Why Apple Could Be Building a Car -- and What it Means

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Source: Apple

Will Apple stores like this one in New York become car dealerships? They might, if reports that Apple is developing an electric car turn out to be true.

Is Apple developing a car?

It may well be, according to new reports by the Wall Street Journal and Financial Times. The Journal says that Apple has "several hundred employees" working at a secret location away from the tech giant's Cupertino campus on "an Apple-branded electric vehicle."

Could this possibly be for real?

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Why these reports should be taken very seriously
Many, many entrepreneurs and companies have tried to enter the auto business over the last century, but nearly all have failed. Tesla Motors is a recent shining exception, but even Elon Musk and his minions have found the road to be harder going than they expected?

Why? What's the huge barrier to entry? Money.

It takes big bucks to design, engineer, and mass-produce a car and a lot of time. Starting from scratch, aiming to produce a modern, premium car in volume? Figure three years, minimum, and well over a billion dollars. (Depending on the car, and the intended production volumes, that could be two or three billion dollars, easy.)

Tesla has managed to do it on a relative shoestring, mostly by cutting corners on the production side. It got its factory essentially for free from Toyota , and it has been scaling up its production rate (and thus its very expensive tooling) gradually.

But those costs are why many auto-industry observers remain skeptical of Tesla's long-term chances. Can the little Silicon Valley start-up really compete in the mass market with giants like Toyota and General Motors that have massive global scale and tens of billions of dollars to spend?

In Tesla's case, that's still an open question. But with Apple and and its vast cash hoard, all of those concerns and objections go right out the window: Of course Apple could spend the money needed to design and produce a car. And of course it could hire all of the industry experts it needed in order to make a great one.

But why would it?

Why Apple might build a car
Apple has a history of jumping into an emerging tech space just when it's starting to cross into the mass market and a history of doing so with a product that sets a new standard.

The iPod wasn't the first MP3 player. The iPhone wasn't the first smartphone. The iPad wasn't the first "tablet". For that matter, the Mac wasn't the first personal computer.

But in all of those cases, Apple brought a new standard of design and usability to market one that resonated with the kinds of consumers that were willing and able to pay a premium price for an extremely well-designed product.

The car business has been around for over a hundred years. But the kinds of cars that might interest Apple the cars that are increasingly "devices" in the Silicon Valley sense are fairly new. It's only in the last few years that we've seen advanced "infotainment" systems like Ford's Sync and MyFord Touch become standard choices.

And it's only in the last few years that an automaker has emerged from Silicon Valley with a car that combines environmental friendliness with high-tech cool.

My first thought in response to this news was, "Apple isn't really designing a car, they're designing an infotainment stack, an advanced in-car entertainment system that they can sell to automakers that's a huge step ahead of things like MyFord Touch."

That makes some sense, because none of the automakers have yet managed to offer an in-car system that is really good, Apple-good. Apple could shake up that space with a typically well-thought-out entry and offer yet another level of seamless "it just works" interconnection to buyers who may already have an iPhone and a Mac.

But the more I think about it, the more I think it's possible that Apple has decided to take on Tesla (and, incidentally, the rest of the global auto business) directly, with a premium electric car that transforms that emerging space just as the iPhone transformed smartphones.

Why Apple might want to build a car
It's well-known that Apple as a company is "into" music. But it's also possible to argue that Apple is "into" cars. Many key Apple executives are.

Apple's late co-founder Steve Jobs famously drove high-powered AMG Mercedes-Benz convertibles and it's said that he toyed with the idea of producing an Apple car for years. Product marketing chief Phil Schiller has a collection of high-end sports cars. Design boss Jony Ive has owned a slew of hot cars, including several Aston Martins. Internet products and services chief Eddy Cue is such a fan of Fiat Chrysler's Ferrari subsidiary that he joined Ferrari's board of directors in 2012.

And industrial designer Mark Newson, who actually designed a concept car for Ford several years ago, was brought in by Apple last year on a part-time basis to work on unspecified "special projects". Might those "projects" include an Apple car?

But there's more to it than that. As cars have become more like "devices", with on-board computers and increasing interconnectivity, they have become more like the kinds of products with which Apple is already familiar, personal computers and smartphones. And the potential for a big-selling electric car to do massive environmental good would surely appeal to Apple's cultural green streak.

Long story short, "How do we make a great world-changing car?" has finally become the kind of question that Apple would want to answer, that would appeal to its unique corporate skill set and interests.

That raises a related question. Would Apple build a car factory, or would it follow the contract-manufacturing approach that has served it well with its other devices?

The Wall Street Journal report said that Apple executives have met with representatives of big-league auto supplier Magna International . Magna's Austrian Magna Steyr unit has done contract manufacturing for several automakers, including Mercedes-Benz and Porsche.

Magna could certainly do the job to a high standard especially with Apple's billions.

So we know that Apple could do a car. And it's (very) plausible that Apple executives might want to do a car. And there's a path to an Apple-like way to getting a car built -- and a path to selling it, following Tesla's example, online and through Apple's global network of retail stores.

But what would it mean if Apple did a car?

What an Apple car might mean for the auto business
I've talked to several senior auto executives about Tesla over the last few years. In a nutshell, the big automakers are intrigued by Tesla. To varying degrees, they're watching Tesla to see what can be learned. But they don't fear Tesla. (Not yet, anyway.)

Apple would be a competitor to fear. Instantly.

Apple's giant cash reserve, design chops, ability to lure top talent from around the world, and track record of disruption should put every automaker in the world on notice.

But that said, there are many more questions to be answered. And we probably won't see the car any time soon: Reports say that CEO Tim Cook signed off on the project last year, and even Apple is unlikely to be able to develop a new car from scratch in much less than three years.

We throw around phrases like "game-changing" a lot. Most of the time, it's hyperbole. But an electric car from Apple really could change the game for the entire global auto business. Stay tuned.

The article Why Apple Could Be Building a Car -- and What it Means originally appeared on Fool.com.

John Rosevear owns shares of Apple, Ford, and General Motors. The Motley Fool recommends Apple, Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Apple, Ford, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.