Apple’s brand extends far beyond technology and coolness. The company has accumulated incredible goodwill with consumers.
So whenever Apple AAPL, +0.43% comes out with the Apple Car, it will grab a disproportionately large market share from General Motors GM, -0.70% and other automakers precisely because of that deep well of goodwill. By the time my youngest child, Mia Sarah, who is almost two, learns to drive, internal combustion engines will likely be a relic consigned to museums (just like Ford’s Model T).
I had this “Aha!” moment recently when I visited a Tesla TSLA, +0.41% store and saw its cars’ power train. It looks just like a skateboard — basically a flat slab of metal (which houses the battery), four wheels, and an electric engine the size of a large watermelon. That’s it — the Tesla has only 18 moving parts.
Wall Street nowadays is going gaga over the stocks of auto dealerships (especially after Warren Buffett’s Berkshire Hathaway bought Van Tuyl Group) and automakers. I am in the minority in thinking that party will come to an end. Just like Tesla, Apple is not going to be using a dealership model to sell its cars. Just as with the iPhone, the company will want complete control of the buying experience.
If both Tesla and Apple bypass the dealership model, the GMs of the world will be at an even larger competitive disadvantage. They will have to abandon the dealership model too. Yes, I know, selling cars directly to consumers is not legal in many states, but if the U.S. Constitution could be amended 27 times, the law on car sales (which is an artifact of the Great Depression) can be amended as well. The traditional dealership model is unlikely to survive anyway, as its economics dramatically degrade in the electric-car world. A car with few moving parts and minimal electronics has few things to break. Consequently, electric cars will need less servicing, throttling the dealerships’ most important profit center.
Three Companies That Could Be Safe From Amazon
What is also amazing about electric cars is that they aren’t that much different from smartphones. Smartphone prices have declined significantly because their components became ubiquitous and commoditized. The simplicity of electric cars and the declining ambition of Tesla, Apple, and whoever else enters that space to be known as a “car” company will likely lead to commoditization of components and thus lower prices. Tesla today is more a software and battery company than a car company.
Think back to the day when Apple introduced the iPhone. No one suspected that it (and the smartphones that followed) would enable a service like Uber, which is putting cabdrivers worldwide out of business.
The baby boomer generation romanticizes cars. Most boomers can recite the horsepower and other engine specs of every car they have ever owned. For the tail end of Gen-X (my generation) and Millennials, a car is an interruption between Facebook FB, +0.25% and Twitter TWTR, -0.15% . We know the brand of speakers in our car but if asked would have to Google its horsepower. We feel little romanticism for our cars and have much higher brand loyalty to Apple and GoogleGOOGL, +0.18% than to GM or Ford Motor F, +0.09%
When Apple makes its entrance into the auto industry, it will likely be successful and highly disruptive. After all, Apple has the much-needed software know-how to design a car. (Apple is already working with car companies on CarPlay, the iPhone-centered car infotainment system.) Apple boasts a global network of stores, possesses unlimited resources ($150 billion of net cash and $50 billion of free cash flows annually), and its imagination has not been damaged by decades of producing cars with internal combustion engines.