Questions about the Apple Car and a Controversial Approach

 

 

Like the vast majority of people who like nice things, I love Apple products for their great design.  I am a car guy generally, and the Tesla Model S.  I bought one of the first 50 Tesla Roadsters, and the Model S.  Electric cars are cool.

The press is reporting that Apple is investing heavily in an electric car.  Marc Andreessen, usually right, thinks anything Tesla can do, Apple can do:

Screenshot 2015-02-15 22.13.06

 

Anyone with that many billions on the balance sheet can do anything — but big companies often fail at new initiatives.  “Roku is an amazing company, but if a raw startup can create a nice usable media player, of course Apple can create a nice, usable media player if it wants to.” This is true, but it doesn’t change the fact that my Apple TV is kind of lame.  There is a difference between “can do” and is “probably going to be successful doing” — success or failure is all in that difference.

Challenges of a Car for Apple

1.  Apple generally outsources production/manufacturing, to companies like Foxconn.  But there is no Foxconn for cars, certainly not for electric cars.

2.  Manufacturing cars is hard.  For all their faults, the major car companies have had 50+ years to refine the skill.  My Model S has had at least a dozen dealer visits in two years, half of them bugs:  leaky seals, door handles stop working, key stopped working, etc.  Same for friends and family – my sister got a new Model S a few months ago, and it’s already filled the trunk with water due to bad seals.  I’m not mad — I consider myself a beta tester for an upstart.  But I wouldn’t cut Apple that slack, and I think few in the mass market would cut Tesla or Apple that slack.

IMG_0255

My original Tesla Roadster (#49). Getting towed in for service. The Roadster was a deeply flawed car, I was blown away by how great the Model S was after the Roadster experience.

3. Apple likes to make the full price, best, high margin product you are happy to pay for, and in return generate great gross margins.  I am not sure this strategy is possible in cars.  Legacy manufacturers make nothing on the product, all on the service/trade-in/undercoating/finance.  Tesla has pursued the “figure out how to make money later” approach.  It would seem Tesla about breaks even on their sales of ~$100K sedans.  If this turns out to be a “many years of losing money to eventually make money business”, will Apple be OK with that?  If it turns out to be a “make no money on car sales, but upsell finanacing at the dealer, and make money on giant repair centers kind of business”, will Apple be OK with that?

 

What I’d Do if I were Apple

I’d ditch the electric powertrain.

Electric cars are cool — I love it, nerds love them.  Great torque from zero RPM.  Charge off your solar panels.

But, for 99% of car drivers, it’s not a game changer.  Internal combustion engines, refined over 100 years, work just great for them.  Maybe some day electric cars will move down the experience curve and be price/performance competitive with ICE, or even superior, but right now for Apple to build a car, choosing electric is 95% of the complexity and somewhere between a wash and a negative with most car buyers.

Advantages of Electric:  Cool and new, fast.

Advantages of ICE: cheaper, bulletproof engineering and refinement, unlimited range, large pool of companies to outsource production too, huge infrastructure of repair centers to outsource maintenance to, huge network of fuel stations.

At current gas prices, or even the gas prices of last year, there is no rational economic advantage to buying an electric car in 2015.  Maybe if you can fully charge from solar, but even then I expect the price premium and steeper depreciation will outweigh it.

There is a population of people who think electric cars are cool and will pay up for that, but I am certain that market will be saturated by Tesla (and others) long before Apple can get a car to market.

 

The Real Advantage of a Tesla

The more I’ve driven my Tesla, the more I believe that the real differentiator vs. regular cars lies not in the electric powertrain, but in the power of a car built from scratch, but a company with one man in charge who can greenlight smart decisions a committee might not.  What are these benefits?

*  Intuitive user interface via touchscreen for all aspects of car

*  Over-the-air software updates means your car keeps getting better every month

*  Unprecedented safety because the company took a fresh look at modern engineering methods, and rather than cost-engineering to a tolerable level of weakness, built a car that is ridiculously strong

*  Pioneering implementation of driver assistance and partial autonomy

*  Direct sales experience vs. franchised dealer

 

Having Elon at the top saying “How would it work in a perfect world?  Why can’t we do it that way?” — that has created a game changing automobile.  The electric powertrain?  Cool.  Impressive when you show it to friends.  Fun when you drive it.  But 95% of the brain damage to pull off the Tesla miracle was in the EV: batteries, charging, heat, range.  And the vast majority of consumers are past caring about speed, HP, torque in their car — we’ve past “good enough” about 20 years ago.

The 2015 Ford Focus, for example, is a pretty decent car.  The vast majority of Americans would have no issue with the acceleration or efficiency of a Focus.  If Apple put out a car that had a Ford Focus powetrain — identical to the 2015 Ford Focus in acceleration and efficiency — but had killer styling, Tesla-like safety, incredible electronics UI, purchase at Apple Store and deliver to your house  — and instead of costing $25,000, cost $40,000, wouldn’t they sell a kajillion of them?

Apple could get that car to market easily, many years before an electric car, with very manageable execution risk.  They could use third party parts suppliers, and even assembly.  There would be a minimum of invention required on the hardware, and they could maximally differentiate on the software, UI, and sales experience — all areas where existing manufacturers are extremely weak.

Tesla is stuck selling $100K sedans to rich people because the economics barely work at that price, and it will be a struggle to get to the mass market car segment even at breakeven, much less a big profit margin.  Apple wants to be a premium product, but if they are in cars, they will not want to be where Tesla is — a product that only the 1% can afford.

Why do something really hard, when the hardest feature is something only a few really want, and generates a lot of compromises for the average customer?  Why not go after the 99% of the market that is and will be non-electric for the next decade plus, and just do every part of the experience that customers don’t like about today’s cars better, in an Apple-like way?

 

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Written by Josh Hannah
Josh Hannah joined Matrix Partners after a career as a serial entrepreneur (Betfair, eHow, wikiHow.) Read more about Josh.

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