What’s happening in auto manufacturing?

Apple has been working on the ultimate garage product for years. We’ve never seen it, but the company apparently has thousands working on it, has invested hundreds of millions of dollars in the effort, and some form of vehicle is expected in the next few years. According to the Morgan Stanley analyst Katy Huberty:

“In any new product category, there are other technology companies that are happy to bring a product to a market that maybe isn’t the prime time or a product that isn’t perceived to be perfect. Apple takes the other side of that. The strategy is about doing fewer things, but doing them really well, and increasing the chances of success.”

It remains possible Apple could abandon such plans because the challenges it is trying to solve are evolving rapidly. At the same time, the auto industry has begun a deep and unavoidable transformation in which its entire reason to exist must change. Before considering Apple’s approach, it’s important to consider the bigger picture of vehicle manufacturing.

Everything is being disrupted:

• Climate change means the industry has no choice but to abandon fossil fuels. A move to electronic vehicles in Beijing, for example, would make the city 2 degrees Fahrenheit cooler, though the overall benefits remain a little unclear.
• Replacing all existing vehicles is not an option, due to the need to preserve raw materials and the pollution created in manufacturing them.
• The cost of maintaining vehicles will grow. Some existing suppliers may not make the transition, and we’re also looking at fast-paced regulatory change.
• Autonomous vehicle development is hard. And as cars become autonomous, what we do inside them will also change.

Changing gears

It’s becoming more widely understood that all these changes will mean an initial increase in Electric Vehicles (EVs), followed by the emergence of truly Autonomous Vehicles (AVs). This transition will likely be accompanied by an increase in public transit and micro-mobility solutions, such as electronic scooters, autonomous transit systems, bicycles and so on.

City planners in some nations are attempting to nurture the use of personal transportation in this way by making it costlier and less efficient to take short journeys by car.

What this means is that many will find fewer reasons to need a car, the number of cars sold will shrink, and the reasons for owning a vehicle will change. Auto manufacturers know this, which is why many are investing in EV development, charging technologies and ride-sharing schemes.

Before it enters this space, Apple must try to answer the same questions every existing manufacturer is attempting to solve:

• How big is the auto market going to become?
• What will it be?
• What will cars become?
• What will we expect of them?
• And what about vehicle ownership?
• As the notion of public transport extends to include car and ride sharing, what will the high-end market demand?

Apple’s answer will be services

Huberty also noted:

“Apple is successful when they’re vertically integrated. They want a hand in the design, in how the software communicates with the hardware, what are the right components and technologies to use…. Apple will just as much focus on the other elements — building, designing, what that vehicle looks like, how the components and the software operate together—as it will on the services.”

The first part of Apple’s road trip, then, will be about getting its vehicles out there leveraging the design and consumer trust, with the services component — and inevitable developer platform — set to follow. You can see this model in iPod, iTunes, iPhone, and the evolution of the App Store, which turned iPhones into anything you need them to be.

What’s the business plan?

It seems safe to assume Apple will attempt to build an outstanding core product that is supplemented by a range of profitable services and accessories. So what can Apple build beyond that and where can it define margins?

Let’s begin with a touch of luxury. Anyone who has ever seen the Apple Watch strap display in-store will recognize the company dabbles in luxury.

That means part of Apple’s proposal will likely be various build-to-order and aftermarket vehicle upgrades: Seats and interiors, battery size, wheel trim and more. There are plenty of vehicle manufacturers who generate plenty of revenue with accessories and upgrades. Beyond the physical stuff, what services might be required in cars that eventually become autonomous?

Here are six ideas:

• I imagine part of Apple’s plan may emulate the economics of radio, so location-based ads, offers, and Maps-related technologies may sit around an in-car entertainment service. This also explains Apple’s own radio stations, its limited support for stations from outside its walled garden, and current investments in podcasts.
• The Apple Car Care service will be popular. I imagine this will provide subsidized repair, maintenance, and emergency services during the life of the vehicle for an annual fee.
• Owners who choose to enrol their vehicles in the Apple Car Share scheme to make a little money when their car is otherwise stationary will give Apple 15%-30% of the proceeds.
• Core software upgrades are likely to be made available for free, with additional functionalities made available as paid-for downloads.
• That’s also where the heavily vetted App Store may sit.
• Apple’s determination to create a closed-loop manufacturing system and its commitment to zero emissions means any vehicles it does put on the road will also see it make an additional direct and indirect local investment in clean energy supply.

But before it makes money on any of these services, Apple must get the car right – and this may turn out to be an incremental journey. Huberty commented:

“I wouldn’t be surprised if Apple comes to market with an EV, right? A car that looks similar to automobiles that are on the market today with a steering wheel.”

How do you differentiate on the hardware?

That’s something Apple’s teams have been working on for a while, with Apple already owning patents for hazard detection, AR windshields, suspension and braking systems, climate control and more.