By on February 22, 2015

nextporsche

Henry Blodget publishes Business Insider. Blodget is a former managing director of Merrill Lynch who rose to fame in the late 1990s on his timely and correct prediction that Amazon stock would reach $400, then lost his $12 million/year job following the burst of the dot.com bubble, and then was permanently barred by the Securities and Exchange Commission over fraud allegations*. Blodget still has outstanding sources and contacts within the tech sector. In a post at his website, Blodget discusses the current excitement about tech companies like Google and Apple exploring automotive ventures, which some say are aiming at becoming the next Dr. Ing. h.c. F. Porsche AG. Not only does he say that the tech sector is cyclical, that the current bubble will also eventually burst and that Apple’s outsized success with their smartphones has been anomalous even for that now routinely successful firm, he makes some sound arguments the next Porsche AG is not likely to come from the Silicon Valley.

Blodget’s post is based around a Twitter exchange he had with what he refers to as Silicon Valley Bigwigs, and he says that they’re illustrative of the irrational exuberance in the tech industry. Some choice excerpts from Blodget’s post follow, but I’m pushing the limit on fair use so, as the good professor says, please throw Business Insider a click and read the whole thing.

The other night, on Twitter, I waded into a debate about the rumored Apple car.

Specifically, I tweeted a skeptical remark about it.

And I immediately found myself on the receiving end of a tone and attitude I remember vividly from the end of the 1990s.

As I recall, the Twitter exchange went something like this:

ME: Making cars is a tough, low-margin business.

VALLEY BIGWIG: Porsche has a 50% profit margin.

Well, that shut me up.

Porsche has a 50% profit margin? Wow. No wonder everyone was so excited about the Apple car. Apparently there is indeed good money to be made in the high end of the car business.

While I nursed my Twitter smackdown, out of curiosity I checked out Porsche’s annual report. And I was startled to discover that the information I found there didn’t exactly jibe with the bigwig’s tweet.

Porsche, I discovered, does not have a “50% profit margin.”

Porsche has about a 15% profit margin….

So I did some more Googling and math. And I learned the following.

Porsche sold about 165,000 cars worldwide in 2013. This brought in $14.3 billion of revenue, and about $2 billion of profit.
Apple already generates ~$60 billion of annual profit, because unlike cars, Apple’s iPhone is the most spectacularly profitable product the world has ever seen.

If Apple grew a car business the size of Porsche’s overnight, Apple’s profit would grow by … a relatively puny 5%.
I tweeted some of these findings back at the bigwig. His response was instantaneous.

VALLEY BIGWIG: Apple targets markets of 20mm-100mm per year…

Apple, the bigwig was saying, was going to aim to sell 20 million to 100 million cars per year.

I again turned to Google and learned that the global car market — the number of cars sold per year worldwide — is currently 88 million. So Apple’s ambition, the bigwig was saying, was to capture somewhere between 25% and 110% of the entire global car market.

I suggested to the bigwig that this assumption might be a bit heroic. This time, the bigwig did not respond. I then asked the bigwig how much money he thought Apple would make in its car business.

VALLEY BIGWIG: $40 billion, initially.

$40 billion!

I pointed out that Porsche makes only $2 billion from its car business. The bigwig then qualified his prior statement:

VALLEY BIGWIG: $40 billion revenue, $20 billion profit

Well, $20 billion was less than $40 billion, but it was still 10 times as big as Porsche’s profit of $2 billion and twice as big as BMW’s profit of ~$10 billion. And we were back at that “50% profit margin” assumption again.

At this point, as I recall, another Valley bigwig chimed in on the Twitter stream. This whole conversation was sort of silly, the second Valley bigwig implied. Apple wasn’t going to build a normal car business, like that of Porsche, GM, Tesla, or even BMW. Apple would not bother to enter the car business if it were going to build just a normal car business. Apple was going to reinvent the car business.

Ah. Apple was going to reinvent the car business.

How, exactly, was Apple going to reinvent the car business?

Some remarks from several participants followed about design, software, autonomous-driving, platforms, and “the new big screen — the dashboard.” Someone explained that, when we’re all riding around in self-driving cars, we’ll have lots of time to listen to music, watch movies, play games, and work, and that Apple will coin money because it will own the whole platform.

In other words, I gathered, Apple will reinvent the car business by transforming cars into gigantic wireless iPhone docks, making them beautiful — Apple’s designers are apparently appalled by the ugly crap we ride around in these days — and selling 20 million to 100 million of them per year. Apple will also reinvent the car business by doubling the prices people will pay for cars or halving what it costs to make them (if it’s going to earn even a 30% profit margin on the cars, let alone a 50% margin, it will have to do one or the other).

