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How Apple is responding to the $230 billion luxury car market



Bloomberg Opinion-If Apple is to succeed in car projects, it must target the $230 billion luxury car market. This may be the only way to satisfy investors. However, it is not an easy task to replace a 125-year old company like Mercedes-Benz.

According to a Reuters report last month, the iPhone maker has renewed its efforts to build its own cars, despite Bloomberg News’ disclosure on Thursday, although there are at least five years away from production. Since the project was launched in 2014, Apple has experienced many false starts. Due to the surge in costs, the focus has shifted from electric vehicles to autonomous driving technology, and then back to Apple. In 2016 and 2019, it laid off hundreds of employees. If CEO Tim Cook continues to move forward, he will face difficult choices about how to enter the marginal market.

Tesla Inc. (Tesla Inc.) has achieved all its success in the recent stock market, but it turns out that these defects stem from lack of car experience, repeated endurance of manufacturing difficulties and lack of production goals. Therefore, there is no doubt that, as my colleague Chris Bryant wrote, Apple will outsource manufacturing to third parties, such as Magna International Inc. (Magna International Inc.).

Sometime around five years ago, the Canadian company and Apple had nearly 1

00 employees working together to help guide the technology company through the engineering process. But the cooperation with Magna has never solved the problem of how or where to make cars.

This time, Magna is not the only choice. Foxconn Technology Group (Foconconn Technology Group) also began to get involved in the automotive industry, the latter signed an iPhone contract with Apple. Foxconn Technology Group established a joint venture with Fiat Chrysler Automobiles NV last year, and the Milan-based auto giant is merging with France’s PSA Group. Perhaps more relevant is that mature automakers are now very serious candidates.

Indeed, on Friday, South Korea’s Hyundai Motor Company appeared to confirm a local report that was in discussions with Apple before issuing a statement. Such cooperation can help solve some of the earlier problems faced by Apple components.

When it comes to consumer electronics, the California-based company is used to be the first to learn about the best technology. After all, it is the biggest player in creating profits for suppliers. For example, if Apple wants to exclusively use the latest advanced 3D sensor technology, then suppliers will contribute to the 200 million iPhones they are expected to sell this year.

As Apple learned in 2016, when it comes to cars, things are different. Since little is known about the number of vehicles expected to be sold in the first year or when they might happen, there is little incentive to require suppliers to provide auto parts when the automaker only provides any parts. Customers like Volkswagen will sell about 10 million cars that year.

Therefore, it makes sense for Apple to cooperate with an established team. Five teams stand out: Volkswagen, Renault-Nissan-Mitsubishi Alliance, Volvo SE and its Chinese parent company Geely Automobile Holdings Co., Ltd., General Motors, and of course, Hyundai Motors and Collaborative relationship with Korean counterpart Kia Motors. Hyundai Motor has developed an electric vehicle platform large enough to prompt suppliers to compete for contracts. Some people have expressed their willingness to make cars for other brands-Volkswagen has partnered with Ford and General Motors has partnered with Honda.

Nevertheless, while teaming can keep your fixed costs low, it poses a challenge in terms of profitability. Eric Noble, president of the automotive consulting company Automotive Labs, said that the cost of contract manufacturers is usually about 10% higher than that of self-built cars. The profit margin of automobile manufacturing is already lower than that of the iPhone. Bloomberg News reported in 2018 that Tesla’s gross profit margin on Model 3 may be about 30%. Apple’s gross profit margin on the iPhone is almost twice that of the latter.

The biggest expense of electric vehicles is batteries. Because of the fixed cost of raw materials, batteries cannot benefit from economies of scale. In the Tesla Model 3, batteries account for more than one-third of the total manufacturing cost, at about $13,000 per battery. If, as suggested by Reuters, if Apple can find a way to reduce costs with new battery technology, then car manufacturing will become a more attractive proposition. However, if the price is similar to that of Tesla, even a 50% cheaper battery may make the car’s profit lower than Apple’s iPhone.

Price is an obvious way to bridge the gap. Apple will not make mass-market cars. It must be a luxury car, and the price may need to be more than $100,000, especially if it has autopilot capabilities that use advanced lidar technology. In theory, this will be a similar pricing strategy to the iPhone, but in reality, it will target a completely different range of expenditures, which is not easy. Dyson, the vacuum cleaner manufacturer, realized that he needed to charge £150,000 (US$200,000) for each car and gave up his work on the vehicle.

Apple has a chance to become a serious car manufacturer. In terms of software and design, it has advantages over existing companies and may even make a leap in battery technology, although this advantage will not last forever. The best way to move forward is to bring the price point closer to Ferrari than Fiat.

The game started again.

This column does not necessarily reflect the views of the editorial board or Bloomberg and its owners.

Alex Webb is a columnist for Bloomberg Opinion, covering European technology, media and communications industries. He has previously reported on Apple and other technology companies at Bloomberg News in San Francisco.

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