Summary
- We are quickly approaching a pivotal moment in Apple's history as technology and mobile are on a collision course with the automobile.
- The themes we see playing out over the next 10 years in the automobile industry will serve as the foundation for the next 100 years of personal transport.
- This likely means that Apple has no choice but to enter the automobile industry.
We are quickly approaching a pivotal moment in Apple's (NASDAQ:AAPL) history as technology and mobile are on a collision course with the automobile. While most would conclude Elon Musk's Tesla (NASDAQ:TSLA) and a few of the strongest automakers are the leading contenders of this new automobile era, Apple and Uber are the two companies best positioned to rule the new era of the automobile.
The Auto Industry Is Ripe for Change
Timing is everything. A few years too early and even the best product will fail to catch on with the consumer, while a few years too late and the best product will likely have already shipped. We are quickly moving towards a period where the auto industry is positioned for change.
Many are still not convinced Apple will enter the automobile industry because of doubt Apple can come up with a product that leapfrogs the best-ranked vehicle on the road today: Tesla's Model S. The problem with that thinking is that "better," when thinking about the future automobile, won't be defined by performance such as battery range, speed or acceleration. Instead, the primary innovation that will hit the auto industry will be shifting dynamics in which power moves from traditional auto manufacturers and car dealerships to technology companies that empower the consumer. Convenience and personalization will outweigh traditional performance metrics.
To rethink the automobile, one has to attack the current industry structure. Apple has had prior success with rethinking the way industries operate. The iPod, despite a revolutionary input method, did not become a mass-market success until Apple convinced the music industry to move to a $0.99 per song download model for long-term survival. The iPhone's biggest innovation may have been shifting the balance of power in the mobile phone industry from the carriers to Apple, something few analysts and pundits thought was possible. At the end of the day, Apple was able to position its products as the catalysts of change. This same type of "breakthrough" moment will occur in the automobile industry. Owning the manufacturing infrastructure capable of producing millions of cars will shift from a source of power to a liability. Instead, the power in the automobile industry will be found by the company owning the mobile ecosystem that empowers the consumer.
While many think Tesla is pushing the envelope in terms of altering the automobile industry, a closer analysis would reveal that Tesla is actually largely residing within the same structure, facing identical limitations to any other automaker, especially in terms of capital requirements and growth. Instead, companies like Uber are not only positioned to wreck havoc in the auto industry, but they are already causing much change. Uber isn't just a ridesharing app, but an aggregated demand phenomenon. Said another way, Uber is using the smartphone to match demand and supply for automobiles efficiently and cheaply. Uber is not alone as Lyft, its closest competitor, has seen some levels of success as well.
Many assume Uber will be the best taxi service in the world, but there are more important underlying trends taking place in the auto market. The automobile's value proposition is changing and few current automakers will be able to respond and remain relevant. Apple's ability to build experiences around style and a thriving ecosystem and Uber's ability to shift power back to the consumer represent the changes that will shake up the auto market the most since the Model T's introduction in the early 1900s.
Using the Model T to Determine the Future
Henry Ford had a very simple goal with the Model T: set the world free. Up to then, personal transportation was for the rich and privileged, which severely limited society's potential. The Model T was cheap, reliable, and utilitarian. These attributes were seen just by looking at the vehicle and its high-quality parts and high ground clearance to navigate a world with very few paved roads. Ford (NYSE:F) sold the Model T for the equivalent of what is around $5,000-$10,000 in today's dollars (the average price for a new car today is $33,000), a byproduct of pricing the automobile low to stoke demand, thereby making it cheaper to produce through economies of scale.
At the high point in 1923, Ford was selling 2 million Model Ts a year, representing approximately 50% of the vehicles on the road. The automobile was a tool for getting from Point A to Point B. Ford nailed the value proposition, and it seemed that the future was in his hands. However, there was one thing that he did not expect to happen.
Chevrolet introduced something that ultimately marked the end of Ford's dominance: different car styles. The automobile moved beyond just a utilitarian vehicle as people were buying new automobiles according to how they looked. Over the next 80 years this trend has only intensified. We now have an auto industry hungry for sales, segmenting the market according to not just style, but also performance and price. We went from a world where one model accounted for a majority of the cars on the road to one where buyers can spend months finding cars that best suit them.
Changing Value Proposition
The primary reason technology will alter the the automobile industry's power structure is that the automobile's value proposition will shift. We already see signs of this shift taking shape. The New York Times highlighted how teenagers can't wait until they turn 16 so that can have their own Uber. The way we value the automobile is changing. People who have never owned or driven a car may indeed hold the purest form of vehicles: tools to get us from Point A to Point B. Car ownership has likely corrupted those that have a car in the driveway, leading us to ignore the negatives and instead focus on the "positives" such as having a car at our disposal. Uber is beginning to expose those "positives" as thin attempts at finding purpose behind a large monthly expenditure.
There are outliers to this dynamic, such as high-end performance cars, but they aren't for the masses and don't represent the overall trend that is occurring across the world.
We are soon entering a period where a car's primary value will resemble that of the Model T, utility. People are once again starting to look at cars as devices that move them from Point A to Point B. However, technology has made it possible to improve on Ford's concept. The smartphone and software will make it possible to position convenience and personalization as the primary value attributes of personal transport.
Convenience
Uber is currently at the forefront of offering convenient personal transport. Using a smartphone (or Watch) to indicate demand for an automobile and then track the approaching vehicle on a map in real-time goes a long way in turning the vehicle into a commodity. Uber begins to question whether car ownership is the most convenient way of getting from Point A to Point B. The frustration with parking, maintenance, and the actual act of driving has its limitations.
