Apple and “Big” Auto

What’s missing from the recent excitement over rumors Apple will move into the auto industry is a look at the details of how such a move could occur, and who will benefit. The biggest near term beneficiary of the move is likely a “legacy car company” (as ICE manufactures are tagged in many analysts’ reports) and its supporting partners.

On the surface, Apple’s move into the auto market is understandable, if a bit different than previous consumer products. The auto market is large enough to move the needle on Apple’s stock, and Tesla has proven the EV market for Apple while it is still unsaturated. Tesla also proved cars can be seen as premium tech products, a niche Apple likes to occupy as a frequent second (or third) mover. Plus, while demand is rapidly growing now for EVs, it will soar in the next five years. After all, who wants to purchase a car in 2025 at a premium price point that will lose almost all resale value by 2030? Then add in the compounding effects of possible near term regulatory action by the new US administration to approximate actions taken by EU countries with ICE sunsets as part of the return to climate treaty negotiations. This sets up high odds of rapidly decreasing ratio of ICE vehicle sales by 2025 and a near perfect market entry point for Apple (excepting light trucks, which will likely maintain their sales numbers longer).

Assuming the rumors are true, and Apple intends to enter the auto market with their own EV, Apple’s sizable (~200 billion USD) war chest enables several possible ways forward through two main approaches. In the first model Apple builds its own factories from the ground up. This gives Apple the advantage of building exactly what is needed, to the desired tech standards, and to the right scale. However, this creates outsized risk for Apple. The company has limited experience with in-house manufacturing, and even if the company uses its war chest to bring in outside talent, the potential cultural clash and missing executive skill sets create risk throughout the company during a rapid ramp-up to meet at scale production.

The other main, and more likely, option is M&A based: Apple uses a legacy ICE company as the foundation for its growth and expansion. Tesla pioneered a version of this path by purchasing the old NUMMI Toyota-GM facility in Freemont CA. As a company (then) still striving for profitability, the acquisition of a single facility made sense for Tesla. But now Tesla is struggling to ramp up global production, both for total numbers and to cut down on delivery times to book profit. The next logical step for a future EV manufacturer with deep pockets would be to acquire all or part of a legacy car company.

GMC’s market cap is ~60 billion USD, and Ford’s is ~35 billion USD, making one-sided joint ventures, or the outright purchase of manufacturing facilities and/or entire companies, easily possible. Legacy car companies have a global reach, established logistics chains (though ICE focused), and the facilities necessary to manufacture at scale. US headquartered legacy car companies provide a common language and legal framework in proximate time zones, without the possible hurdles of purchasing foreign national flagship companies. A US M&A event also serves as a political hedge against other anti-trust investigations and accusations of moving jobs overseas by spreading manufacturing jobs around the country in a manner similar to how defense contractors operate. Plus, it provides a potential lever to repatriate cash without a (or with a greatly reduced) tax burden.

Another potential option is using overseas cash holdings to purchase a non-US car company with a global reach. Considering how much cash Apple has in the EU, BMW with a market cap of ~60 billion USD seems a likely a potential. Plus, there are plenty of low cost areas in the EU to expand into for future manufacturing, avoiding risk and uncertainty with Pacific supply chains: Poland, the Baltics, Portugal, and Greece…all places with good sea and air ports, workforce, great food, and awesome low cost living conditions. Southeastern Europe (Czechia, Slovakia, Hungary, Slovenia, and Croatia) is an option too, but this area will likely have higher infrastructure improvement costs with reduced seaport options, though also with possible reduced entry costs via greater government support.

An M&A approach enables Apple to rapidly scale EV production while reducing the impact to their valuable culture. Holding the controlling interest of a legacy ICE manufacture will allow Apple to keep EV production as a separate business unit during rapid scaling, giving Apple time to learn and decide when/how/what to integrate with reduced pressure while still taking advantage of the car manufacturing talent embedded in the partner/target company. Plus it reduces the time Tesla has to continue to build its moat. Additionally, Apple can change facilities to EV production at a rate that allows them to learn, while matching the market’s the soon to be falling demand curves for various types of ICE vehicles and offset some of the EV ramp up costs.

This article is to open a dialog on EV growth strategy, and is not meant as investment advice. For that, check with your financial advisor, lawyer, etc before making any investment decisions.

I’m looking forward to reading your comments.

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