Apple Looking to Shift Gear to Disrupt Transport Industry

Technology giant builds team of engineers and designers for self-driving electric vehicle project

a1Technology giant Apple Inc. (NASDAQ: AAPL) is considering acquiring a stake in McLaren Technology Group, the British supercar engineer and Formula One team owner, as part of its efforts to disrupt the transportation industry and decentralize revenue generation from its iPhone over the next few years, as reported by Bloomberg on September 21st, 2016. Apple would more likely consider making a large investment in U.K.-based McLaren than buy it outright.

Apple is also in talks to acquire Lit Motors, a San Francisco-based electric motorbike startup, for its several international self-driving patents. Interestingly, Bayerische Motoren Werke AG (BMW), Audi AG, and a South Korean automaker are also pursuing buying Lit Motors for the same reasons.

While there was an assumption that Apple has been focusing more on the underlying self-driving software in recent months, it seems to be also diversifying its efforts to build its own vehicle or tie up with an established carmaker. Sitting pretty with cash of $232 billion in cash at the end of June 2016, Apple is gung ho about acquisitions and strategic investments. Given the recent development in Apple’s strategic plans, a possible deal with McLaren would bring brand strength, advanced engineering, and a portfolio of patents to the equation. A tie-up with McLaren, whose expertise ranges from automotive engineering and on-board computer systems to novel chassis materials such as carbon fiber and aluminum, could accelerate Apple’s automotive project.a2

What bodes well for Project Titan?

Eager for a new hit to replace the iPhone, Apple has built up a team of hundreds of engineers and designers to work on a self-driving electric vehicle project dubbed Project Titan since 2014 and has been targeting a release as soon as 2020. The secretive project includes recruits from companies such as Tesla Motors Inc. (NASDAQ: TSLA) and Mercedes-Benz. Its original team leader, Steve Zadesky, left recently, after which Apple veteran Bob Mansfield took over the project.

Apple also hired the former head of BlackBerry Ltd.’s (NASDAQ: BBRY) automotive software division, Dan Dodge, in July 2016 and has continued to hire engineers with expertise in designing vehicle manufacturing systems. It is believed that Apple’s efforts are focused on the underlying systems that would power a self-driving car rather than building an electrical vehicle itself. Hence, industry watchers are closely watching whether Apple would use its possible acquisition of stake in McLaren as a technology incubator or for rolling out an electric car.

Would acquiring McLaren be the right strategy for Apple?

Analysts have questioned Apple’s possible acquisition of a stake in McLaren since the U.K.-based company is best known for luxury fast cars with limited mass-manufacturing capabilities. McLaren can make only a few thousand cars a year, compared with mainstream automakers with several factories each cranking out hundreds of thousands of autos each year. Moreover, McLaren is not known for electric cars or its autonomous driving capability. Some Apple analysts have also questioned whether the company would depart from its traditional strategy of controlling both the hardware and software in its products.

In the case of a possible acquisition, McLaren would likely to be valued from £1 billion to £1.5 billion ($1.3 billion and $1.95 billion), which would make it Apple’s biggest acquisition since the $3 billion purchase of Beats Electronics in 2014.

Closely held McLaren is more than 55% owned by Bahrain Mumtalakat Holding Co., the investment arm of the Kingdom of Bahrain. The next two biggest shareholders are TAG Group Ltd., a Luxembourg-based holding company, with 11%, and McLaren Chairman Ron Dennis, with 10%. McLaren, which owns an advanced technologies group and the eponymous Formula One racing team, produces luxury sports cars that can cost as much as $1 million apiece. The owners of McLaren Technology control 80% of McLaren Automotive, which produced 1,654 vehicles in 2015, generating revenues of £450 million. McLaren has pledged to invest £1 billion over the next six years on R&D. McLaren Technology reported revenues of £265 million and pre-tax losses of £22.6 million in 2014.

Many analysts have speculated that Apple would buy Tesla Motors, which is seen to be a good fit because it sells electric cars with self-driving capabilities.

Tech companies shift gear to automotive

a3Apple’s self-driving project comes after rival technology giant Alphabet Inc.‘s (NASDAQ: GOOG) Google started talks with the world’s top automakers and assembled a team of global suppliers to speed up its plans to bring self-driving cars to the market in 2014. The suppliers named by Google included Bosch Group, which supplies power electronics and long-range radar to Google; ZF Lenksysteme, which supplies a new steering gear; LG Electronics, which supplies the batteries; Continental; and Roush. Roush, the Michigan-based engineering and specialty manufacturing company, built the pod-like two-seater that Google began testing on public roads in early 2016.

Efforts to break reliance on iPhone

Apple has been facing flak from investors after sales dropped in early 2016 following a decade of continuous growth. To add to its woes, Alphabet has dethroned Apple as the world’s most valuable company following a magical four-year run. Driven by sales of its most popular products, the iPod, iPad and, above all, the iPhone, Apple’s revenue skyrocketed to $233 billion in the fiscal year ended September 30th, 2015, from $14 billion a decade earlier. The biggest source of concern for Apple is its major dependency on its blockbuster product iPhone, which accounted for 66% of its FY15 revenue. However, tapering demand for the iPhone has emphasized the importance of new sources of revenue.

For Q3 FY16, Apple posted revenue of $42.4 billion and net profit of $7.8 billion, or $1.42 per diluted share, compared to revenue of $49.6 billion and net profit of $10.7 billion, or $1.85 per diluted share, in the year-ago quarter. The results represent the second consecutive Y-o-Y declines in quarterly revenue and iPhone sales. R&D spending jumped by more than a quarter to $2.6 billion compared with a year earlier period.

Didi deal could provide Apple with China foothold

In the second week of May 2016, Apple struck a $1-billion deal with Chinese ride-hailing company Didi, a rival of Uber Technologies Inc. in China, is seen as a lucrative investment since it could provide access to big-ticket companies in the Chinese market. Didi is backed by China’s two largest Internet companies, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. These companies could help Apple market the Apple Pay electronic payments system and other services, as well as help the US Company foray into transportation. In turn, Apple will help Didi build up a ride-sharing platform that already handles more than 11 million rides a day and serves about 300 million users across China.

Apple’s possible in McLaren reflects an intensifying battle over the future of driving and highlights new alliances among auto makers and technology firms in a major shift from internal combustion engines to self-driven electric vehicles.

Stock Performance

a4Apple’s stock ended the day at $114.62, gaining 0.94%, at the close on Thursday, September 22nd, 2016, having vacillated between an intraday high of $114.94 and a low of $114.00 during the session. The stock’s trading volume was at 31.04 million for the day. The Company’s market cap was at $621.12 billion as of Thursday’s close.

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