Apple vertical integration could boost 'Apple Car' margins, threaten Tesla

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Investment bank Morgan Stanley believes the "Apple Car" has an opportunity to drive down the normally razor-thin margins of the auto industry and pose a threat to Tesla.

Credit: AppleInsider
Credit: AppleInsider


In a web call with investors, Morgan Stanley lead analyst Katy Huberty spoke about rumors of an Apple-designed self-driving car or autonomous vehicle system. She answered questions alongside the bank's Chinese and European battery teams.

Speaking about Apple's vehicle opportunities, Huberty said that it makes sense for Apple to enter the car market because of the total size of the industry. Smartphones, Huberty points out, are a $500 billion total addressable market (TAM). Apple has about one-third of this market. But the mobility market is "$10 trillion."

"So Apple would only need a 2% share of this market to be the size of their "iPhone business," she points out.

One of the most important factors in Apple's potential entrance into the auto market is vertical integration, the analyst added.

"Apple really only succeeds when it's vertically integrated. This means designing the components and designing every part of the product how it looks and feels to the consumer, the software and the ecosystem that surrounds those products," she said.

Because of that, Huberty cast doubt on a partnership with another automaker. She also points out that Apple has already invested in areas relevant to an auto product, including operating systems, processors, batteries, cameras, and displays.

That vertical integration could even apply to Apple's extensive financing and trade-in service program, as well as AppleCare. "Financing and leasing and trade-in programs are incredibly important to a successful auto strategy," she writes.

If Apple controls every or most aspects of an "Apple Car," it'll have an opportunity to drive down the normally razor-thin margins of the auto industry. That's one sticking point confusing investors about the rumors.

"With respect to margins, investors frequently say that the current auto industry margins are highly unattractive compared with Apple's current mid-20% EBIT margins today. But I would remind everybody that when Apple entered the PC, handset and wearables market, the margins of competitors were razor thin," Huberty writes.

Through a vertical integration strategy and driving scale on a limited number of SKUs, Apple has shown an ability to "enter industries with low profitability and earn very strong margins. I don't see why autos would be any different."

"The auto market looks very similar to the industry structure and profitability of many other markets Apple has entered in the past," she adds.

Although the "Apple Car" story first surfaced years ago, Huberty says Apple is in a better position now because it's producing more of its components in-house. The move into a new market could also bring down Apple's churn rate to basically zero.

When it comes to the timing of an "Apple Car" release, Huberty notes that Apple is rarely first in an industry. A current timeline of four to five years out "makes sense, but it's certainly possible they come out a year or two later."

And it's possible that Apple could produce the car in the U.S.

"Tim Cook has said there will be other Apple products made in the US and a car would be a perfect example of that. When a product launches, usually over [half] of revenue would be in the US so you would want to manufacture locally in the US or Mexico from a logistics standpoint," Huberty says.

One of the bigger questions is whether Apple's vehicle would pose a threat to Tesla and existing automakers.

"The question is, is Tesla Blackberry or is Tesla Samsung? After the iPhone launch, Samsung was a very successful company alongside Apple for many years. And as the market shifted from feature phones to smart phones, Blackberry fell to the side even though they were early in the market," Huberty says.

The analyst adds that "there is an example where both Tesla and Apple could be successful for many years and help grow the market together."

Huberty maintains her 12-month AAPL price target of $144, based on a sum-of-the-parts model. She arrives at that estimate by applying a 5.5x enterprise value-to-sales (EV/Sales) multiple on Apple's product business and a 13.6x EV/Sales multiple on Services. That results in an implied 7x EV/Sales multiple for the 2021 fiscal year and a 32x enterprise value to free cash flow multiple.

Shares of AAPL were priced at $129.54 in intra-day trading on Thursday morning, up 2.33%.

Comments

  • Reply 1 of 17
    wood1208wood1208 Posts: 2,546member
    Thought Apple don't make product if there is no good margin unless fits strategically into long term benefits across the board products.That is benefit of vertical integration.
  • Reply 2 of 17
    By then Tesla is way ahead of the game, it would threatens other legacy car maker....not Tesla
    minicoffee
  • Reply 3 of 17
    Apple don’t have vertical integration on manufacturing. Apple design and hired companies to build and assemble things according to Apple’s spec. 
    On the other hand Tesla design and build most things in-house, sometimes in the same building. 
    n2itivguy
  • Reply 4 of 17
    They’re a decade behind on autonomous driving and data models.
  • Reply 5 of 17
    tjwolftjwolf Posts: 398member
    I don't think Katy Huberty's logic is quite right here: she says that it makes sense for Apple to build a car because the *mobility* industry is a $10T dollars, so Apple only needs a 2% market share to have a business the size of iPhone.  But Apple wouldn't bet building a "mobility" widget, they'd be building a "car" and the car industry isn't anywhere near $10T in size - i.e. Apple would need a significantly larger share of the car market in order to get another iPhone business.

