Chatter about an Apple self-driving car had mostly died down until a well-regarded analyst revived it with a vengeance earlier this month.
In an Aug. 14 note, TF International Securities analyst Ming-Chi Kuo -- who has a reputation for being right about what Apple Inc. (Nasdaq: AAPL) has in its pipeline - predicted a car will be the company's "next star project."
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Kuo forecast the Apple Car would debut between 2023 and 2025 with the potential to be as disruptive to the auto industry as the iPhone was to the mobile phone industry.
Rumors of an Apple car have percolated since early 2015, when a van with obvious self-driving technology was traced to the Cupertino, Calif., tech giant.
Since then, analysts and pundits alike have struggled to figure out what "Project Titan" - Apple's internal code name for the endeavor - would ultimately produce.
Clues have been sparse and sometimes contradictory.
It seemed clear the company had every intention of becoming an auto manufacturer when it was revealed in 2015 that Apple was hiring auto tech and design experts and had plans for recruiting up to 1,000 people to staff the effort.
But since then, there has been a strange mix of reports on the Apple self-driving car project. Executives came and went. There were rumors of partnership talks with manufacturers like BMW and Mercedes Benz that never bore fruit.
The "common wisdom" on Project Titan veered from an actual self-driving car to just the technology for one (which Apple presumably would license) and back to an actual car again.
But when you think about it, neither one of these options make sense...
Why You Won't Be Buying an Apple Self-Driving Car
Kuo's research note gave renewed credibility to the idea that Apple is indeed building an auto for sale to the public.
I don't think so.
Auto manufacturing is an extremely capital-intensive and merciless industry - just ask Tesla Inc.'s (Nasdaq: TSLA) Elon Musk.
Apple did briefly toy with the idea, but according to The New York Times, it kept running into roadblocks. Plans for a manufacturing plant gave way to a mostly futile search for a partner to build a car designed by Apple.
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Eventually, a partnership did emerge with Volkswagen. But for now, it appears to be limited to a project aimed at refitting T6 vans as electric self-driving shuttles tasked with transporting Apple employees between its two Cupertino campuses.
Beyond the manufacturing complications, selling cars is not nearly as profitable as selling iPhones, iPads, and related services.
Operating margins for the world's biggest automakers typically range between 3 and 8%. They're not much higher for aspirational brands. BMW's operating margins are about 10 to 11%.
But Apple's operating margins are three times that, usually falling between 27 and 30%. Even if Apple charged premium prices - pretty much a given - the margins on auto sales wouldn't come close to what the company gets from its other segments.
And falling margins don't sit well with Wall Street.
Then there are those who believe Apple is working on a package of self-driving car technology it will sell to automakers.
That's not likely, either...
Every Industry Is Wary of Apple
When The New York Times reported the Apple-Volkswagen collaboration on the self-driving shuttles, it provided some enlightening background on why the company's talks fell through with other automakers.
Most were reluctant to hand over too much control to Apple. They were concerned about Apple's dominant brand diluting their own, as well as which company would own the customer experience and relationship.
That's not surprising. Ever since Apple upended the music industry with iTunes, it has had a hard time convincing other large companies to enter into partnerships in which Apple will have significant control over the user experience.
In addition to its struggles with automakers, Apple has also had little luck making deals with video content providers to fulfill its Apple TV aspirations.
So if Apple were able to develop compelling self-driving technology, it would have a tough time lining up customers. Any automaker that didn't use its own homegrown tech would likely opt for that of another third party, such as Alphabet Inc.'s (Nasdaq: GOOGL) Waymo, that would pose fewer headaches than an Apple partnership.
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But if Apple isn't going to sell cars and it isn't going to sell its tech to those who do, what the heck will it do?
After all, no one doubts the existence of Project Titan at this point.
I believe there's a third option - the one option that best matches Apple's strengths and profitability requirements.
And it's the only explanation that fits everything we know...
This Apple Car Project Would Really Move the Needle
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The odds are very good that Apple ultimately plans to launch a high-end ride-sharing service that uses only self-driving vehicles.
We know Apple has been eying this business for some time. It's one reason why it invested $1 billion in Didi Chuxing, the "Uber of China," back in 2016.
Apple could offer such a service as a vertically integrated operation - it would design and own the vehicles as well as run the service itself.
Building a fleet of self-driving vehicles isn't nearly as daunting as manufacturing large numbers of cars to sell to the public. And in any case, Apple doesn't need to build them from scratch.
The current Apple-Volkswagen shuttle project illustrates how this would work...
How to Build an Apple Car
From The New York Times article: "The frame, wheels, and chassis of the T6 vans will remain, but Apple is replacing many components, including the dashboard and seats, said two people familiar with the project. Apple is also adding other computers, sensors, and a large electric car battery, they said."
Assuming Volkswagen is game, it would be paid to build Apple's self-driving vehicle fleet using stripped-down VW models modified to Apple's specifications. The Volkswagen brand wouldn't appear on the final product, but the German automaker would get a nice new source of revenue.
This Apple Car would showcase a variety of Apple services and technologies, such as Apple Music, Apple TV, and augmented reality.
Apple will also make an iPhone "ride" app the only way to access the service. And it's likely you'll need to pay your fare with Apple Pay.
The exclusivity won't be permanent, but in the early stages, it will generate interest while buying time for Apple to work out the kinks. Eventually, Apple will allow an Android version of the app, much as it opened up the iPod to Windows in 2003, two years after the iconic device debuted.
While there inevitably will be plenty of ride services with self-driving vehicles, Apple will target the high end of the market by offering a much more luxurious experience. It will let competitors engage in a price war that will destroy profit margins and leave them offering bare-bones service.
Speaking of margins, a self-driving transportation service will have margins much more to Apple's liking.
General Motors Co. (NYSE: GM), which last fall announced plans to place driverless taxis in several large cities by 2019, said it foresees a "total addressable market of several hundreds of billions of dollars." GM also said it expects the service to generate profit margins of 20 to 30%.
If GM can get profit margins like that from a driverless car service, imagine what Apple will be able to command.
Frankly, entering the driverless vehicle--powered transportation field suits Apple perfectly - a high-margin business that leverages the company's expertise in tech and services.
And now is the ideal time to jump in...
An Industry on the Verge of Massive Disruption
Another reason Apple isn't building a car to sell to the public is because that business model is about to get blown up.
Ride-sharing companies like Uber and Lyft are simply a taste of what's to come. Over the next few decades, car sales will decline as more people opt for transportation they "rent" rather than "own."
Last year, Intel Corp. (Nasdaq: INTC) released a study that estimated this "passenger economy" would grow to $800 billion by 2035 and $7 trillion by 2050.
An Apple ride-sharing service - let's call it Apple Ride - is where the auto industry is headed. It's where the biggest profits will be. And it makes a lot more sense than an Apple-branded car.
The strategy of exploiting an industry ripe for disruption is something late Apple founder and CEO Steve Jobs well understood. Remember this?
"There's an old Wayne Gretzky quote that I love. I skate to where the puck is going to be, not to where it has been. And we've always tried to do that at Apple."
Jobs said that in 2007 - the year the iPhone debuted.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.