Opinion: The Apple Car could run traditional automakers off the road
Jul 26, 2017
OUTSIDE THE BOX
By Vitaliy N. Katsenelson
Apple’s CarPlay system. Bloomberg News/Landov
Apple's brand extends far beyond technology and coolness. The company has accumulated incredible goodwill with consumers.
So whenever Apple (AAPL) comes out with the Apple Car, it will grab a disproportionately large market share from General Motors (GM) and other automakers precisely because of that deep well of goodwill. By the time my youngest child, Mia Sarah, who is almost two, learns to drive, internal combustion engines will likely be a relic consigned to museums (just like Ford’s Model T).
I had this “Aha!” moment recently when I visited a Tesla (TSLA) store and saw its cars’ power train. It looks just like a skateboard — basically a flat slab of metal (which houses the battery), four wheels, and an electric engine the size of a large watermelon. That’s it — the Tesla has only 18 moving parts.
Wall Street nowadays is going gaga over the stocks of auto dealerships (especially after Warren Buffett’s Berkshire Hathaway bought Van Tuyl Group) and automakers. I am in the minority in thinking that party will come to an end. Just like Tesla, Apple is not going to be using a dealership model to sell its cars. Just as with the iPhone, the company will want complete control of the buying experience.
If both Tesla and Apple bypass the dealership model, the GMs of the world will be at an even larger competitive disadvantage. They will have to abandon the dealership model too. Yes, I know, selling cars directly to consumers is not legal in many states, but if the U.S. Constitution could be amended 27 times, the law on car sales (which is an artifact of the Great Depression) can be amended as well. The traditional dealership model is unlikely to survive anyway, as its economics dramatically degrade in the electric-car world. A car with few moving parts and minimal electronics has few things to break. Consequently, electric cars will need less servicing, throttling the dealerships’ most important profit center.
What is also amazing about electric cars is that they aren’t that much different from smartphones. Smartphone prices have declined significantly because their components became ubiquitous and commoditized. The simplicity of electric cars and the declining ambition of Tesla, Apple, and whoever else enters that space to be known as a “car” company will likely lead to commoditization of components and thus lower prices. Tesla today is more a software and battery company than a car company.
Think back to the day when Apple introduced the iPhone. No one suspected that it (and the smartphones that followed) would enable a service like Uber, which is putting cabdrivers worldwide out of business.
The baby boomer generation romanticizes cars. Most boomers can recite the horsepower and other engine specs of every car they have ever owned. For the tail end of Gen-X (my generation) and Millennials, a car is an interruption between Facebook (FB) and Twitter (TWTR) . We know the brand of speakers in our car but if asked would have to Google its horsepower. We feel little romanticism for our cars and have much higher brand loyalty to Apple and Google (GOOGL) than to GM or Ford Motor (F)
When Apple makes its entrance into the auto industry, it will likely be successful and highly disruptive. After all, Apple has the much-needed software know-how to design a car. (Apple is already working with car companies on CarPlay, the iPhone-centered car infotainment system.) Apple boasts a global network of stores, possesses unlimited resources ($150 billion of net cash and $50 billion of free cash flows annually), and its imagination has not been damaged by decades of producing cars with internal combustion engines.
General Motors’ answer to Tesla has been no different from Nokia’s response to the iPhone.—
Let me stress that last point. There is a good reason why Nokia, which at one time was the dominant cellphone manufacturer, failed to compete with the iPhone. It had too much institutional knowledge. Nokia had hundreds of engineers who tried to add IQ to a dumb phone. The company was attempting to convert Symbian, a dumb-phone operating system, into a smartphone operating system. Despite Apple showing Nokia how the smartphone should look, the company couldn’t see its product as a smartphone but rather just as the next iteration of a dumb phone.
General Motors’ answer to Tesla has been no different from Nokia’s response to the iPhone. GM came out with the Chevy Volt, which was really one of its internal combustion engine (ICE) cars with an electric engine dumped in. Unless an ICE car company creates a silo unit isolated from the rest of the operation, it will be extremely difficult if not impossible to get engineers who have designed ICE vehicles all their lives to change their thinking and turn into electric-car engineers.
So, how does one invest in this overvalued market? Our strategy is spelled out in this fairly lengthy article.
Vitaliy N. Katsenelson is chief investment officer at Investment Management Associates in Denver, Colo.,and which holds a position in Apple. He is the author of “Active Value Investing” (Wiley) and “The Little Book of Sideways Markets” (Wiley). This article first appeared on Katsenelson’s Contrarian Edge blog.
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