Come Monday, Apple is expected to release more details and launch plans for its latest product - the Apple Watch. Of course, the smart watch is nothing new, with the tech world having seen products from both small Kickstarter funded startups like Pebble and the more established players like Motorola (with their excellent Moto360) in the last few years. The hardware and battery life is expected to be along the same lines as the Moto360 (it is definitely expected to have a more "premium" feel), the software and functionality will also be on similar lines. But that's where the similarity will end. While Android Wear devices are estimated to have sold less than 750,000 units in 2014, analysts expect Apple to ship close to 20 million units this year alone. And some think the number could be higher, way higher.
But this is not the first time Apple has threatened to move in decisively on a nascent market and overhaul the category with its marketing, awesome supply chain capabilities and fanatic customer base. Take the very recent case of Apple Pay. Apple Pay is an NFC based mobile payment solution that was introduced with the iPhone 6 and currently only works with a limited set of devices (latest generation iOS devices only currently). It was hardly a revolutionary idea. The Google Wallet, Google's similar take on mobile based payments, has been around since 2012, but hardly anyone cared or used the darned thing. Apple Pay however saw enormous traction, with over 1 million cards registered with the service in the first 3 days alone and growing acceptance by merchants across US. Acceptance will only grow once the Apple Watch comes out.
And these are only two recent examples. Consider how Apple revolutionised the music industry (with iTunes), the smartphone industry and even the tablet market, and you will have an inkling of why carmakers might be losing sleep over Apple entering their domain. Apple has already tested the waters with its Apple Car Play system, essentially allowing your iPhone to take over the car's entertainment system (Google's competing Android Auto is the competition there). But Apple is never content to be a minor component player in any market it enters. And given its size, marketing and customer clout and financial and supply chain prowess, neither should it be. Because the truth is, the auto industry is ripe for disruption.
The Case for Change
The auto industry has essentially remained the same since Henry Ford cranked out his Model T way back in 1908. Oh yes, cars are now more powerful, more reliable, slightly more efficient and definitely more luxurious than they were back then. But functionally, cars remain metal boxes run by a fossil fuel based internal combustion engines. Imagine this, if someone from the early 1900s did land up in our time, the only contraption he or she would probably recognise without too much difficulty would be our cars. While almost every other industry has seen a revolution or two, the auto industry has plodded along, happy to produce small incremental changes year after year, a fancy headlamp here or a slightly more efficient engine there.
A lot of it has to do with high investment, low return and capital intensive nature of the business, which ensures competition is low. David Halberstam's excellent book, The Reckoning, gives a fantastic account of just how difficult it was for the likes of Nissan and Toyota to break into the top ranks of car companies. It took years, a heck of a lot of investment and sacrifice by a generation of Japanese to see these companies among the world's top automakers. But once they were among the elite, things reverted to type - in the auto industry, the more things change, the more they remain the same.
Change is imminent
But recently, with the advent of Tesla and more tentative advances into self driving cars by Google, change is afoot in the auto industry. It might not have the makings of a revolution yet, but the automakers can see what is coming. Tesla has set the benchmark for a well designed, high performance electric vehicle and they have done with zero "automotive" pedigree, lesser resources than the majors and a lot of chutzpah. But widespread acceptance is still far away, with a lot hinging on a national roll-out of a battery supercharger network and the gigafactory currently under construction. But they have shown how the coterie of automakers can be challenged by an upstart (read this account of how Tesla used OTA updates rather than recalls to fix safety concerns) and there's little doubt that Apple will use the Tesla template to fight the same battle (Elon Musk has already complained about employee poaching).
So why not hurry things along and just acquire Tesla? Because thats just not the way Apple works. Apple's acquisitions have almost always been like buying distinct pieces of a giant jigsaw puzzle rather than buying the entire puzzle themselves. And that's before you add in the finances. Tesla's market cap is currently 25 billion dollars and an acquisition will cost anything upwards of 40 billion or so, not exactly chump change even for Apple. If you then add up the cost of dialling up the supply chain a hundred times to suit the scale at which Apple likes to operate, you quickly rule out that possibility.
Hurdles Aplenty
Of course, this is not going to be a simple or, for that matter, a quick and profitable ride. The auto industry is riddled with protectionism, trade barriers, unionism and that's without even getting in to the hassles of setting up and running a car factory. Apple will have to be at it's manipulative, cajoling and consultative best to tackle the minefield of rules and regulations that beset the industry. In many ways, its a challenge that Apple is uniquely poised to tackle. As proved by its dealings with the entertainment industry (another industry notorious for its unwillingness to change), the telecom companies in the US and recently, the banking and payments industry as well, Apple has a way of sweet talking and strong arming various stakeholders in to seeing the light their way. But all this takes time, which is why the 2020 deadline for an electric car in production seems realistic.
