There have been various media reports about Apple Inc. (NASDAQ: AAPL)’s possible entry into the car business as a manufacturer. The company’s recent hiring of automotive executives and insiders leaks have pointed to a possible Apple Car in the works.
Why Apple can easily get into the car business
Apple Inc. (NASDAQ:AAPL) has got nearly $178 billion in the bank, more than enough to build a car factory. The company could also get a running start into the car business by acquiring Tesla Motors Inc (NASDAQ:TSLA), a maker of all-electric cars. With a market cap of $26 billion, Tesla is an affordable company for Apple to acquire if it desires. In any case, Tesla makes cars that have fondly been described as smartphone on the wheels, making it a good part for Apple in the car industry.
The major challenge for Apple Inc. (NASDAQ:AAPL) is that auto industry doesn’t have good returns. Profit margins are low that even a healthy automaker such as Ford Motor Company (NYSE:F) earns profit that is only a tiny fraction of the total sales it generates. In the last quarter, Ford posted a profit of $855 million, less than 4% of the sales for the quarter. The other automaker that Apple may want to compete with directly, Tesla, suffered a loss of 10% of its sales. Apple is used to huge profit margins, posting a record $18 billion of profit in just three months.
The other potential challenge for Apple Inc. (NASDAQ:AAPL) in the car business is that it may have to antagonize franchise auto dealers the same way Tesla has done to sell its cars directly to consumers. Apple is not used to such confrontations because its mobile business gives it an easy time. The products are easy to ship to customers and returning them for fixing does not require elaborate transportation.
Reinforcing iOS ecosystem
Although Apple Inc. (NASDAQ:AAPL) has made something that looks like an oversized investment in hiring people with experience in the auto industry, the company may not be going into car business as a manufacturing. It is possible Apple is hiring to improve its CarPlay platform because for the company anything that reinforces the iOS ecosystem desires a good investment. One of the Apple’s key hires, Johann Jungwirth, worked on infotainment systems at Mercedes-Benz.