    The second problem with her logic is that, by her own reckoning, Apple succeeds because it vertically integrates.  It was particularly successful with the iPhone in that regard, because its competition (Google/Android) did not.  But if it enters the car business, it'll already find a car manufacturer that's very established and very vertically integrated - Tesla.  So Apple's vertical integration, that helped it so much in the iPhone market, will just table-stakes when competing with Tesla.  And, as another poster already commented, we don't even know whether Apple can vertically integrate manufacturing, which Tesla has managed.

    My personal feeling is that Apple is several years too late in trying to take on Tesla.  If it wants to overcome that company's head start, it needs to either tightly partner with or purchase outright an existing car manufacturer and then use its massive financial resources to upgrade that partner to a level of efficiency  equal or greater than what Tesla has achieved.
    watto_cobraravnorodom
  • Reply 6 of 17
    mknelsonmknelson Posts: 830member
    They’re a decade behind on autonomous driving and data models.
    6 years at the most and even that's a stretch- Tesla didn't start introducing "Autopilot" hardware until September 2014. Project Titan started around the same time.

    Plus, all the years of Apple maps data, image recognition technology, etc.
    Beatswatto_cobra
  • Reply 7 of 17
    SpamSandwichSpamSandwich Posts: 33,408member
    mknelson said:
    They’re a decade behind on autonomous driving and data models.
    6 years at the most and even that's a stretch- Tesla didn't start introducing "Autopilot" hardware until September 2014. Project Titan started around the same time.

    Plus, all the years of Apple maps data, image recognition technology, etc.
    Apple has been partnered with “Didi”, the Chinese Uber and collecting driving data for years.
    Beatswatto_cobra
  • Reply 8 of 17
    BeatsBeats Posts: 2,532member
    Kuyangkoh said:
    By then Tesla is way ahead of the game, it would threatens other legacy car maker....not Tesla

    Blackberry is way ahead of the game! -Remember that?

    I wouldn't underestimate Apple.
    watto_cobraroundaboutnow
  • Reply 9 of 17
    MplsPMplsP Posts: 3,271member
    tjwolf said:
    I don't think Katy Huberty's logic is quite right here: she says that it makes sense for Apple to build a car because the *mobility* industry is a $10T dollars, so Apple only needs a 2% market share to have a business the size of iPhone.  But Apple wouldn't bet building a "mobility" widget, they'd be building a "car" and the car industry isn't anywhere near $10T in size - i.e. Apple would need a significantly larger share of the car market in order to get another iPhone business.

    The second problem with her logic is that, by her own reckoning, Apple succeeds because it vertically integrates.  It was particularly successful with the iPhone in that regard, because its competition (Google/Android) did not.  But if it enters the car business, it'll already find a car manufacturer that's very established and very vertically integrated - Tesla.  So Apple's vertical integration, that helped it so much in the iPhone market, will just table-stakes when competing with Tesla.  And, as another poster already commented, we don't even know whether Apple can vertically integrate manufacturing, which Tesla has managed.

    My personal feeling is that Apple is several years too late in trying to take on Tesla.  If it wants to overcome that company's head start, it needs to either tightly partner with or purchase outright an existing car manufacturer and then use its massive financial resources to upgrade that partner to a level of efficiency  equal or greater than what Tesla has achieved.
    I had the same thought. Her 'apple only needs a 2%' argument is a classic mistake people make. 2% may seem like a small amount, but what matters is what is achievable and at what cost.

    The other mistake is assuming that vertical integration will be an asset. People want vertical integration between their iPad and their iPhone. Not necessarily with their car, and equating a $50k-100k auto purchase to a smartphone or tablet is on oversimplification at best.
    watto_cobramuthuk_vanalingam
  • Reply 10 of 17
    1348513485 Posts: 190member
    Yes, Apple was "too far behind" and "too late" when it introduced:
    Mac
    iPod
    Macbooks
    iPhone
    iPad
    etc.

    There is no "too far behind". It's not a race, there is no finish line, it's a competition. The Big Three should never have had a worry about Tesla if it was a race because they've been making cars for over a hundred years. Of course, for all the noise Tesla gets, and how well it's doing (quality aside), it still has a minuscule market share. Besides, there will be in the next few years a federal mandate to make all charging stations compatible with a standardized EV plug (or adapter during the change period), so any small infrastructure advantage Tesla has there will disappear.
    watto_cobraroundaboutnow
  • Reply 11 of 17
    Like asking Foxconn to assemble the iPhone, don't manufacture the car for profit purposes, I'm pretty sure hundreds of car manufacturing contractors will come out in the next five years, focus on R&D on autonomous driving, driver interface software, battery and mechanical design
    watto_cobra
  • Reply 12 of 17
    mknelsonmknelson Posts: 830member
    mknelson said:
    They’re a decade behind on autonomous driving and data models.
    6 years at the most and even that's a stretch- Tesla didn't start introducing "Autopilot" hardware until September 2014. Project Titan started around the same time.

