Overview
Apple has become globally known for its innovative path in the communications and computing areas, revolutionizing both and in the process becoming a behemoth. Likewise, Tesla is doing the same in automobiles, general purpose robots, and via related companies, in space travel and artificial intelligence.
However, in a little-noticed announcement, Apple abandoned its electric automobile manufacturing effort, an area one in which one would believe it could fare well. This installment addresses our views on the underlying reasons and possible future implications — key considerations for any sophisticated institutional investor or risk manager.
Lauding the Late Steve Jobs
Getting it Right
Steve Jobs was the driving force behind Apple before he left in 1985 and upon his return in 1997. He had the wisdom to see the potential in the PC market, and unlike Dell, HP, and a variety of other manufacturers, chose not to use the Windows operating system, but insisted on using Apple’s proprietary system.
That strategy appeared to be a mistake in Apple’s early years, but with the release of iPods, iTunes, and ultimately iPhones, that control enabled it to derive revenues long after the initial device sale via its App Store. The decision also enabled Apple to create a “walled garden” of devices that work seamlessly with each other but poorly with those of any other manufacturer. (However, like many tech giants, Apple’s App Store and “walled garden” are under attack from various regulators for their market dominance.)
Only Part of the Picture
Early on, Apple chose not to manufacture its own products, but rather to rely on partners for that role; Apple chose to focus on product development, product positioning, marketing, and support. Foxconn, based in China, but now with facilities in a variety of countries, was Apple’s primary manufacturing company. Some have stated that Apple’s margins were much greater than Foxconn’s, which is true, but the claim misses the point. Foxconn would have great difficulty gaining market acceptance for a phone under its name and has prospered from its relationship with Apple.
Musk’s Approach
Getting it Right
Like Mr. Jobs, Elon Musk is generally viewed as an industry titan for founding several world-leading firms. While, like Mr. Jobs, Mr. Musk is generally viewed as an innovator, he has taken a very different approach. Firstly, Mr. Musk believes control over the manufacturing process is critical to his ventures’ success.
Secondly, Mr. Musk believes product design and manufacturing must be intimately connected to the point that he has placed design teams right alongside the manufacturing units.
Lastly, Mr. Musk believes effective manufacturing creates a material competitive advantage over time.
Lauding the Late Steve Jobs
So, who is right? Our view is that they are both right, as they appear to have appropriately responded to the challenges and opportunities presented to them. In Mr. Jobs’ case, rapid innovation and market acceptance via slick marketing were key lest we forget the award-winning Super Bowl ad of the female athlete throwing a hammer at the massive screen of Big Brother below:
Additionally, there were the slick ads for the Apple iPod shown at the top of this installment.
Lastly, there is the iconic glass cube that introduces the all-important Apple Stores.
Despite this success, Apple has fallen short with their electric automobile effort¹. After ten years, Apple terminated its efforts. In fairness to Mr. Jobs, perhaps he would have been successful, as he often had to break norms to launch his many innovations. Nonetheless, it failed, deciding to focus on providing software alone to vehicles.
A Chinese consumer electronics company, Xiaomi, in the space of a few years, vaulted to one of the leaders in electric vehicle rankings. Of course, significant support came from the Chinese government, per Wikipedia:
“Xiaomi Automobile was established in 2021, based in the Beijing Economic and Technological Development Zone. The company received a permit to produce vehicles from China’s National Development and Reform Commission in August 2023. Production of the SU7 started in December 2023.” ²
Underlying Reason
It is not unusual for a firm to lose some of its competitiveness after the driving force leaves, particularly if it happens suddenly, which was the case with Mr. Jobs.
To become competitive in the automobile business, Apple had to address a range of operational complexities beyond manufacturing.
A less-kind view is that current management excels at managing existing businesses, which is a massive job, but struggles to introduce revolutionary products. Supporting this view is the statement that Apple’s offering of a foldable phone might not happen until 2027³, whereas Samsung has had one on the market since August 2024⁴.
Mr. Musk
Getting it Right
While Mr. Musk had a near-exclusive reign over the electric auto market as of several years ago, it appears that BYD and Xiaomi are now challenging him in the global market. Perhaps this is little surprise, as it has become standard operating procedure for a country (previously Japan and now China) to allow foreign manufacturers to set up facilities, copy them, create barriers for those foreign companies, and then support domestic manufacturers globally.
Expanded Palette
Recently, Mr. Musk has become increasingly involved in politics, first by assisting Mr. Trump’s campaign and now by taking a major role in the DOGE. One might question the level of his involvement, but given the numerous suits Mr. Musk and his firms are involved in, and his statement about jail, it appears his political activity is intentional.
Conclusion
Turning to the impact on sophisticated institutional investors and risk managers, perhaps the question should not be which manager is more effective or which strategy is more sound. In our view, the main item is the fit with the firm and its opportunity set, as well as the managements’ team awareness of what is appropriate in various situations.
Mr. Musk is a great believer in failure, as he believes it as a driver of innovation. One hopes that Apple’s management team and board understand the reasons it failed with electric vehicles and adjust if innovation is a key part of its future. Our experience is that management is often focused on protecting current businesses rather than building new ones, thereby creating opportunities to the future leaders like Mr. Jobs and Mr. Musk.
Sources
[1] https://en.wikipedia.org/wiki/Apple_car_project
[2] Xiaomi Automobile was established in 2021, based in the Beijing Economic and Technological Development Zone. The company received a permit to produce vehicles from China’s National Development and Reform Commission in August 2023. Production of the SU7 started in December 2023.
[3] https://www.tomsguide.com/news/iphone-flip-everything-we-know-about-apples-foldable-phone-plans
[4] https://en.wikipedia.org/wiki/Samsung_Galaxy_Z_series