Why Apple Won't Buy Tesla Motors

By Markets Fool.com

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An Apple retail store in New York. Apple stores could become car dealers if Apple decides to bring an electric car to market. Photo source: Apple

Entrepreneur and venture capitalist Jason Calacanis got some attention earlier this week when he boldly predicted that Apple would buy Tesla Motors for an astounding $75 billion -- within the next 18 months.

My Foolish colleague Evan Niu explained on Wednesday why he doesn't see that happening. Simply put, as Evan sees it, it would be way out of character for Apple to spend that much money on an acquisition.

Evan is astute, and as a longtime Apple shareholder I found his argument convincing. But as someone who covers the auto business for a living, I've got an even better reason that Apple won't buy Tesla, at $75 billion or any other price: It doesn't need Tesla.

It takes big bucks to succeed in autos, but not $75 billion big
How much would it cost, soup to nuts, to duplicate what Tesla has done? To design a great electric car, bring it to market, and tool up a factory to build it in quantity?

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For someone coming in off the street, the price tag would be steep: Tesla hasn't just built a car, after all, it's built a brand and a distribution network and so forth.

But Apple has all of that. Unlike just about any other potential electric-car market entrant, Apple doesn't need Tesla's brand, and it doesn't need Tesla's stores. (And it probably doesn't need Tesla CEO Elon Musk, not that Musk would be likely to go to work for Apple anyway.)

Apple would still need to spend big bucks. It would have to hire people with the experience to design and develop a car, to steer Apple around the (huge and significant) regulatory hurdles around the world, and to produce a car.

How much has Tesla spent to get this far?

So how much has Tesla spent to do its version of all of that? The Financial Times'Dan McCrum recently added up all of the money that Tesla has spent since 2006 on research and development and capital expenditures, and came up with this number: $3.1 billion.

McCrum notes that Tesla isn't done spending: Its contributions to the battery "Gigafactory" in Nevada will total about $2 billion, and it's planning to spend another $1.5 billion this year to expand its production facility and get the Model X SUV to market.

(Let's note that if we add all of that up, we have three cars -- the Roadster, the Model S, and the Model X -- and a battery factory. As far as we know, Apple is starting with just one car.)

So let's say that Apple went the deluxe route. Let's say that they're spending big to hire the best talent available (as they reportedly have been) from companies like Tesla and Fordand the big battery makers, that they're plowing big bucks into R&D and software development to create a car that's more advanced than anything else, and that they're going to give a top-notch contract manufacturer the budget it needs to build the Apple Car to the highest possible standard.

Oh, and they might build a battery factory of their own, and turn that into another line of business. But they might not build a car factory: It seems likely that Apple would seek a partner to manufacture the car, likely a big auto supplier and contract manufacturer like Magna International.

But Apple would still have to pay for the tooling and robots and so forth that Magna would need to build Apple's car -- and it would have to pay Magna. The upshot: Apple might save some hassle, and it won't be stuck owning a car factory -- but it won't save money.

So how much will this cost? We're still probably talking less than $10 billion.

It takes a lot of money to build a car, but "a lot" is relative
Now, to a new market entrant, $10 billion is an immense sum. It's a big sum to Tesla: I've been arguing for a long time that the biggest potential pitfall facing Tesla is that it may not be able to spend the money needed to acquire the scale to compete with the global automaking giants.

But Apple had $178 billion in cash at year-end. It might balk at a $75 billion acquisition, but a $10 billion (likely less) bill to enter a business with a product that literally might change the world by spurring mass adoption of electric cars?

I still don't know that going into the car business makes sense for Apple. The profit margins (about 15% for brands like Porsche and Ferrari) aren't close to what Apple is used to. But if it does decide to do so, doing it alone makes a lot more sense than acquiring Tesla -- at any price.

The article Why Apple Won't Buy Tesla Motors originally appeared on Fool.com.

John Rosevear owns shares of Apple and Ford. The Motley Fool recommends and 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.