• riccardo

Has Apple CEO just told us the future of automotive? (not e-mobility)



 

Last week I was listening to the earnings call of Apple. An analyst asked the management of the company the following: “… can you talk about the framework that you use internally to evaluate new markets that might be attractive, and what you believe will determine your success as you look to enter new markets?”. Apple’s CEO answered with the following: “… thanks for not asking me any -- any specifics … the kind of things that we love to work on are those where there's a requirement for hardware, software, and services to come together because we believe that the magic really occurs at that intersection. …”


Here is the link to the transcript for the reader who is interested in the whole context of those pieces of phrases.


Now, we do not know whether the CEO was referring to any specific initiative they are currently evaluating, and we do not know the industry nor the sector that initiative would be in. However, we probably do not need to know either. Some of us might have read old and recent articles on the possibility of Apple working on a car of some sort. That is what I thought about while hearing that answer, even though it was just a wandering thought, and I have no idea about the possibility. However, that piece of information Apple's CEO gave us seems too strategic not to be leveraged in some way. What we might want to do, is to go through some what-if analysis, and try to answer something of this sort:


What if, among the several initiatives a company like Apple might be evaluating simultaneously at this moment, there was something within the automotive industry? Would they be generally right to search for opportunities bringing together hardware, software, and services?


I mean, " ... would it be a good solution in general?", not only because Apple is good on that intersection? Please note, I am not mentioning “electric vehicles” because the focus here is on the overall business, something too often discounted in recent articles. Focusing on the “engine” would limit the scope of the discussion.


To be honest, to some extent, this is not completely new within the automotive business. I had similar talks over lunch when I was there almost ten years ago. However, the assumptions were completely different and that is what we might want to change now. It is not only about asking whether automotive companies should make some sort of vertical integration by bringing in-house pieces of software-development and post-sales. We might want to think about whether they should put in place a process that in a few years can completely change the dynamics and the fundamentals of automotive companies. For example, if hardware, software, and services are brought together, what we are calling here “services” will likely be much more than what today are called "post-sales". It implies different people (not implying getting rid of current employees, please), different processes, and different go-to-market strategies. We might figure something out by asking: "if Apple were to focus on that, how would they do it?". Chances are, we would have to think about a new product intended for [almost] a different end-use.


Despite some app-integration and a little more, old car companies still appear as hardware businesses not much improved in the last decades if not for regulatory needs (mainly environmental and safety ones). True, some are trying to move ahead of the competition through interesting partnerships. The automotive industry is struggling and consolidating like many other hardware companies, in a world where successful players often sell software, services, and innovative hardware (i.e. technology). Overcapacity is an issue for existing players, but consolidation is not a complete answer to new entrants. Of course, I leave room for error not having entire visibility; automotive companies are likely much ahead of this post and they might already have better plans.


I was about to post this and I realized this was going to be the first post without numbers, which I thought was not acceptable. So, I am closing with a final thought: Tesla has recently reached a valuation (i.e. market capitalization) of about $800 Bil. In the world, about 70 M cars are sold each year, with China and the USA representing respectively the first and second markets making together about 50% of the total - close to Pareto? If we considered a common Taxi vehicle in China, the average MSRP or selling price would be about 20k USD, which would imply a worldwide car market of about 1.4 Tri (bottom-up figures might bump that up about 30%; sorry, those are the margins of error here; coherent with the discussion though. At a cash flow margin of about 10%, which is $140 Bil, a valuation of $800 Bil (the one Tesla reached) would be like saying that Tesla will conquer the whole market, and investors would discount its cash-flows like a perpetuity at about 17.5% (about x5.7 multiple) which is not out of reason. Therefore, CF value = $140 Bil / 17.5% = about $800 Bil - agreed, cash-flow margin and discounting might be different; cars are not even the whole "vehicle" market ... say, even 50% of the market might be enough. We might of course think investors went crazy, or we could think that this valuation was the exact one for when Tesla will conquer the entire market, or, the truth might be somewhere in the middle. In the case of a "middle" scenario, is tough to think Tesla is thinking of achieving that by just relying on automotive hardware; well, they are already doing other and related ...


I look forward to learning something by watching events unfold.



 

Required disclosure: I own Tesla and Apple shares. This post does NOT constitute in any ways investment advice.


 

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