Apple’s New Autonomous Car Strategy May Represent A Fundamental Corporate Evolution At Apple – Seeking Alpha

A few months ago, we wrote about how the various leading tech companies including Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Tesla (NASDAQ:TSLA) and others are racing to develop the driverless car.

We looked at the potential winners and losers as the car eventually becomes fully autonomous. The losers would be those companies that benefit from the existing paradigm without investing in future technologies. The winners, we felt, were those companies that are investing in mobility services- such as Uber, and platform technologies for those cars- such as Mobileye (NYSE:MBLY), but not necessarily the car manufacturers themselves.

There were many rumors regarding Apple's development, but mostly news reports, nothing really coming directly from the company until Apple CEO, Tim Cook, discussed autonomous driving with Bloomberg TV earlier this week.

A background on the iCar development

The earliest mention of the Apple Car was back in 2012, Mickey Drexler, who then was a member of Apple's Board of Directors, said "Steve's dream before he died was to design an iCar".

Starting in 2014, Apple began working on a secret project to build a car.

In February 2015, a first article appeared in the Wall Street Journal reporting that Apple was developing a self driving car under the project name Titan, and was hiring a thousand engineers to work on this project, some of which included senior car industry executives with significant research experience, based in a secret location. Quoting from Tesla CEO, Elon Musk, "It's pretty hard to hide something if you hire over a thousand engineers to do it."

One thousand Apple employees is a potential R&D investment in the couple of hundred million dollars per year, which implies an approximate $1 billion investment into this project between 2014 and 2016. Clearly, if Apple could capture a similar market share that it had gained with the smartphone back in 2008, it's a huge return on investment.

In September 2015, it was reported that Apple had accelerated its efforts and the Titan project had received a "committed" label with a 2019 completion date for the project. At the same time, Apple also entered talks with and met with several car manufacturers with regard to a potential partnership including BMW, Daimler, Magna Steyr and even McLaren, but it appears nothing came of these talks.

However, by the end of 2015 the project started to hit problems. In January 2016, Steve Zadesky, who was heading the program informed colleagues he was leaving the company. Later, in July, the Wall Street Journal reported that Bob Mansfield, a member of Apple's Special Projects team had taken over to lead Apple Car development. Apple laid off or transferred hundreds of employees who were working on the project following an internal 'reboot'.

In December 2016, Apple's Director of Product Integrity, Steve Kenner, sent a five page letter to the National Highway Traffic Safety Administration (the NHTSA), commenting on the Federal Automated Vehicles Policy. This was the first official written evidence by Apple that they were looking at autonomous driving.

Apple's letter to the NHTSA confirmed a new direction in developing the software for self driving and that Apple would like to be the provider of the autonomous driving operating system, rather than a fully-blown self-driving car including the software, hardware, engine, body and all. To quote from Apple's letter to the NHTSA: "Apple uses machine learning to make its products and services smarter, more intuitive, and more personal. The company is investing heavily in the study of machine learning and automation, and is excited about the potential of automated systems in many areas, including transportation."

In April 2017, Apple was granted a permit from the California DMV to test self-driving vehicles on public roads. A DMV spokesperson announced that Apple had registered three 2015 Lexus RX450h SUVs to be driven by six Apple employees with expertise in autonomous vehicles.

Companies that participate in the DMV's Autonomous Vehicle Testing Program must file Disengagement Reports that outline how many miles were covered with self-driving vehicles and what (if any) disengagements occurred- i.e. the cars autonomous system disengaged and the driver had to take over, as well as accidents. Thus Apple won't be able to keep much of the testing on public roads a secret for much longer.

According to MacRumors, Apple is thought to currently have several teams working on different aspects of its automotive software. In Canada, Apple hired the team that formerly developed the car infotainment BlackBerry QNX system and are thought to be developing the base operating system. Other teams are working on various software that will run on it, such as a heads-up display. And of course, Apple is developing the underlying self-driving AI capabilities.

Tim Cook on Bloomberg

Until this week, Tim Cook was quite cagey on what he said about car technology and the self driving space, mostly calling it "interesting". Because Apple will have to start making public reports with regard to its progress, it seemed to the right time for Cook to address in detail for the first time on what Apple is doing.

To fully quote Cook:

"I think there is a major disruption looming - not only for self driving cars but also the electrification piece. If you've driven an all electric car- it's actually a marvelous experience, and it's a marvelous experience not to stop at the gas stationplus you have ridesharing on top of this. So you have three vectors of change happening generally in the same timeframe. As we look at it, what we've talked about focusing on publicly, is that we're focusing on autonomous systems. Clearly one purpose of autonomous systems is self driving cars, there are others. We sort of see it as the mother of all AI projects. It's probably one of the most difficult AI projects to work on, and autonomy is something that is incredibly exciting for us and we'll see where it takes us. We're not saying from a product view what we will do, but we are being straightforward that it's a core technology that we view as very important."

Apple is Changing as a Company

While Apple's CEO did not bring any significant incremental news that wasn't already rumored or widely known, the fact he formally discussed it is a big step. It signifies that Apple is past the experimental stage and is taking development seriously.

Apple's car strategy was not feasible back in 2014 which ultimately led to its failure back then.

Apple likes to take a product and design it from end-to-end, such as it did with the phone- covering the software, hardware and product design- everything. Thus Apples earlier goal of building the iCar does make sense when looking at Apple's overall strategy as a company, but in reality we never believed it made sense for Apple to build the iCar.

Apple maintains very tight control over its suppliers as well as the quality of the parts they manufacture. The supply chain for a car is exponentially more complex and it would be impossible for Apple to wield the same control over the suppliers it enjoys with its i-products. Additionally, Apple enjoys a gross margin at around 40% and the highest it could hope an Apple car would bring is half that, in the 20% range (what a premium car would typically get).

Unusual for Apple, its new car strategy -- focusing on the autonomous system as a platform technology -- is much more like a Google strategy. Google's Android OS, for example, is a platform technology for generalized phone hardware.

In 2017, Apple's car technology (and Googlesque) strategy makes a lot more sense.

It does not quite chime with the typical Apple ethos of controlling every aspect of the product. We think it could represent a fundamental change and somewhat of a corporate evolution for the Apple company as a whole and we are interested to see where Apple goes from here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Apple's New Autonomous Car Strategy May Represent A Fundamental Corporate Evolution At Apple - Seeking Alpha