Since reports began to surface about Apple's plans to get into the car business, Wall Street has been abuzz. Can a company that outsources pretty much all of its manufacturing to China really remake an industry where an average product costs about 40 times what an iPhone does? It would take a radical restructuring of both Apple's design-oriented, asset-light business model and the car industry's decades-old franchised dealer system and tightly-controlled manufacturing.
There are definitely reasons to find the speculation that Apple will be making cars plausible and intriguing. Others think Wall Street and Silicon Valley are exaggerating.
An Apple car would be far into the future, according to an analysis this week from Barclays. Apple isn't likely to have a car on the road until about 2020, if ever. As tech icon Peter Thiel famously said of the difference between Silicon Valley dreams and reality: "We wanted flying cars, instead we got 140 characters."
Here are five reasons Apple's dream of building a car seems likely to remain a fantasy, and five reasons to believe Apple might really do it. Channel your inner Apple CEO Tim Cook and see which list makes more sense to you.
1. It's the economics, stupid. They don't work.
Put simply, neither the profit margins nor the stock multiples of the auto industry look much like Apple's business. Apple turned each dollar of sales into 29 cents of operating profit last year, powered by 39 percent gross margins and relatively lean spending on R&D and even advertising for a company its size.
Ford turned $144.1 billion of sales into less than $4 billion of operating profit, a 2.3 percent margin. Its gross margin was less than a third of Apple's—in a great year for car sales. Ford's stock trades at 10 times this year's expected earnings. Apple's shares command 15.5 times—cheap for a tech company—but a lot for an automaker.
Would Apple want to be less profitable and less highly valued?
2. When did someone invent a contract manufacturing industry for cars?
Apple doesn't make iPhones, iPads or iWatches—they're outsourced to Asian contract manufacturers. There's no comparable base of manufacturers for cars.
If anything, the long-term trend has been for automakers to bring more work in-house, said Ascendiant Capital Partners analyst Theodore O'Neill. Electric-car darling Tesla Motors assembles its own cars, makes its own batteries and, like Apple, runs its own stores where it can. But Tesla has run afoul of state franchising laws that protect incumbent car dealers. Putting a mechanic at an Apple-store "genius bar" could be as hard to do legally as it is, well, to find mechanics who are geniuses. And a base of outside auto manufacturers would have to be built.
3. The rumors depend on a different kind of car industry—and a very different kind of car.
Morgan Stanley analysts Adam Jonas and Katy Huberty are big believers in some form of Apple car strategy, but making an Apple-branded car assumes other huge changes in car buying and manufacturing that haven't happened.
In a report this week (Jonas covers cars; Huberty covers Apple), the Morgan Stanley analysts emphasized that the "AppleCar" bandwagon is about cars that are both electrically powered and self-driving. Only 400,000 of the 88-million-plus cars sold globally last year were electric. None were self-driving, according to a Barclays report.
4. Apple can expand its business in cars even without making one.
Apple's business today is selling a combination of content (notably, iTunes) and advertising along with its hardware. Its CarPlay business is getting under way to deliver content to cars already, partnering with dozens of companies. By June, for example, any 2015 Hyundai Sonata with a navigation system is scheduled to be able to use CarPlay and its Android equivalent. By 2016 the service will be expanded to even more cars, and smartphones are expected to quickly replace cars' CD players and much of their existing navigation technology, Hyundai spokesman Miles Johnson said.
There are ways for Apple to get much more business than that from cars without making one, Huberty and Jonas said. CarPlay can lead to a role for Apple in reengineering other instrumentation and control systems or even designing cars' interiors, they write. That would let Apple take a bite of a more profitable part of car making—the software in the car—without making one. "It doesn't need to assemble the chassis, engine and seats to reach its goal," they said.
5. Cars aren't a growth business, at least in the developed world.
Annual smartphone shipments are forecast to grow almost 50 percent by 2018, according to Statista. They also see almost 20 percent growth in car unit sales by then, but those numbers depend on an expansion led by India, Russia and South America, and Russia and much of the Latin American world are struggling. Growth in Western Europe and the U.S., with their concentration of wealthier consumers who can afford advanced cars, is much lower. It's risky to bet on a capital-intensive low-growth business.
1. The people they're hiring don't make sense if Apple isn't building a car.
One headline that started the rumors was electric-car battery maker A123 Systems' lawsuit charging that Apple illegally hired Mujeeb Ijaz, chief technology officer of its venture technologies unit. By itself, that might not matter much: A123 also makes batteries for hand tools, and no one thinks Apple is going there. But Ijaz's 11 patents are all about how to integrate large-scale batteries with automobiles. "You would only hire this guy if you were making cars," O'Neill said. O'Neill pointed out that no other car maker has come close to matching Tesla's cost advantage in electric-car batteries. Apple has also hired former Mercedes-Benz R&D chief Johann Jungwirth.
2. The auto industry is ripe for disruption, and it's huge.
At $1.6 trillion a year, the auto market is four times as big as the smartphone business. "The world's currently richest, most valuable technology company will meet one of its most disruptable businesses," the Morgan Stanley analysts wrote. They emphasize that most of a car's major systems have changed little in decades.
Barclays analysts Ben Reitzes and Brian Johnson noted the car has so many different kinds of software that it's a "rolling legacy enterprise software environment," and Silicon Valley is set up to feast on legacy software.
3. The car is the untapped market for what Apple already does, and Google may go there also, pressuring Apple.
About 10 percent of people's free time is spent in cars, so naturally, people who sell content and ads want to reach them there. That's why both to link their smartphones more tightly with cars' electronics. Google has a self-driving car project but isn't expected to make its own cars. Though as Barclays analysts noted: "It doesn't seem to us that Google is necessarily interested in entering the automotive manufacturing business, but it seems interested in dominating the OS so it can augment its search experiences. Apple may need to pursue an iCar so that Android won't be the mobile platform of choice while traveling."
Over time, the percentage of a car's value attributable to software will also rise, up from today's 10 percent, according to the Morgan Stanley team, making ownership of the whole car more important. How high will it go? Maybe 60 percent, they guess, once self-driving electric cars are the norm. That will both improve margins and favor software companies, they argued. But that number is a pretty naked guess.
"It seems like a strategy to make sure Android (and its link to Google Maps) isn't the dominant operating system in the car over the long term," Reitzes and Johnson reasoned.
4. The margins may not be a problem if Apple can remake the industry.
Tesla should achieve 15 percent operating margins by the middle of the next decade, Morgan Stanley predicts. Apple should make better margins than traditional car makers because of its upscale brand and the fact that it would own most of the software that flows into its cars, Huberty and Jonas argue, and could get near Tesla's targets.
Plus, of course, Apple has $180 billion of cash.
5. The car of the future may play into Apple's hands, and sooner than you think.
Not many people buy—or seem to want—electric cars yet, let alone self-driving cars. But if the technologies do reach commercial scale within a few years, incumbent automakers won't have a huge advantage in making or selling them, Morgan Stanley analysts contend.
The electric-car market alone could hit $70 billion by 2021 and still be only 2 percent of total cars, according to a Barclays estimate.
In the meantime, Apple's stock is likely to depend more on how Apple does with the iWatch and its long-in-development strategies to deliver entertainment via television sets. But you don't get to be the world's most-valuable company without thinking ahead.
—By Tim Mullaney, special to CNBC.com