A former Apple executive explains the financial incentive behind Apple creating a car (AAPL)

November 30, 2015 at 11:50 AM EST

Business Insider

If you want to know why Apple should make a car, just look what it did with the iPod and the music industry, argues Jean Louis-Gassée, a former Apple executive who now writes a weekly column for The Monday Note.

The car business is a low margin business. Ford's 2014 financial report shows a 3.9 percent operating margin. Apple's hovers around 40 percent.

If Apple can get anywhere close to the operating margins it currently has by selling cars, it will usurp the car industry.

It's easy to see how Apple could make money from it, but the better question is "Why should it bother?" Louis-Gassée writes.

The iPod serves as the example for this: The music player made Apple money because of its superior design, the iTunes store, and its distribution.

Apple could enter the car market with one model in one color (or maybe a range of five colors) and undercut the competition. Cars today can be customized to no end — one Volkswagen car has 117 choices for a steering wheel and 341 choices for its front seats — but that introduces too much chaos into the product line for Apple. The iPod, after all, was originally introduced in one color and only with 5GB of storage.

Inside the car, Apple could design its software to be the same throughout — no unnecessary add-ons or presenting a buffet of features — in an experience much like how it is to buy an iPhone today rather than choosing to get the GPS or CD drive in a car.

By stripping down the product line, Apple's finances (more than $200B in cash on hand) mean it could also leverage some attractive supply deals for the parts it does need in bulk, according to Louis-Gassée's arguments.

Producing the car is only one step, though.

Apple also has advantages in understanding the consumer and figuring out how to reach them. The car dealership experience isn't a great one, and Apple can turn that around by providing an Apple store-style service to car buyers, Louis-Gassée argues. It wouldn't need much maintenance given it is rumored to be an electric car (no oil changes, etc.) and specialty maintenance could be outsourced to auto body shops as is.

"Actually, I wonder how often we go to a car maintenance place compared to the frequency of Apple Store visits," Louis-Gassée writes.

In the end, Apple has high operating margins because of its streamlined process and ability to negotiate favorable supply deals. While the car industry has become an all-you-can-eat buffett of options, Apple can give you a car and let you decide to take it or leave it (and that extends to dealerships, servicing, etc.) It's been the Apple way, and it's worked in the PC industry, the music player industry, and the smartphone.

Cars are different, and Louis-Gassée concedes that Apple might have to take a hit coming down from 40%, but there is a lot of room between Ford's 3.9% and Apple's current margin numbers that branching out into cars might be the new revenue stream the Cupertino company needs.

"For example, are Apple’s 40% Gross Margin and +20% Net Income numbers eternal? If they are, we might not see an Apple Car. But if an aging personal computing industry causes Apple to reconsider its profit strategy as it enters its fifth decade (the company will be forty years old next year), attacking the venerable, lower-margin car industry might make sense," Louis-Gassée concludes.

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