Apple’s Electric Car Dreams May Bring Detroit Nightmares

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What Will Apple’s Role Be in Electric Car Innovation?

Before Apple Inc. decides to move ahead with its Project Titan project and build an electric car, the company may want to look at the menu of challenges that come with being in the automobile business these days.

Apple has put a few hundred people, including some new hires from the auto industry, on a skunkworks project to do the early development of an electric vehicle resembling a minivan. Such a car would challenge Tesla Motors Inc. as well as electric and hybrid cars sold by Nissan Motor Corp., General Motors Co., Ford Motor Co. and other companies.

If Titan results in a real car, Apple must be ready for such challenges as growing safety rules and an ever-changing regulatory environment for zero-emission vehicles. And let’s not forget that electric cars generate low margins, and usually losses, that Apple’s profit-loving shareholders have rarely experienced.

“They weren’t in the phone business and succeeded, but the car business will be more difficult by two orders of magnitude,” said Erik Gordon, professor at University of Michigan’s Ross School of Business. “You can easily contract with a company in China to do the simple assembly of a phone but you can’t so easily do it with the complicated assembly of cars.”

Apple does have the advantage of a $178 billion cash hoard. That’s six times the cash Volkswagen AG has on its books and seven times what GM is carrying, according to data compiled by Bloomberg. In fact, that cash hoard alone could fund GM’s capital expenditures budget for 20 years.

The company is probably looking at several options and would be more likely to engineer the software that controls autonomous-driving cars or rethink the human control of today’s cars, said Jon Bereisa, CEO of consulting firm Auto Lectrification LLC who worked on the Chevy Volt program.

“It’s still a car and it’s very foreign to them,” Bereisa said in a telephone interview. “With autonomous cars, there will be more software, more computation and more controls and some of that could even reside in the cloud. They could work with car companies to put Apple inside.”

Private Location

Steve Zadesky, vice president of iPhone product design, is leading the car project, according to a person familiar with the project.

Zadesky was given permission to create a 1,000-person team and poach employees from different parts of the company, the Wall Street Journal reported Friday. Working from a private location a few miles from Apple’s corporate headquarters in Cupertino, California, the team is researching different types of robotics, metals and materials consistent with automobile manufacturing, the newspaper said.

The iPhone maker may be looking at the car business simply because it needs a way to spend money, said Sam Jaffe, a senior research analyst at Navigant Consulting Inc., in a phone interview.

“So how do they spend all of that cash?” Jaffe said. “They are going to have to enter into new markets. It’s inevitable that one of those markets will be automotive. The future of the car industry is how to replicate the design ethos of consumer electronics.”

While Apple is seen as being a design leader, that alone won’t make an electric car a great bet. Falling gasoline prices have pushed down sales of fuel-efficient cars. Nissan dropped the price on its electric Leaf to boost sales and GM lowered prices on the plug-in hybrid Chevrolet Volt for the same reason.

Electric cars are still a tiny portion of global sales. Nissan needed three years to sell 100,000 of its Leaf EV. Tesla’s record was 31,655 of the Model S last year in an industry that sells more than 100 million vehicles a year. The company plans to sell 55,000 this year and is still losing money.

Right Choice

There is even an open question about EVs being the right choice for the future, said Eric Noble, president of The CarLab, an automotive consulting firm in Orange, California. The California Air Resources Board, whose clean-air rules for cars tend to be adopted by many other states and also influence federal emissions standards, requires automakers to produce a certain percentage of zero-emission vehicles for sale in the state. They can be hydrogen fuel cell-powered, electric or hybrid vehicles.

Changes to the regulations now favor hydrogen-powered vehicles because they can be refueled faster than electric cars can be recharged and can often drive longer before needing to fill up. Also, state tax rebates for hydrogen fuel cells can be double that given to buyers of electric cars. These incentive programs may start to turn the tide toward hydrogen over electric drive, Noble said.

U.S. Effort

Both Toyota and Honda plan to sell fuel-cell vehicles in the U.S. this year. Toyota has wound down its electric RAV4 sport utility vehicle and Honda stopped selling the electric Fit subcompact.

“Another risk is that electric vehicles are in danger of being passed over,” Noble said. “You could argue that Honda and Toyota are already doing that.”

While electric cars may turn out to be the wave of the future, there is no question that they are a tough business now.

“For Apple, the problem isn’t paying to build the car, its getting a return on the investment,” Gordon said. “Shareholders and analysts will hate the margins and the distraction. They’re not even the cool, first player. They are following Tesla and Google.”

Google has its own self-driving car program and showed a prototype in December.

Tesla Losses

Tesla has racked up $1.3 billion in losses since 2008 and doesn’t expect to break even until 2020.

The carmaker has been blunt about the challenges and costs of high-volume manufacturing. In an earnings call with analysts on Feb. 11, Tesla CEO and co-founder Elon Musk said the company was going to “spend staggering amounts of money” as it delivers the first Model X SUV to customers this summer, builds the gigafactory for battery production and designs the Model 3 sedan, due in the second half of 2017.

“If Apple is starting now it would take a couple of years to catch up to Tesla,” said Ben Kallo, a San Francisco-based analyst for R.W. Baird. “Even after a car is designed, the competitors will have to source batteries in quantity and cost. Tesla is a couple of years ahead on this front.”

There’s another big challenge. This is a car we’re talking about. After many decades of building cars, even the auto industry’s venerable players like Toyota and GM have stumbled at the seemingly simple task of making all of their vehicles free of safety defects.

Government Fines

The Department of Justice fined Toyota $1.2 billion in relation to a 2009 recall of millions of its cars for a sticky gas pedal caused some cars to accelerate unexpectedly. GM is bracing for the possibility of a similar fine after recalling 2.59 million cars because the ignition switch could turn off while the car is in motion.

The fine is big enough that GM Chief Finance Officer Chuck Stevens said this month that the carmaker will likely delay a decision to return more cash to shareholders until after the company sees what its fine will be.

Dealing with government safety rules and investigations has gotten tougher and very expensive. The National Highway Traffic and Safety Administration is scrutinizing cars and safety issues more closely. While vehicle quality has steadily improved for the industry, last year saw a record number of recalls as carmakers contend with stiffer safety rules.

Carmakers recalled 64 million vehicles, which was double the record set in 2004, according to data from NHTSA. The agency’s administrator, Mark Rosekind, has vowed more vigorous oversight.

So why would Apple bother? Apple could just use its mastery of human-to-machine interaction and make drive controls or self-driving car technology, Noble said. That way they could profit from their expertise without the headaches of being a true carmaker, he said.

Musk has another thought that could explain Apple’s car project. On Tesla’s earnings call, before news of Project Titan became public, he said Apple is “just running out of ways to spend money. They spend money like it’s water over there and they still can’t spend enough of it.”

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