    Plus, all the years of Apple maps data, image recognition technology, etc.
    Apple has been partnered with “Didi”, the Chinese Uber and collecting driving data for years.
    Yes, I forgot about that! thx!
    watto_cobra
  • Reply 13 of 17
    Smartphones, Huberty points out, are a $500 billion total addressable market (TAM). Apple has about one-third of this market. But the mobility market is "$10 trillion.".....

    mobility in this case  referring to cars and personal travel, that should have been clearified 
    watto_cobra
  • Reply 14 of 17
    tjwolf said:
    I don't think Katy Huberty's logic is quite right here: she says that it makes sense for Apple to build a car because the *mobility* industry is a $10T dollars, so Apple only needs a 2% market share to have a business the size of iPhone.  But Apple wouldn't bet building a "mobility" widget, they'd be building a "car" and the car industry isn't anywhere near $10T in size - i.e. Apple would need a significantly larger share of the car market in order to get another iPhone business.

    The second problem with her logic is that, by her own reckoning, Apple succeeds because it vertically integrates.  It was particularly successful with the iPhone in that regard, because its competition (Google/Android) did not.  But if it enters the car business, it'll already find a car manufacturer that's very established and very vertically integrated - Tesla.  So Apple's vertical integration, that helped it so much in the iPhone market, will just table-stakes when competing with Tesla.  And, as another poster already commented, we don't even know whether Apple can vertically integrate manufacturing, which Tesla has managed.

    My personal feeling is that Apple is several years too late in trying to take on Tesla.  If it wants to overcome that company's head start, it needs to either tightly partner with or purchase outright an existing car manufacturer and then use its massive financial resources to upgrade that partner to a level of efficiency  equal or greater than what Tesla has achieved.
    I agree that Katy Huberty's logic is flawed. She seems to have missed the point that, while the addressable industry is $10T, the initial outlay and running costs for said industry will also be a lot more than the mobile industry and 2% may not be justifiable for Apple to invest. 

    Having said that, I do not think Apple needs to take on Tesla. For Apple to win, we do not need Tesla to lose. If Tesla is the future of the auto industry then the number of companies getting into that industry will grow, not diminish. 
    I cannot see why Apple cannot be one of those companies.
    roundaboutnowminicoffee
  • Reply 15 of 17
    MplsP said:
    tjwolf said:
    I don't think Katy Huberty's logic is quite right here: she says that it makes sense for Apple to build a car because the *mobility* industry is a $10T dollars, so Apple only needs a 2% market share to have a business the size of iPhone.  But Apple wouldn't bet building a "mobility" widget, they'd be building a "car" and the car industry isn't anywhere near $10T in size - i.e. Apple would need a significantly larger share of the car market in order to get another iPhone business.

    The second problem with her logic is that, by her own reckoning, Apple succeeds because it vertically integrates.  It was particularly successful with the iPhone in that regard, because its competition (Google/Android) did not.  But if it enters the car business, it'll already find a car manufacturer that's very established and very vertically integrated - Tesla.  So Apple's vertical integration, that helped it so much in the iPhone market, will just table-stakes when competing with Tesla.  And, as another poster already commented, we don't even know whether Apple can vertically integrate manufacturing, which Tesla has managed.

    My personal feeling is that Apple is several years too late in trying to take on Tesla.  If it wants to overcome that company's head start, it needs to either tightly partner with or purchase outright an existing car manufacturer and then use its massive financial resources to upgrade that partner to a level of efficiency  equal or greater than what Tesla has achieved.
    I had the same thought. Her 'apple only needs a 2%' argument is a classic mistake people make. 2% may seem like a small amount, but what matters is what is achievable and at what cost.

    The other mistake is assuming that vertical integration will be an asset. People want vertical integration between their iPad and their iPhone. Not necessarily with their car, and equating a $50k-100k auto purchase to a smartphone or tablet is on oversimplification at best.
    I think the term "vertical integration" as used in the article refers to manufacturing processes, where Apple has a high degree of control of all the pieces and parts that would go into the car (like they do with all of their other products). Whether the car "integrates" with our iPhones, etc. is besides the point (although I'm sure it will!).
  • Reply 16 of 17
    AI_liasAI_lias Posts: 402member
    Some points to be made: Tesla controlling a lot of the process will be hard to beat by Apple when having to use outside manufacturers. (Tesla wants to even get into mining)
    Apple car will be too expensive for most people, based at on their current product offerings. Sure, there are cheap starting pricing points, but impracticality stripped down to encourage upselling. 
    There’s plenty of opportunities for Apple to make boneheaded design decisions to make things more expensive in the long run, with a car. I don’t trust them on this. 
    I don’t trust them with designing a nice looking car either, for some reason. 
    On the upside, they have lots on money and money can buy a lot of talented people to switch over to Apple. We’ll see. 
    Autonomous driving has a long long way to go, for reliability and trustworthiness. 


    edited January 8
  • Reply 17 of 17
    badmonkbadmonk Posts: 995member
    I think KH is making sense here.  Tesla is starting to show it’s flaws, the fit and finish of their cars is not great and their styling is starting to feel dated.  The cockpits lack an integrated heads up display in the windshield and I can see Apple nailing this.

    I think Tesla will survive but they need real competition.  In terms of people not wanting vertical integration in their cars, I disagree.  I h would never buy or lease car that lacks Apple CarPlay or Android Auto which is why I would never personally buy a Toyota.
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