2016/06/01

Why Automakers Should Fear Apple, Not Tesla

Apple CarPlay in Volvo XC90
Tesla Motors TSLA -2.50% gets credit – deservedly so – for lighting a fire under the global auto industry, inspiring carmakers to speed up their product development times and to get serious about introducing long-range electric cars and new technologies like over-the-air vehicle updates.

But another Silicon Valley company, Apple AAPL -0.48%, appears to be spending billions on R&D for mobility, far more than Tesla. And unlike Elon Musk’s enterprising company, Apple has the financial firepower to sustain the pace, with $153 billion cash burning a hole in its pocket, more than the world’s 14 top automakers put together.

While the creator of the iPhone and iPad has never confirmed it is working on a car, there is plenty of evidence to suggest it sees the auto business as its next big opportunity.
The latest came from Morgan Stanley MS -0.91% technology analyst Katy Huberty, who studied Apple’s R&D spending patterns over the past 15 years and concluded that it’s pouring more money into shared mobility than it did when it launched its most successful product, the iPhone.
From there, she makes some pretty huge leaps of logic to conclude that Apple will own 16% of the $2.6 trillion shared mobility market by 2030, resulting in $400 million in new revenue (almost three times what Apple is believed to take in on iPhone sales).

Some of her analysis is flawed – for example, she claims Apple is outspending automakers on R&D by 20x. In fact, she is comparing Apple’sincremental R&D spending over the last three years with the auto industry’sincremental spending over the same period: $4.7 billion for Apple vs. just a net $192 million for the top 14 automakers. Tesla alone increased its R&D spending by $444 million during 2013-2015, she notes.

What this comparison fails to acknowledge is that automakers already invest billions of dollars on future vehicles and technology each and every year – this is their core business, after all – while Apple and Tesla are industry newcomers trying to get in the game. General Motors GM -3.77%spent $7.5 billion, or 4.9% of its revenue, on R&D in 2015 while Ford Motor F -3.60% spent $6.7 billion, or about 4.5%.

Apple, whose core business is mobile devices and software, spent $8.1 billion, or 3.5% of revenues, on R&D last year, according to its 10K, up sharply from the $6 billion spent in 2014. Morgan Stanley quoted slightly different figures ($8.5 billion vs. $6.6 billion) but the trend is clearly up. And that’s on top of a 33 percent increase in R&D from 2013 to 2014. For the record, Tesla (as you would expect for a start-up) outspent them all on R&D as a percentage of revenue: $718 million, or 17.8% of 2015 sales.

Nobody, including Morgan Stanley, knows whether the $4.7 billion extra that Apple has poured into R&D over the past three years is going entirely toward shared mobility, but the analyst makes a decent case.

She went back 15 years and looked at Apple’s R&D spending patterns ahead of major product introductions. Apple spent $1 billion ahead of the iPhone and the iPad, and $2 billion ahead of the iWatch. Now, suddenly, R&D investment is spiking – up 80% in the last two years, vs. 37% revenue growth. Clearly, Apple is gearing up for something big.
It’s a poorly kept secret that Apple is working on an electric car. But given that it leaves the manufacturing of its mobile devices to others, no one expects Apple to build its own cars, a notoriously low-margin business.

Shared mobility service, with its recurring revenue stream, looks far more likely. Earlier this month, Apple showed its hand with a $1 billion investment in Didi Chuxing, China’s biggest ride-sharing company, setting up a battle with Google GOOGL +0.12%, which is an investor in rival Uber.

Both Apple and Google are angling to gain control of people’s digital lives, whether at home, on their phone, or in their car. The two tech giants envision a model in which you don’t have to own a phone or a car. You merely buy a subscription to the services these devices provide.

That helps explain the feeding frenzy among automakers trying to pair off with ride-sharing companies, including GM’s $500 million investment in Lyft back in January, Volkswagen’s stake in Gett, and Toyota’s investment in Uber, among others. As Forbes contributor Bertel Schmitt points out, however, none of these mobility services could exist if the automakers didn’t manufacture the cars.

But to ignore Apple’s well-financed march toward mobility services would be a huge mistake for established automakers. The question is, will they be able to stop it?

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