I expressed some skepticism about this…

In fact, a clear-eyed observer of the iPhone phenomenon will quickly note that it is an anomaly even within its own company. Apple has been making computers for 30 years, for example, and it has not done anything in the computer business that is remotely like what it has done in the phone business. Apple did invent the tablet market, but that doesn’t look anything like the iPhone business either. Part of what makes the iPhone business so remarkable, after all, is something that does not exist in most other markets, including the car market: Subsidies that reduce the price of a $600 product to $200 or even free. It seems unlikely that wireless carriers are going to offer to pick up $40,000 of the price of a $60,000 Apple car. Or give the $40,000 model away for free (with a contract).

But that’s a different story.

The important story here is that some of the smartest minds in Silicon Valley appear to have stopped thinking critically.

*Blodget was never convicted of saying one thing to Merrill Lynch customers and assessing companies completely differently in private company emails. However, after those emails were published by now scandal tainted former NY governor and then New York state attorney general Eliot Spitzer, Blodget signed a consent agreement with the SEC that permanently barred him from the securities industry, fined him $2 million and made him pay another $2 million in restitution to Merrill Lynch customers.

Ronnie Schreiber edits Cars In Depth, a realistic perspective on cars & car culture and the original 3D car site. If you found this post worthwhile, you can get a parallax view at Cars In Depth. If the 3D thing freaks you out, don’t worry, all the photo and video players in use at the site have mono options. Thanks for reading – RJS

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24 Comments on “Henry Blodget: Apple Won’t Be the Next Porsche...”


  • avatar
    Pch101

    Apple is a high-margin company because a lot of the costs are fixed (or quasi-fixed.) The cost of making the next unit of i-Whatever is low compared to the sales price; the brand is powerful enough to extract that kind of price differential.

    The car business is necessarily a lower margin business because the primary cost is the cost of parts, and that cost is largely variable. Every additional unit sold is more profitable than the last, but it can’t be as profitable as the i-Whatever because the parts of the car are never going to be that cheap.

    Porsche makes for bad comparisons, regardless. No mainstream automaker (TMC, VAG, GM, F, etc.) produces high pre-tax margins. They’re higher than some businesses (supermarkets and car dealers are low margin businesses, for example), but they’re pretty mediocre as far as the S&P 500 is concerned.

    I don’t know what Apple’s plans are, but my guess is that they are trying to do enough to own the interior of the car, not build the entire car. Perhaps Apple can be like JD Power — an outsider that becomes so prominent through consumer awareness that the OEMs can’t afford to ignore it.

    • 0 avatar

      While mass market automotive is a low percentage margin business, because those margins in absolute dollars can be four figures (or five on a nicely equipped pickup truck) per unit and you’re selling tens of thousands or more of each unit, the dollar figures can be impressive.

  • avatar
    Ron

    Nothing easier than picking on an anonymous idiot.

    No one signs a consent agreement with the SEC unless they are guilty as sin.

    • 0 avatar
      mike978

      Agreed, probably as guilty as charged. So I don’t see the need for the qualification. Spitzers issue was using a prostiture, doesn’t invalidate his prosecutions.

      Good article though. This weeks Economist has an article about the “Apple car”. So.ilar conclusions that it won’t work.

  • avatar
    gforce2002

    John Dvorak over at PCMag thinks the whole thing is about getting patents and providing the actual software inside the car, not producing an actual car. He could very well be right.

    • 0 avatar
      Albino Digits

      He could, but traditionally Apple likes to maintain as much control as possible over the final product. Dvorak’s idea is more of a Microsoft thing. Unfortunately for Microsoft, their system hasn’t worked very well for Ford.

      • 0 avatar
        Pch101

        Microsoft offers what amounts to a head unit. And nobody except Bill Gates loves Microsoft.

        It could be somewhere in between, such as a partnership with an automaker to produce a car co-branded with Apple that has the interior touch points and infotainment, and perhaps some of the exterior design cues, developed by Apple. It could be model-specific (i.e. some kind of plugin-hybrid.)

        • 0 avatar
          WheelMcCoy

          “…such as a partnership with an automaker to produce a car co-branded with Apple …”

          I’m thinking this too. Back in the 1990s, Lexus successfully offered leather interiors made by Coach. Apple will go much deeper:

          – Summon your car from from your Apple Watch or iPhone

          – Diagnostics and a maintenance history will be sent to your dealer service center, which will be running Apple Software.

          – Toll bridge transponders tags are ugly. Now imagine the car equipped with a hidden chip to support Apple Pay. This could work at drive-thru restaurants and gas stations too.

