Apple Automotive – A Titanic End

Infotainment is now the only option.

• Apple has finally admitted what has been obvious for many years and closed down its efforts to build a vehicle, refocusing the resources on generative AI.
• Project Titan has been in and out of the news for many years and, while the technology media has routinely jumped up and down with excitement, this project never made economic sense which I am certain is the reason why Apple has pulled the plug.
• The timing of the announcement makes it look like it is market conditions that are responsible for the closure, but I see this as a convenient way of not having to admit that it made a mistake.
• Apple has launched a Metaverse device into a very weak market leading me to think that for the vehicle, market conditions have nothing to do with the closure.
• Instead, it is all about economics and the reality remains as I have argued for over 8 years (see here) that making a vehicle makes no sense whatsoever and that infotainment is the only way by which Apple will make good margins from the automotive industry.
• Apple is a company that makes premium products, and it will openly admit that it does not do cheap very well.
• These premium products attract high gross margins which Apple investors expect to be maintained which is one reason why the shares continue to hold their premium valuation versus its peers.
• The problem with making vehicles is that even the best car makers earn 8-10% EBIT margins on premium vehicles in a normalised market.
• This is because these products are high ticket items and it is impossible to earn 40% gross margins on pressed steel, brake pads, wheels and so on as these pieces are commodities.
• Hence, unless users were willing to pay 2 or 3 times more for an Apple car than a competing vehicle at the performance and trim level, margins would be far lower than the habitual and expected 40%.
• Apple fans are an emotional and loyal bunch, but I think that this would stretch even their loyalty too far.
• Hence, while a vehicle would have a big impact on the top line, it would have a large and deleterious impact on profit margins which in turn, impact the valuation of the shares.
• This, combined with the reality that making cars is much more difficult than Mr Cook thought, are the real reasons why Project Titan has been closed down.
• Efforts will now turn to generative AI where I suspect Apple is busily trying to build a foundation model which I think it will also find more difficult than expected.
• As these large language models become more popular, more and more problems are emerging all of which stem from the problem of causality which I have discussed many times over many years (see here).
• AI in general has long been a weak spot for Apple and its traditional silence on the issue is starting to make some of its larger investors restless.
• AI is going to be important regardless of whether the AI bubble pops and Apple badly needs to address this issue as Siri looks more antiquated and obsolete with every passing quarter.
• Hence, I suspect that there may be some commentary on this topic when Apple releases its FQ2 results in April and potentially a soft launch of something at WWDC in June.
• The closure of Project Titan leaves infotainment as its only route into the vehicle and I continue to think that it is considering a creeping take-over of the infotainment unit.
• If it can force automakers to leave a hole in the dashboard for it to fill, then this is a product from which it can earn 40% gross margins.
• This also gives it the opportunity to control the distribution of apps and services in the vehicle just as it does in its smartphones leaving OEMs as nothing more than app developers for their own vehicles.
• I have thought that this is the best way for Apple to make money from the vehicle, but it will be many years before it has any noticeable financial impact.
• Hence, in the short-term, it remains all about the iPhone and to a lesser degree services which I continue to think are not exciting enough to justify the valuation.
• If I was to own anything in US big tech, it would be Google especially if the current bad press continues to erode its valuation.