Apple fans are already hyperventilating with excitement about how much money Apple is going to make selling cars.
So let’s put some numbers around that.
What if Apple immediately builds a car business the size of, say, Porsche’s? How much more money will Apple make?
Well, Apple made about $US53 billion of operating profit in the fiscal year ending in September, 2014, a spectacular 28% operating profit margin on revenue of $US182 billion.
Porsche, meanwhile, made about $US2.6 billion of operating profit, an impressive (for a car-maker) 20% operating profit margin on revenue of $US14.3 billion.
So if Apple sprouts a car business the size of Porsche’s, Apple’s operating profit will increase by… 5%.
Wait — only 5%!?
That doesn’t sound like much.
What if Apple grew a car business the size of General Motors? How much extra money would Apple make then?
Well, General Motors sells a lot of cars, but it doesn’t make much money selling each one. General Motors generated operating profit of $US1.5 billion in 2014, about a 1% profit margin on sales of $US156 billion. So if Apple’s car business immediately became the size of General Motors’, Apple’s profit would grow by even less — by about 2%.
How about Tesla? Everyone suddenly thinks Apple should buy Tesla. How much would Apple’s profit grow if it bought Tesla?
Well, Tesla currently loses money, so Apple’s profit would actually shrink if it bought Tesla. But its revenue would grow by about 2%.
OK, but Apple doesn’t want to build a plebeian car business like General Motors’ or a niche luxury car business like Porsche’s or a profit-less car business like Tesla’s. It wants to build a huge, profitable luxury car business, like BMW’s.
So how much would Apple’s profit grow if it built a car business with the same size and profit as BMW’s?
BMW was projected to earn about $US11 billion in 2014.
So if Apple grew a BMW, Apple’s profit would increase by about 20%.
All Apple has to do to grow its profit 20% is to create a car business the size and quality of BMW’s.
And therein, of course, lies Apple’s real challenge. It’s most important and profitable product, the iPhone, is so fantastically profitable that it really is a one of a kind.
Apple fans presented with the numbers above will snort at your small-mindedness and argue that Apple will just do in the car industry what it did in the phone industry — produce a product so amazing that it suddenly destroys almost every other player in the market and earns vastly more profit per unit than any other car in history.
And maybe Apple will, in fact, do that.
But before you just take it for granted that Apple will do that, ask yourself a few things.
Such as how, exactly, will Apple do that?
By creating a snazzy new car design?
It had better be pretty snazzy, given that dozens of super-high-quality car companies with great designers spend every waking moment trying to do that. (Look at the Porsche above. It’s beautiful. Apple’s Jony Ive may be a design god, but I’d like to see how he tops that.)
Also ask yourself:
1) How much will Apple cars cost?
2) How many will Apple sell?
3) How much profit will Apple make on each one?
And as you’re asking yourself those questions, remember that cars cost a lot more than phones, that there’s no super-cheap Foxconn for car manufacturing, and that your typical iPhone customer will not be able to go out every two years and shell out $US50,000 or more for a new Apple car.
For some context, Tesla, a wildly successful new car company, has been in the car business for about a decade. Tesla sold about 30,000 cars last year, at just over $US100,000 a pop ($US3.2 billion of revenue). Tesla made zero operating profit on those cars, but it did manage to squeeze out a ~28% gross margin (similar to Porsche’s). This suggests that Tesla might be able to make some money someday.
So how much will Apple cars cost? And how many will it sell? And how much profit will it make on each one?
You be the judge.
But if you conclude that Apple will immediately sell tens of millions of cars and make tens of billions of dollars while competing with the likes of Porsche, Mercedes, BMW, Tesla, Toyota, Ford, Audi, Lexus, and other excellent car companies, I’ll have what you’re having. And I say that as a (happy) Apple shareholder.
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