This is bad news for automakers as the idea of ridesharing causes consumers to think beyond factors and attributes that automakers have spent decades building and marketing as reasons to buy their product. This shock to the system has similarities to the cell phone market when the iPhone altered what people expect and want out of a smartphone. One can now make the argument that the same thing is happening in the luxury watch market following the launch of Apple Watch. I'm convinced many other industries will follow a similar path as technology and software upend the status quo.
Personalization
There is one thing that Apple has the potential to excel at with an automobile: using hardware, software and services to personalize the driving experience. The ability to have the driver and passenger compartment adapt to one's lifestyle and personality is something that the world has never seen or even thought about.
Every subsequent technological breakthrough found in an Apple product has included a move towards becoming more personal. That trend will continue with the automobile.
Having a car be able to adapt to whoever is sitting in it, which makes more sense in a world where car ownership is on the decline, will be one of the most revolutionary developments the automobile has ever experienced. We are used to a certain level of customization in automobiles such as different seat positions, but personalization will add much more in the way of software to customization to produce an entirely new experience. A family with four kids and luggage has different needs than a commuter headed to work. Having a car that can adapt to both of these users in terms of seating, amenities, and not to mention technological needs and luxuries will be much more important than having a car that has fast acceleration or longer driving range.
Succeeding in Land of Disdain
If Uber's success and popularity aren't enough evidence that the world is ready for a new way of personal transport, consider the complete destruction of car culture in the U.S., where most of today's car loyalists still look at the 1950s and 1960s as the pinnacle of car fandom. Today people buy vehicles because they need to. There is now a certain level of disdain in the automobile buying market.
I have little confidence that the current fleet of automakers will be able to compete in an industry built on a different value proposition. Companies born in a mobile era such as Uber and Lyft are best positioned because they can extract value from a sea of commodity, where all of the cars are the same in and out. Mobile companies wouldn't be limited by car manufacturing which will represent a ball and chain. This is the primary reason why I fear Tesla, a pioneer in electric vehicles, may remain a pioneer because of its manufacturing facility.
Apple. The company that excels at selling experiences will rely on pages from previous playbooks with the automobile. Design will play a crucial element of any product from Apple with Jony Ive, Marc Newson, and the industrial design team playing a role in every piece that goes into the vehicle. Apple will rely on third-party contract manufacturers to assemble the actual electric vehicle. Mapping and other telemetrics will combine with a revolutionary personalization system to position the car to handle additional autonomous features including accident avoidance. I haven't even mentioned the innovation in terms of materials. In a sea of commodity, Apple knows how to build a pretty cool-looking vessel.
Uber. While a network effect has given Uber an increasingly valuable proposition for drivers (and users), I would expect the company to continue moving towards controlling key technologies that play a role in the Uber experience, such as mapping technology and navigation. The risk for Uber is being locked out of smartphones or operating systems in the future, the same fears held by Amazon and Facebook. This dynamic is made that much more interesting in an era where the entire automobile will controlled by an operating system. Uber's response may include eventually producing the entire automobile, relying on strong cash flow from ride-sharing to contract with a third-party to produce pretty generic commoditized vehicles.
Why Not Tesla?
Tesla's approach is largely confined within a legacy industry which represents its biggest challenge. While Tesla clearly has a lead in terms of software compared to other automakers, there are doubts that the company has enough resources to truly move beyond just performance-based metrics and begin to create an overall personal transportation experience.
Self-Driving Cars and Car Ownership
The automobile's value proposition will change regardless of self-driving cars. While there is strong evidence that truly autonomous cars are still many years off, the much more important aspect is that convenience and personalization (the new value drivers for the automobile industry) can be achieved in stages. A growing number of people already consider Uber as more convenient than owning a car, and this is in a world with no autonomous cars.
If self-driving cars do become a reality, then car ownership trends and the overall auto industry and will undergo such change in short order, it is difficult to truly conceptualize how many existing companies will lose relevancy overnight.
What About CarPlay?
Many people still think Apple's primary ambitions in the automobile industry are related to an expanded CarPlay where our iPhones will sync with a car's dashboard and infotainment system. On the surface, that plan sounds a lot easier than rethinking the entire car. However, there are several issues that are not being addressed. Putting CarPlay in a car not built by Apple is the equivalent of Apple putting iTunes on a Motorola phone in 2004. There are fundamental issues with not controlling the entire experience as the car manufacturer has a different value proposition than Apple.
Car manufacturers have not shown any willingness to lose major aspects of their vehicles dashboards and diagnostics to technology companies. Much of this is moot anyways because the overall auto industry structure is not altered one bit by just controlling the dashboard. To truly change the world, which is the only thing Apple would be focused on doing by entering the automobile, they need to embrace convenience and personalization and alter the way value is extracted from the automobile industry. That is only possible by owning the entire automobile including contracting out manufacturing to a third-party and owning the retail distribution.
The Next 10 Years Will Determine the Next 100 Years
The themes we see playing out over the next 10 years in the automobile industry will serve as the foundation for the next 100 years of personal transport. This likely means that Apple has no choice but to enter the automobile industry. The change that the auto market will undergo will have a number of important implications including the way cities are laid out, how we function as society, and how the car is just the beginning of how technology can impact our lives. Simply put, having technology companies control personal transport will be the start of controlling the home and other large portions of our lives.
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