone (and iPod and iPad) is supposed to stand for seamless integration with the Internet, as Walter Isaacson reported in his biography of Apple co-founder Steve Jobs. That makes cars an ideal platform for the kind of technology Apple already produces.

A cumbersome business model

Manufacturing cars — like, on an actual assembly line -- is an entirely different business, and an almost indisputably worse one than the business Apple is already in. Apple’s profit margin, for instance, is 22%. Its tightly controlled lineup of a few basic products generates phenomenal scale. Apple builds almost all of its products in China and other low-cost countries, where it doesn’t have to tangle with labor unions or western-style safety and environmental rules. Its products are lightly regulated consumer gizmos that are easy to ship and rarely need to be recalled.

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Toyota (TM), the world’s most successful automaker, has a profit margin of 7.6%, by comparison, which is just one-third of Apple’s. Like most big car companies, it builds vehicles all over the world, to minimize the risk of exchange-rate gyrations and satisfy demands in many countries for locally assembled vehicles. In addition to managing a massive manufacturing footprint, Toyota must abide by strict safety and environmental rules that vary from country to country and even within the United States.

Because the typical car consists of more than 20,000 parts, costly recalls are a cost of doing business, even when suppliers such as Takata cause the problem. On top of that, every automaker must contend with a constant stream of lawsuits from customers who get hurt or killed using their products, even when the product works exactly as designed. And even mighty Toyota is highly susceptible to recessions, since car purchases usually tank when companies cut jobs and consumers hunker down.

Why would Apple ever get involved in a low-margin, high-risk business like car manufacturing? Oh, right -- because Tesla has proven you don’t have to be a big established player to make compelling cars. Of course, Tesla has also proven how hard it is to turn a profit in the car business. Tesla is so disruptive that it lost $294 million in 2014 and has never turned an annual profit in the nine years it’s been reporting numbers. CEO Elon Musk says Tesla won’t be profitable until 2020, and some analysts think it will take longer. Even so, rumors have persisted for more than a year that Apple wants to buy Tesla, as if Apple's profit stream is too predictable and it needs the volatility of a money-losing manufacturing division and an experimental "gigafactory." 

The difference between building cars and building phones or computers is that it can take decades to scale a car company up to profitable size, with all sorts of complexities that could kill the company along the way. Apple, by contrast, went from being a Tesla-like newcomer in the smartphone market in 2007 to commanding 48% of the U.S. market in 2014. That share is the equivalent of GM, Ford and Chrysler combined in the automotive business. So unless Apple can somehow transform heavy manufacturing into digital magic, it would be sacrificing everything shareholders love about the company by building cars. CEO Tim Cook surely realizes this -- he’s a supply-chain genius who knows a cumbersome business model when he sees one.

Specific opportunities for Apple

It still makes sense for Apple, like Google, to build prototype vehicles, perhaps even a fleet of them. This is probably why Apple is hiring a lot of automotive talent. Automotive software isn’t something you strap onto a car at the end of the assembly line (like CarPlay). To work right, it has to be integrated into a vehicle from the outset as part of a development process that can easily take five years for a single car. And it’s the automakers who have the leverage — not Apple — because they’re already building cars with user interfaces that are pretty darn... well, there’s the opportunity for Apple.

Many in-vehicle information systems have turned out to be overcomplicated assemblages of buttons and menus that leave drivers mystified and frustrated. Ford’s Sync system — developed with Microsoft (MSFT) — was a particular flub. Apple excels at the kind of streamlined experience that would be ideal in a car, where the driver is supposed to be watching the road, after all.

But no automaker is going to hand over the design of its cabin to Apple, simply because it’s Apple. So Cook & Co. need to develop some automotive expertise in order to compete with other suppliers that are chasing the same prize and have business relationships with the automakers going back decades. Building one prototype out of a minivan is barely a start. Building 100 or 1,000, however, and driving them around all over the world, might yield insights that could make Apple a serious partner in the auto industry.

Meanwhile, Cook may wait years to spell out what Apple’s automotive ambitions really are, since the sort of Applemobile rumors already swirling keep competitors off balance. That means we’re likely to catch glimpses of many “iCars” that will fuel a lot of eager anticipation. Just don’t expect one to materialize in showrooms.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.