The (dim) light at the end of the tunnel
But there are of course, positives at the end of all this for the likes of GM and Toyota (well maybe not for GM). First of all, Apple's car plans are a good 5-6 years away, enough time for the established automakers to get off their arses and start planning for the future (they have more notice than the likes of Nokia and Blackberry). Secondly, if the iPhone is an indication, Apple's entry will more likely than not, also serve to increase the market, with adequate space for existing incumbents (don't be surprised if Hyundai plays the same role as Samsung in the smartcar space). And thirdly, premium pricing and engineering will definitely have a big role to play, which is good news for the likes of Ferrari, BMW etc.
Granted, these are small positives to outweigh the potentially huge negatives that threaten the established order, but they are what the automakers should be immediately working on. Exciting and potentially turbulent times await some of the largest employers in one of the biggest industries in the modern world, but I for one, can't wait for what Tim Cook and Jonathan Ive have in store for us come 2020.
But this is not the first time Apple has threatened to move in decisively on a nascent market and overhaul the category with its marketing, awesome supply chain capabilities and fanatic customer base. Take the very recent case of Apple Pay. Apple Pay is an NFC based mobile payment solution that was introduced with the iPhone 6 and currently only works with a limited set of devices (latest generation iOS devices only currently). It was hardly a revolutionary idea. The Google Wallet, Google's similar take on mobile based payments, has been around since 2012, but hardly anyone cared or used the darned thing. Apple Pay however saw enormous traction, with over 1 million cards registered with the service in the first 3 days alone and growing acceptance by merchants across US. Acceptance will only grow once the Apple Watch comes out.
And these are only two recent examples. Consider how Apple revolutionised the music industry (with iTunes), the smartphone industry and even the tablet market, and you will have an inkling of why carmakers might be losing sleep over Apple entering their domain. Apple has already tested the waters with its Apple Car Play system, essentially allowing your iPhone to take over the car's entertainment system (Google's competing Android Auto is the competition there). But Apple is never content to be a minor component player in any market it enters. And given its size, marketing and customer clout and financial and supply chain prowess, neither should it be. Because the truth is, the auto industry is ripe for disruption.
The Case for Change
The auto industry has essentially remained the same since Henry Ford cranked out his Model T way back in 1908. Oh yes, cars are now more powerful, more reliable, slightly more efficient and definitely more luxurious than they were back then. But functionally, cars remain metal boxes run by a fossil fuel based internal combustion engines. Imagine this, if someone from the early 1900s did land up in our time, the only contraption he or she would probably recognise without too much difficulty would be our cars. While almost every other industry has seen a revolution or two, the auto industry has plodded along, happy to produce small incremental changes year after year, a fancy headlamp here or a slightly more efficient engine there. A lot of it has to do with high investment, low return and capital intensive nature of the business, which ensures competition is low. David Halberstam's excellent book, The Reckoning, gives a fantastic account of just how difficult it was for the likes of Nissan and Toyota to break into the top ranks of car companies. It took years, a heck of a lot of investment and sacrifice by a generation of Japanese to see these companies among the world's top automakers. But once they were among the elite, things reverted to type - in the auto industry, the more things change, the more they remain the same.
Change is imminent
So why not hurry things along and just acquire Tesla? Because thats just not the way Apple works. Apple's acquisitions have almost always been like buying distinct pieces of a giant jigsaw puzzle rather than buying the entire puzzle themselves. And that's before you add in the finances. Tesla's market cap is currently 25 billion dollars and an acquisition will cost anything upwards of 40 billion or so, not exactly chump change even for Apple. If you then add up the cost of dialling up the supply chain a hundred times to suit the scale at which Apple likes to operate, you quickly rule out that possibility.
Hurdles Aplenty
Of course, this is not going to be a simple or, for that matter, a quick and profitable ride. The auto industry is riddled with protectionism, trade barriers, unionism and that's without even getting in to the hassles of setting up and running a car factory. Apple will have to be at it's manipulative, cajoling and consultative best to tackle the minefield of rules and regulations that beset the industry. In many ways, its a challenge that Apple is uniquely poised to tackle. As proved by its dealings with the entertainment industry (another industry notorious for its unwillingness to change), the telecom companies in the US and recently, the banking and payments industry as well, Apple has a way of sweet talking and strong arming various stakeholders in to seeing the light their way. But all this takes time, which is why the 2020 deadline for an electric car in production seems realistic.
The (dim) light at the end of the tunnel
But there are of course, positives at the end of all this for the likes of GM and Toyota (well maybe not for GM). First of all, Apple's car plans are a good 5-6 years away, enough time for the established automakers to get off their arses and start planning for the future (they have more notice than the likes of Nokia and Blackberry). Secondly, if the iPhone is an indication, Apple's entry will more likely than not, also serve to increase the market, with adequate space for existing incumbents (don't be surprised if Hyundai plays the same role as Samsung in the smartcar space). And thirdly, premium pricing and engineering will definitely have a big role to play, which is good news for the likes of Ferrari, BMW etc.
Granted, these are small positives to outweigh the potentially huge negatives that threaten the established order, but they are what the automakers should be immediately working on. Exciting and potentially turbulent times await some of the largest employers in one of the biggest industries in the modern world, but I for one, can't wait for what Tim Cook and Jonathan Ive have in store for us come 2020.
