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Author: Winslow
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Word Count: 1,785
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While there have been constant reports about Apple’s plan to enter the automotive industry, I don’t think they will actually make a car. And even if they do make a car, it is likely to be insignificant to the automotive industry. Let me explain my reasoning and I welcome any private messages to discuss different views.
Apple, in our perception, is the company that enters an industry and dominates it. It has revolutionized industries such as portable music players, smartphones, and earphones. In these industries, it’s hard to find a product that provides a better user experience than Apple.
However, Apple’s past industry entries have been limited to the electronics hardware industry, which is drastically different from the automotive industry.
Let’s first look at the electronics hardware industry.
We can use Apple and Xiaomi as examples of high-end and cost-based pricing, respectively. Apple products are priced high (with smartphones averaging around 6,500 yuan) while Xiaomi products are priced based on cost (with smartphones averaging around 2,000 yuan). These different pricing strategies result in significant differences in gross profit margins, with Apple’s gross profit margin ranging from 35-40% and Xiaomi’s gross profit margin ranging from 10-12%. The difference between these margins is substantial.
Behind this difference is that Apple’s products support high-end pricing and high gross margins through an excellent user experience, while Xiaomi’s products support cost-based pricing and lower gross margins through a more accessible user experience. If we place the price range of the two companies’ products into the full range of product pricing, Apple’s products are priced at the top while Xiaomi’s products are priced in the middle.
Although Apple’s products are expensive while Xiaomi’s are more affordable, Apple still has a higher market share in the 2021 Chinese smartphone market, with 16% compared to Xiaomi’s 15%. This shows that despite significant differences in pricing, Apple’s high-end pricing can still occupy a large market share.
Now let’s talk about making cars.
If Apple wants to create a leading electric car, it will likely follow Apple’s consistent approach and near-perfectionist corporate culture in producing an excellent user experience that represents the industry’s highest quality car.
So, how much do you think this car will cost?
We can use Tesla as a reference point. Tesla’s core components are considered top-of-the-line in the automotive industry, but to be honest, the overall quality of the car is only average (for example: construction, interior, etc.). Tesla’s price is around 300,000 yuan and maintains a gross profit margin of nearly 30%.
With Apple’s quality requirements, such as those seen with iPod, Macbook, iPhone, and even AirPods, the cost of making an Apple car will definitely be higher than the cost of making a Tesla car. Therefore, the price of the Apple car will also be higher than that of Tesla.
With this qualitative analysis, let’s take a quantitative approach.We have to consider that if we aim for the craft level of the automobile industry, the pricing should be not just slightly higher than Tesla’s, but significantly higher than it. The pricing should at least approach that of some traditional representatives with excellent quality. Excluding some outrageous luxury brands like Bentley and Ferrari, Apple’s car should fall in the same range of quality and price as Porsche.
However, Porsche’s gross profit margin is less than 20%. If Apple wants to maintain the same gross profit margin as Tesla while keeping the high quality, pricing is likely to even exceed Porsche’s.
According to the market share of car sales prices in China: 30% are under 100,000 yuan, 25% are between 100,000 and 150,000 yuan, 17% are between 150,000 and 250,000 yuan, 17% are between 250,000 and 350,000 yuan, 8% are between 350,000 and 500,000 yuan, and 3% are above 500,000 yuan.
If Apple’s car is priced above 500,000 yuan (which is almost certain), even if it occupies the entire market of this price range, its market share will only be 3%. The possibility of one company monopolizing the entire market is tiny. Maybe more optimistically, Apple’s saturated market share at this price level would be around 1%.
It can be said that this market share has almost no influence on the automobile industry, far from Apple’s 16% market share in electronic hardware. If the product penetration rate is so low, it is almost impossible to disrupt the industry.
To summarize, if we aim for the high quality required by Apple in the automobile industry, the pricing will be high, and high pricing will inevitably lead to a low market share. In the automobile industry, high pricing greatly affects customers’ purchasing power and consequently the product penetration rate.
Therefore, although high pricing and market share can be achieved in electronic hardware, they cannot be achieved in the automobile industry.
Of course, if Apple’s car does not settle for a low market share, there is still a way.
— finding ways to reduce costs while maintaining high quality, thereby lowering pricing and increasing product penetration rate.
In other words, put great effort into reducing production costs. Invest heavily in component development and manufacturing, and dig deep vertically. This seems to be copying Tesla’s assignment.
But is it feasible, like Apple’s electronic hardware business, to outsource/procure production and components? Inevitably, the original equipment manufacturers and suppliers would make and demand reasonable profits, making costs higher. The gross profit margin would also decline.
Apple is faced with two roads.
The first is the high-pricing path, sacrificing market share for a tiny bit of market share is meaningless for Apple, with such great investment in car research and development.
The second is the cost-saving path, which requires Apple to have no shortfalls in an unfamiliar industry with little experience, allowing it to catch up with vertical integration of production and manufacturing, a professional course.Not to mention, no matter which path is chosen, there needs to be a series of supporting investments to keep up with the industry’s average level, such as service centers and charging networks.
Both of these paths are difficult to take, and the chances of success are really not great. Even the wealthy Apple company faces numerous difficulties in making cars, and the road ahead is extremely difficult. The market thinks too highly and simplistically of Apple’s car making ambitions.
Apparently, even the all-powerful Apple will encounter a brick wall.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.