Apple and Tesla: Contemplating the Automotive Ifs

By Michael Comeau  FEB 19, 2014 10:30 AM

When Apple has meetings, people pay attention.

 


My original opening to this article read like this: Apple (NASDAQ:AAPL) is almost certainly not acquiring Tesla Motors (NASDAQ:TSLA).

But maybe it should.

It would be cool to imagine Elon Musk as Tim Cook's successor, wouldn't it?

On Sunday, the San Francisco Chronicle reported that Apple's top M&A guy, former Goldman Sachs (NYSE:GS) banker Adrian Perica, met with Musk (and probably Tim Cook as well) last spring in Cupertino "around the same time analysts suggested Apple acquire the electric-car giant."

This is easily the most exciting Apple meeting news since Tim Cook palled around with Carl Icahn.

So what's all the hoopla about? After all, corporate honchos meet all the time to do research, discuss potential deals, and socialize.

Well, it's simple. We all like to play guessing games about what Apple's up to.

The company needs new business lines as growth in smartphone and tablet demand slows.

The global automotive market is enormous. According to consulting firm IHS Automotive, global auto unit sales hit 82.8 million in 2013.

That means we can do some big-time fuzzy math -- if Apple can get $X worth of product in Y% of the market, it can bring in $Z revenues. Lots of us did this exercise when rumors about an Apple iTV were running hot and heavy.

So let's assume Apple enters the infotainment category, meaning it becomes the car's entertainment and control interface.

If we get really kooky, we can envision scenarios with Apple bringing in tens of billions of dollars:



The reality is far less exciting.

Let's look at Harman International Industries (NYSE:HAR), which supplies infotainment systems to both luxury automakers such as BMW (ETR:BMW), Audi, Lexus, Porsche (ETR:PAH3), and Mercedes parent Daimler AG (ETR:DAI), as well as mass-market brands like Toyota (NYSE:TM) and Chrysler.

Last quarter, it had $691 million in infotainment sales.

Apple would have to achieve 15 or 20 times that to move its revenue needle. That means moving down market to non-luxury brands, which doesn't make sense for a company that has never been in the volume business.

And in any case, Apple does not play well with others. Its entire business model revolves around controlling both hardware and software.

Risking attaching its interface genius to endless variations of other companies' hardware would be out of character to say the least.

Remember the Motorola ROKR?

So what's the solution?

I say it's going end-to-end and taking the whole enchilada. I doubt it's going to happen, but let's explore this idea.

The electric-car market is tiny and Tesla is even tinier. With projected fourth-quarter unit sales of 6,900, it's got a long way to go to even hit 1% of the global auto market.

But being small comes with growth potential.

And if we play the fuzzy math-game with full automobiles, we can assume a long-term revenue opportunity exceeding $100 billion, even with sub-5% automotive market share:



Unfortunately, auto manufacturing does not scale like gadget-building does, where there is access to contract manufacturers that can readily produce in big numbers. So when I said long term, I'm talking really long term. Years, if not decades.

Tesla would have to massively expand its production capacity, which would take a lot of time and money (fortunately, Apple's got mountains of cash).

Tesla also has a rabidly loyal customer base, bleeding-edge technology, and a highly charismatic CEO -- all Apple-esque qualities.

The biggest challenges would be cultural.

Could Tesla still be Tesla with a massive corporate parent?

And would Elon Musk be comfortable having a boss?

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Twitter: @MichaelComeau

Position in AAPL

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