Is Apple the new Ford?
The prior technology long wave (1908 – 1974) was powered at its core by the automotive technology where Ford jumped out to the early lead and then dueled with General Motors for the remainder of that particular tech wave. In several articles we wrote last year we expanded upon this macro model that these cyclical tech waves repeat themselves and that Apple is analogously “the Ford” for the current tech wave albeit not for cars, but rather computers and smartphones. Or is it?
Imagine our intrigue when we saw reports from the Wall Street Journal a few weeks ago that Apple has several hundred employees working on a secret electric car project code named Titan! The speculation has not dissipated since that report. In fact, just the opposite has happened.
Last week I saw the CEO of Volkswagen on CNBC saying in an interview that cars are more than just their electronic components. They are constituted through engines and many other mechanical parts. My thinking to this stone aged response was that Tesla is an electric car company created not by the big car manufacturers but a young tech upstart by the name of Elon Musk.
Musk’s electric car company – Tesla Motors – is already doing exactly what the Volkswagen exec said was completely impossible for Apple to accomplish. A tech company cored in electric technology is in fact making better electric cars than the big three. There is no doubt that the Tesla electric cars go much faster and further on a single charge than Ford, GM and all the other car companies combined.
Tesla, and now perhaps Apple, is betting that the paradigm shift in electric technology will have the same impact witnessed in the early 20th century. Steam engines were essentially replaced by internal combustion engine technology in the space of a few decades. I’m sure the executives of steam engine companies for shipping and railroads scoffed at the automotive industry during its nascent stages in the same derisive manner that the Volkswagen CEO did.
After all, Henry Ford’s first car was called a “quadricycle” which rode on four bicycle tires and barely achieved a top speed of 20 miles per hour using only two forward gears; it had no reverse gear. When steamship and locomotive builders saw images of Ford’s first automobile and of the creations of the hundreds of others tinkering with the internal combustion engine technology, I’m sure they perceived no threat whatsoever.
It was simply a stretch of the imagination much too far in thinking that those feeble and small engines could ever power monstrously large locomotives and ocean going vessels. But today if you want to see a working steam engine you must visit a museum, while automobiles are everywhere.
I also recall that Motorola made similar statements when Apple released its first smartphone. I hope none of you are still holding onto any of that Motorola stock (which peaked near $180 in 1999 and now trades around $65). For sustainability reasons and therefore for economic reasons electric cars, trucks and trains are in the future and will displace internal combustion technologies – eventually.
For us at STI the question is a slightly different one: It is a matter of when electric vehicles will evolve into machines which will ultimately displace fossil fueled technology. We are certain Apple is seeing this transition and is beginning to investigate where their technology can beat others, and more importantly, where they can enter the market to ride the wave in generating even more revenue and cash from this ongoing technology evolution.
At STI we are not thinking along the lines of other analysts who are speculating that Apple will attempt to build a car product as Tesla has from the ground up. No, Apple sees that the volume in sales are far too low right now to generate the kind of revenues and profits they require to keep their juggernaut moving. We further don’t see Apple buying Tesla. The cost for buying out Tesla due to Tesla’s capitalization is far too expensive today (note: Tesla’s market cap is approximately $24 billion).
So what do we think Project Titan is for Apple? We envision Apple seeing how far they can go with their current innogration model in taking share from the fragmented electric car market. Keep in mind Apple did not try to become the phone company when they released the iPhone. They focused on updating the technology to drive all the other smaller players from the market without trying to become Verizon or AT&T.
We suspect that Apple will never try to displace Ford or Mercedes Benz but rather co-opt the product supplies which those companies currently build themselves. Within the slope of technology innovation Apple has proven itself time and time again to understand that they don’t need to create all of the technology but rather to create the Apple ecosystem which envelops market segments and drives competitors from them.
Apple did not create all of the technology for the smartphone. They licensed some of those core technologies and built the missing pieces to enable their ecosystem. In so doing what they did was build a model where they generate enormous profit, many times greater than all of the competition. For that reason Apple will not build an electric car today. The technology has not matured to the point where the costs would not drain what they are focused on – profit dollars!
No, Apple will likely expand their technologies to move further into that market where, for example, their new Apple Watch could become the keys to every car just as they are working for it and the iPhone to become the payment system for every retail purchase you transact. My wife purchased a new car a few weeks ago and there is no slot for an ignition key. She simply leaves the key fob in her purse and her proximity to the car’s sensors does everything from remotely starting the car to unlocking it by a mere touch of the door handle.
In the not too distant future an Apple Watch might be programmed to do just as you do with a garage door opener to take on all of the functions which require close proximity to electronics for autos. Apple recognizes that the more central they make their products – be they iPhones or watches – the longer they can continue to deliver that magical lift in profit dollars. The economic benefits in innograting auto tech can, of course, go much further than this example.
A decade back Lincoln Continental allowed drivers to customize everything from how tight the steering was to the suspension. Most Lincoln owners were not interested in learning how, or were even oblivious to the fact that, their Continental could be customized at all. That feature disappeared as a result. With the advancements occurring within electronic technology the only things which might stay mechanical for cars and trucks in the future may be the transmission and the brakes.
Apple has always recognized where technology sits and leverages innovation and licensing to bring high margin products to market. Though I have not the first clue what Project Titan is, I am confident that it will be another endeavor to leapfrog competition in markets that are new to them or ones they are in today. Their unblinking eye looks for market opportunities that they can address with updated, and better, products.
Back in the mid 1990s Bill Gates, one of the founders of Microsoft, quipped that car companies were not innovating and that was the cause for their margin and quality erosion. A co-worker of mine in Poughkeepsie posted a response to the quip attributed to one of GM’s executives. Imagine Microsoft’s famous lockup screen – termed the “blue screen of death” – occurring when someone was driving on a super highway at 60 miles per hour. The list was a hilarious description of many common Windows failures such as the blue screen of death juxtaposed onto one of the most stable products ever invented – the car.
I bring this up because Apple always strives to make rock solid products. Products which have had a track record in failing far less often then the competitor’s product due to their level of innogration within the Apple ecosystem. While we can’t say at STI what Project Titan is, we can say most of the industry is taking it seriously. Apple has shown it can build products for new markets which are stable and leaps ahead in functionality and ease of use. This is why STI continues to see Apple as the premier tech stock in the world for years to come. It is in how they view opportunity and how they approach the market.