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Apple Car Project Should Be Less Secret Than It Appears

July 28, 2016
A car isn't a product that Apple can just cook in a lab for 10 years until everything is perfect and then spring it on the world with a dramatic on-stage reveal. 

The tech world has been fascinated for months by Apple's work on its own car in a project not-so-modestly dubbed Project Titan. Years before an Apple car might hit the roads, though, the company is hitting some speed bumps.

Apple is shifting strategy a bit to prioritize self-driving car technology, though it hasn't given up work on designing and making its own car, my Bloomberg News colleagues reported on Thursday. Rather than sell an iCar, then, Apple is leaving itself room to license its technology to other carmakers, buy an auto manufacturer or find some other way to bring the automotive world a little Apple magic. 

It's clear from this internal shift that Apple is still trying to find the right approach to bring its vision of transportation to market. Nor is it clear how Apple will make money from its car project. An iCar is something that would fit with the company's existing business model. Apple has long sold bright, shiny objects and a car would be just another bright, shiny object.

But if Apple changes tactics, how does that fit with Apple's business approach? Will it become a software-licensing business like Microsoft? Will it make the self-driving car system available to automakers free--as Google does with its Android smartphone software--in return for getting Apple Music and iMessage into cars? Maybe Apple isn't completely sure yet, which is fine. We want companies to be working on big things and worry about the money-making schemes later.

But the company has to grapple with a seemingly intractable problem. If it plunges full bore into the car market, it will be a drain on Apple's famously fat profit margins. Apple's gross margin, or the share of revenue left after paying manufacturing costs for its products, was 39% in the last nine months--an unheard-of level for a company that makes hardware. Apple's operating profit margin was 29%, a key reason why even in a down year Apple's $7.8 billion in net income in the June quarter was bigger than the yearly net income of 95% of companies in the S&P 500, according to Bloomberg data.

And now look at the car business. Among the carmakers with the biggest gross margins is Volkswagen at 20% in its passenger car division in the first half of 2016. One of the German automaker's biggest contributor to profits, Porsche, pulled in a 17% operating margin. At Apple, those levels of profits get you fired. 

Again, it's too early in Apple's work on a potential car to start modeling permanently lower profit margins. Apple never cares what investors think about its finances, and that has mostly been a good thing. My worries are not only financial, it's also that Apple may be doing harm to its car ambitions by fogging the project in its typical top secret, tighter-than-the-NSA secrecy.

A car isn't a product that Apple can just cook in a lab for 10 years until everything is perfect and then spring it on the world with a dramatic on-stage reveal. No. Look at what Google has been doing with its self-driving car program. It's been talking about it for years. It's conducting test drives under every conceivable condition. It's changed its mind about doing the actual manufacturing of the car on its own. Google is talking to regulators and suppliers and potential factories that could bring the company's designs to life. 

Granted, Apple is not as far along with its car project, but it's not clear it's in Apple's DNA to do the kind of glad-handing partner discussions and regulatory assurances that Google is doing. During the company's earnings call this week, Apple CEO Tim Cook wouldn't even acknowledge that his company would be releasing a new iPhone in two months. That's how ingrained secrecy is at Apple. 

Meanwhile, Mark Zuckerberg this year outlined Facebook's 10-year plan. Even another crazy secretive tech company, Amazon, talks about its drone project occasionally to put pressure on regulators, spook its delivery partners and excite the public. Of course, these companies aren't throwing open to the public their board discussions about their next big thing, but they do talk in broad strokes about where they're going and why. 

If Apple wants to change its stripes and get into new areas of technology including digital video, automobiles and virtual reality, the company may have to change its attitude and loosen up on its secretive ways, too. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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