Intellectual Horsepower

01-2012-tesla-model-s-fd-1347336745Brains are replacing brawn throughout the economy.

So it’s not a surprise that the last bastion of American muscle, the automobile, is ripe for disruption. This week’s revelation – that Apple is developing an electric car that it hopes to bring to market by 2020 – is a logical, albeit ambitious, progression as Apple seeks to create the ultimate mobile device.

For the past 100 years, cars have been marketed on performance: horsepower, torque, engine displacement, acceleration. But what if user experience is more important? Fundamentally, all cars go from point A to point B. But how enjoyable and productive can that journey be? Perhaps rather than thinking about travel time, we need to think about productive travel time – the car, after all, is just another work space. By the time cars drive themselves (which, according to Google and Tesla, is not far off), a car can be a mobile office. Surely the new Apple car – by the time it is released in 2020 – ought to be self-driving.

The new horsepower, I would argue, is interface. Performance is taken for granted. For years, the leading Android phones have had more horsepower under the hood than the iPhone, with better technical specs across the board. But who cares? Apple has better software and a better-integrated user experience. And it’s Apple’s phones that command premium pricing, not because of the hardware, but because of the seamless melding of hardware and software (and some pretty great marketing too.)

hero-01-LHDTelsa – with its stunning Model S – has captured the heart of Silicon Valley. It encapsulates all the Valley’s values, and has become the car among VCs for all the right reasons: it’s modern, elegant, technologically superior, and changed the rules, disrupting a massive old-line industry in the way that only dreamers can. The vehicle is sleek and its performance metrics impressive, but what impresses people most is the stunning 17” touchscreen console. Picture a giant iPad running Google maps for navigation on top with your Twitter feed on the bottom. It’s an instant sale.

So what does this mean for Ford and GM and the rest of the major auto OEMs? Watch out.

Traditional auto companies have long operated under an assembly-and-test model. Most parts are outsourced. The only major component they build themselves is the engine, and that’s where all the margin is. It’s why the industry has resisted drivetrain innovation for so long. Take away the engine, and you take away the profit. Back in 2000, at least one of the Big 3 automakers had a fuel cell that was the size of a briefcase, ran on hydrogen, and emitted only pure water. Using this fuel cell, the company could have manufactured a zero-emission vehicle. But the project was scrapped, largely because swapping out the engine would mean saying goodbye to 100 years of production efficiency gains – and some $3,000 of profit per vehicle.

Beyond manufacturing, the major automakers are marketing companies. Each brand tells a story, and people tend to buy the brands that most closely reflect their values: luxury, performance, muscle, rebellion, family. But Apple knows a thing or two about marketing. With all the data collected from your iPhone, an expert system may already know precisely which model of car will suit you best, which could lead to dramatic efficiencies in producing just the right product mix for the market at any point in time.

How hard could it be for Apple to go from 0 to 60 in a whole new sector? Can they meet the ambitious goal of producing a world class automobile in 5 years, vs. the industry norm of 7? I wouldn’t bet against it. BMW recently did a study of how a switch to all-electric cars would impact their engineering staff. The result? 90% of engineers wouldn’t be needed. An electric vehicle is so much simpler to engineer, as there are far fewer moving parts, and fewer systems to coordinate. Eliminate spark plugs, pistons, oil, cooling systems, transmission, exhaust, and all the interplay between them and what’s left is a much simpler machine.

Apple exudes engineering prowess and style. And by controlling the car’s operating system, they can create a fully integrated experience. Imagine a self-driving car that reads your iPhone calendar and automatically drives you to your next meeting. And since your iWatch knows how well you slept the night before, the car can evaluate traffic patterns and see if there’s time to stop at Starbucks along the way.

What does all this mean for investors? Carl Icahn’s prediction that Apple will reach one trillion dollars in market capitalization may not be that far off. But the other end of that trade might be just as important: will the incumbent automakers be able to compete?

Gary Zimmerman

Gary is the Founder of MaxMyInterest.com.
Gary Zimmerman

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