          – Apple interiors would be better designed — look better and work better.

          Apple’s big weakness, however, is navigation and maps. After falling out with Google, Apple has partnered with TomTom. Still, Google / Waze are still far ahead of them.

        • 0 avatar
          Vulpine

          Not any more, Pch. Ford has gone with Blackberry for their next generation system.

          • 0 avatar
            dtremit

            “Ford has gone with Blackberry for their next generation system.”

            That’s technically true, but a little misleading. Ford is using QNX, which Blackberry acquired in 2010 when they needed a new operating system. The ownership stake aside, QNX is essentially a supplier to Blackberry, as they are to Ford.

            More importantly, writing a solid RTOS like QNX is a huge, expensive endeavor that pays few dividends. Even if Apple were to increase its level of integration in a car, it might well turn to a company like QNX for much of the low-level software. It has done so before — both the original iPod and Airport ran on third-party software.

          • 0 avatar
            fvfvsix

            IIRC, BMW’s iDrive is also QNX-based

  • avatar

    A person who’s saying that carmakers will not “give the $40,000 model away for free (with a contract)” has never read TTAC articles about the growth of leasing in car markets, and its expansion from luxury cars to everyday cars.

  • avatar
    Vulpine

    Too many people misunderstand how Apple works; Apple is unlikely to even consider entering the automotive business as a competitor against such a huge, well-established market. On the other hand, in the one place every single automotive OEM is seriously struggling, Apple would have the ability to lead and show them how it SHOULD be done–a way that works–and this is in the user/vehicle interface. In essence, how the operator controls and communicates with their vehicle hasn’t significantly changed for almost a century. They use a big steering wheel, two or three pedals and a lever or two to control all the mechanical aspects of the vehicle while we’ve gone from a basic radio to a near fully-internet-capable communications stack that is simply too distracting when a driver still needs to keep their attention on the road itself. And now much of that control is being taken out of the hands of the driver, no matter how attentive or precise they may be.

    So no, I don’t see Apple as the next PorscheAG or even Tesla, but rather the next Philco, Autolite, Bose, Chrysler, etc. creating a communications/entertainment stack that’s easy to use, accurate and non-distracting.

    • 0 avatar
      Rod Panhard

      I agree with Vulpine. Apple changed the music business. Today, when you plug your iPod into your car and listen to the music you picked out, a LOT of people are getting cut out of the revenue that used to happen 10 years ago when a motorist got in the car and turned on the radio.

      Apple, having successfully separated everyone else from that money, now wants to get that money into their pockets.

      A fully iTunes capable interior would allow parents to stream three different movies to three kids in the backseats,and whatever different music the driver wants from the person riding shotgun.

      It sounds like pie in the sky, but it also sounds like a crapton of money to be made from the family driving from Columbus, Ohio to Disney World in Florida.

      It’s a no-brainer.

  • avatar

    If APPLE produces EV, they’ll most likely be as unaffordable as a TESLA is.

    And before any TESLA FANBOYS wanna jump up and talk about “how they afford a base Model S”… let me just say that breaking your back to have one doesn’t make it affordable.

    Affordable is a sub $50,000 EV that’s the size of a Tesla Model S and can be afforded by Main Street.

    • 0 avatar
      VenomV12

      As I told my brother, if Apple makes this car it is because the super rich tech execs that buy Teslas got tired of not having the amenities of their S-Classes and 7 series but love the idea of an electric car. They got tired of paying Musk 6 figures for a car that has the interior of a Honda Accord. With 3/4 of a trillion dollars in the bank they decided to make the car they wanted. With the cash reserves they have they don’t ever have to make a profit, hell they may want to lose money on this for all we know. If Apple makes this car, it will be pretty top notch.

    • 0 avatar
      ckb

      Indeed. It was silly of the author to even bring up Tesla in a story about how affordable cars are to “main street”. Oh wait, You just pre-emptively created the response to your own irrefutable argument to take a dig at Tesla (allcaps of course). This article has nothing to do with that and is more or less a hypothetical conversation between an investor and the industry that ruined him full of wild assumptions. However, assuming all the assumptions are correct he has an interesting point.

      …actually, that IS just like your post! Well played.

  • avatar
    Xeranar

    Interesting, I’m fairly comfortable that Blodget made up most of this discussion to illustrate a point. But it still stands, Apple within the modern tech industry that has been dominated by extremely open-platform systems (windows for all the ballyhoo is just one element, not an ecosystem) that generated a huge assortment of competitors because anybody with a few million bucks back in the 1970s and 1980s could setup shop in Taiwan, China, or South Korea and produce cheap PC parts while the two main silicon x86 foundries were owned by Intel and AMD that churned out massive numbers of cheap chips because when you’re in a competition of two it isn’t much of a competition.

