Talk related to Project Titan (Apple’s car ambitions) had been quiet for the past four months, until Bloomberg published a story detailing that the autonomous vehicle will be delayed, again. The Bloomberg reporting—which we believe to be accurate—begs the question: Will the Apple Car see the light of day? We put the odds at 50/50 that the car is on the market by 2026. In terms of AAPL shares: We believe that all of the Titan-related R&D investment and little of the revenue upside potential is currently priced into shares. In other words: If they terminate the project, earnings go up in the near term by ~2%. If they release a car, earnings go up in the long term. The worst case for investors: The 8-year-long project gets extended by another decade with an annual R&D spend of $1B not yielding a finished product.
In this note, we overview what we know thus far about Apple’s car development, the impact it could have on revenue, and how CarPlay fits into the bigger picture.
Updates to Apple Car, via Bloomberg:
- Apple still wants to build a car.
- A year later than previously expected, an Apple-branded vehicle could be on the market by 2026.
- The company has given up on L5 autonomy. Now, it plans for FSD to be limited to use on highways.
- The selling price is now expected to be lower than $100k, down from $120k. Comparatively, the average car sells for about $45k in the US.
- Apple could offer its own car insurance.
The long and winding road
It’s been a long and winding road for Project Titan. The initiative is entering its ninth year of development which is substantial when compared to iPad, the iPhone, and the iPod, which took 6 years, 3 years and 1.5 years, respectively. If you’re curious, we believe an actual Apple television was in development for 6 years before the project was ended in 2015. That means Project Titan holds the title for the longest investment period of any Apple product to date, longer than the company’s anticipated MR headset which has been in development for about 6 years.
The long road investment approach should not be a surprise when we look at the company’s R&D spend over the years. Since 2016, Apple has increased its spend by 160% compared to a revenue increase of about 85%. This reflects R&D as a percentage of revenue increasing from 5% to 7% during that period. In FY22, Apple spent a total of $26B in R&D, which means Project Titan accounted for about 4% of total spend. This is a much different story than Meta, for example, spending 20% of their R&D on the metaverse. Our sense is that Apple is striking the right balance between spending just enough to inch the project forward, while not too much as to damage profit margins.
Does it make sense for Apple to make a car?
The simple answer: Yes. The concept of the car is fundamentally changing. The car is no longer an engine on wheels but a computer on wheels. Tesla has proven the power of vertically-integrating software, hardware and services in auto—a playbook that Apple wrote for devices.
Another reason why Apple should make a car is that it will singlehandedly solve their growth challenge. In 2023, the company will hit $400B for revenue and, given the law of large numbers, it’ll be difficult to grow if the company pursues products geared toward mid-sized addressable markets. The auto market is massive enough to move up Apple’s growth rate. As a point of reference: Each year, there are about 75m cars sold globally. Applying a $32k average selling price suggests that the addressable market is about $2.5T. If Apple were to capture 2% of vehicle sales (1.5m cars) at an average price of $100k per car, that would add $150B a year in revenue. Assuming Apple’s core business grows at 5% over the next 7 years, and Apple sells 1.5m cars in 2030, Project Titan would account for 25% of Apple’s overall business in 2030.
How would it come to life?
In order for an Apple Car to come to life, the company will need a manufacturing partner. Magna (ticker MGA, $16B market cap) has been rumored as a likely partner given that it is based in Canada (no geopolitical risk). They’re also one of the world’s biggest auto parts suppliers and, separately, build almost 4m high-end vehicles each year for automakers such as Mercedes, BMW, Jaguar and Toyota. That run rate is about 2X more than Tesla will deliver in 2023. If Magna is chosen by Apple to build out its vision, tooling the manufacturing line and ramping up production would likely take 3-5 years, a similar ramp that the Model 3 endured. Given this reality, we think it’s best to think of 2030 as the year when Apple’s car production would ramp.
Don’t forget about CarPlay
We think of CarPlay and the Apple Car initiative as two independent approaches. Today, CarPlay is available in 98% of new cars in the US, which means that automakers recognize the importance of selling cars equipped with CarPlay. At WWDC 2022, the news of CarPlay’s upcoming 2023 overhaul underscored the fact that legacy auto needs Apple. The new version extends Apple’s in-car control beyond the maps and media and right into the root vehicle features which power the entire instrument cluster. From our vantage point, the UI is more visually appealing than that of Tesla. Some of the company’s CarPlay partnerships include: LandRover, Mercedes Benz, Porsche, Nissan, Ford, Lincoln, Audi, Jaguar, Acura, Volvo, Honda, Infiniti and Polestar.
While it won’t be implemented until late 2023, broader OEM adoption will be evident in 2025. Timeline aside, the software will significantly increase Apple’s presence inside of the car and reiterates the company’s ambition to do more in auto. The primary near and long-term goal of CarPlay is to bring more users into the Apple ecosystem, by adding a benefit to iPhone ownership. There is also the Trojan Horse benefit of working with auto OEMs: Apple learns more about making cars. If CarPlay is where Apple’s auto ambitions end, the impact to revenue would be fractional, driven by small gains in the iPhone’s market share.
Looking back at Project Titan
First conceived in 2014, Project Titan has undergone its fits and starts.
- 2014: While Steve Zadesky, a former Ford engineer, was the initial lead on the product, Jony Ive and hardware engineer Dan Riccio had an influence on its direction. Jony Ive envisioned an autonomous vehicle powered by a Siri interface. In contrast, Dan Riccio felt that it should be partly autonomous, partly human-operated (HOV). Hundreds of engineers and researchers came on board with a variety of expertise in machine learning, camera optics and batteries.
- 2016: The lead is passed from Steve Zadesky to Bob Mansfield which stalls Titan‘s progress. Mansfield shifts the focus away from building a car to a licensed software approach. In streamlining operations, he announces layoffs, terminates several of the Apple’s partnerships (Magna Steyr and VW) and overhauls the EV design. Project Titan members begin testing automation on Apple Park’s shuttle bus routes.
- 2017: Apple receives a permit from the State of California to test autonomous vehicles.
- 2018: Apple hires former SVP of Engineering at Tesla, Doug Field.
- 2019: The company invests in autonomy through its acquisition of Drive.ai, and hires former Google employee, Ian Goodfellow, to act as Project Titan‘s Director of Machine Learning.
- 2020: After Mansfield leaves the project, Apple hires John Giannandrea to oversee the vehicle’s AI systems.
- 2021: For $125m, Apple purchases a test track in Arizona that was formerly owned by Chrysler. There, the company retrofits Lexus SUVs with their proprietary software. Doug Field resigns as head of Titan and takes on a new position at Ford. Kevin Lynch, VP of Technology at Apple, takes over Titan. While not an expert in auto, he’s best known for his work on Apple Watch. LG and Magna complete a joint-venture agreement that is rumored to be linked to Apple.
- 2022: Apple hires two veterans in the auto industry including former executive at Ford, Desi Ujkashevic, and former executive at Lamborghini, Luigi Taraborrelli.