    Now, Apple sources parts cheaply from these mini-OEM competitors because their final product is so vaunted for class and identity reasons that they control 30-40% of the market. But they’re in no way going to get involved in actually making cars. Just as Google actually isn’t going to sell their rolling box to people. They’re test beds that are exposed to the public to get their minds at ease with the concepts being put forward. People are naturally resistant to change and by repeatedly showing them how safe these vehicles are they’re setting themselves up to reap major benefits as the big-5 will more or less have to partner with them to get access to a worthwhile ecosystem once these systems fall into place.

    The real issue is Apple NEEDS to get this market because while they are the largest consolidated maker their ecosystem is dwarfed by Google’s Android. Thus if any automaker is going to partner with Apple over Google Apple needs to offer something tremendous or at a discount in order to get that foothold or the automakers may just go ecosystem agnostic and use a proprietary core with an allowance to log into either ecosystem.

  • avatar
    BrunoT

    Yeah, he signed a consent agreement because he was as pure as the driven snow. Riiight.

  • avatar
    Landcrusher

    How Apple could win is to better play the friend versus enemy game.

    IF Apple made an intuitive car interface that was a winner because it was Steve Jobs level simple elegance rather than post Jobs redesigned crap for no other reason than to be different or cuz the competition has it. If at the same time, Google is percieved as a possible competitor rather than a supplier by the auto makers. And if the autos wake up and figure out it would be better to get out of the interface business, then Apple could end up making a hundred plus per car for a good size share of the market.

    That’s good money.

    Trying to become a car maker could easily knock them back to a niche tech player, and likely will if they don’t wise up soon enough.

  • avatar
    Fred

    I’ve read at several tech sites that Apple will have a car by 2020. That’s just the headline and I don’t bother to read any more.

    • 0 avatar
      Vulpine

      Despite myself being a long-time Apple user, I would bet against that headline. Mainly I would do so because Apple doesn’t rush into anything; they take their time, analyze the potential and do one heck of a lot of testing to ensure it’s as bulletproof as they can make it before they release it to the unruly masses. Even then, those unruly masses have a tendency to discover something they overlooked which forces a re-design. Building a car whole-hog would require a lot more of everything than what they did with the iPod, the iPhone and the iPad. Releasing an Apple-designed vehicle to the unruly masses would have many of those masses intentionally searching for the least fault in the design and going out of their way to blow the issue all out of proportion in their efforts to prove Apple as the “bad guy” in industry.

      Of course, such effforts would force Apple to fix those perceived faults–even if they’re no different than what we deal with in every other car on the road–making the Apple Car the safest, most reliable vehicle ever built.

  • avatar
    Alfisti

    I die a little inside when i see people mention the words Apple and intuitive. Apple i snot intuitive, Apple just ham fists it’s way over your data and manages everything IT’S WAY. If you are OK to sit back and let Apple decide everything for you then sure it’s easy, but try to so much as veer off that track and their interface becomes massively annoying.

    I used iTunes for the first time in a while and three people in the room (two under 30) could not figure out how to select 7 of the 13 songs in a album and have iTunes just play those selections. There used to be a little check box near each song but now that has vanished and is replaced by a typically vague icon that no one could work out what to do with.

    Don’t even start me of trying to transfer data.

  • avatar
    DriverDan

    Some interesting and insightful remarks from commenters here. But it’s important to remember that the felon Blodget, (and the sad, always-wrong-about-AAPL Dvorak) make money using apple-bashing headlines as link bait, consistently, over the years. They can’t be taken seriously, even if they write something positive about Apple. They’ll say anything. Like most media and Wall St. Analysts and pundits, they don’t seem to understand or appreciate how Apple makes money. Even though Apple has made it very clear about why and how they operate. Market share is not important to Apple. They are regarded as apostates in this. Making customers happy is the end-all and be-all of Apple. That’s hard for us modern cynics to appreciate. But that’s always been the trail to follow.

    Apple didn’t invent the PC, music player, smartphone, tablet, smartwatch, or anything like that. They disrupt established products with something drastically different/better, by focusing on the customer, something everyone says they do, but actually don’t. Everyone says they innovate, but few really do.

    Whatever they’re thinking of with the automotive space (which NO ONE yet knows outside of Apple), one of the things they’ll be disrupting is journalistic coverage of automobiles. That part has already begun. And so, beware who you turn to for opinion regarding anything Apple.

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