Whereas Apple's (AAPL) entries into the smartphone, tablet and smartwatch markets were bold proactive moves aimed at creating new mass-markets with the help of out-of-the-box thinking, its autonomous driving efforts to date feel like a reactive move. An attempt to avoid getting left behind as Alphabet's (GOOGL) Waymo, Tesla (TSLA) , Nvidia (NVDA) , Intel (INTC) and auto industry incumbents make big investments in developing a large and potentially lucrative new computing market.
This doesn't necessarily mean Apple's efforts are doomed to failure. But it does likely mean that Tim Cook & Co. need to make some hard decisions on whether to significantly increase Apple's self-driving investments, or to pull the plug and pursue less ambitious automotive goals.
Car Project Woes
On Wednesday evening, The New York Times reported Apple has struck a deal with Volkswagen (VLKAY) to retrofit some Volkswagen T6 Transporter vans into electric self-driving shuttles for Apple employees. However, it adds that the shuttle won't be finished by a year-end deadline, and that it's "unclear" whether Apple's partnership with Volkswagen will go beyond the shuttle.
The NYT also notes that Apple's attempts to partner with the likes of BMW, Mercedes-Benz, Nissan (NSANY) and Chinese automaker BYD have failed due to a reluctance among automakers to give Apple the kind of control -- over car design, the user experience, the customer relationship and/or data -- it sought.
The story comes a couple years after it was learned that Apple has backtracked from an original goal of making a fully fledged self-driving electric car (first reported in early 2015) in favor of developing self-driving systems it would offer to existing automakers. In October 2016, Bloomberg reported Apple is developing an automotive OS (different from its CarPlay platform, which runs on top of third-party operating systems). However, the OS hasn't yet been launched.
What Apple Is Up Against
Whereas the NYT reports Apple's fleet of self-driving test cars features "more than 50" retrofitted Lexus SUVs, Waymo's fleet is considerably larger. In January, Waymo announced a deal with Fiat Chrysler (FCAU) , which had already supplied it with 600 Chrysler Pacifica minivans, to add "thousands" of additional Pacificas to its fleet. And in March, it inked a deal with Jaguar Land Rover to buy up to 20,000 electric SUVs for its fleet.
In addition, Waymo, having been launched in 2009, has seen its test cars travel 6 million miles on public roads, and has also simulated over 5 billion miles of autonomous driving in Google's data centers. All of that experience is a big reason why Waymo is now able to offer rides in fully driverless cars to consumers along designated routes in the Phoenix area, and plans to launch a commercial ride-hailing service by year's end.
Some automakers are moving aggressively as well. Though recent accidents raise some safety questions, Tesla's second-gen Autopilot system features a handful of functions associated with autonomous driving, and is supplying Tesla with a lot of real-world data. General Motors (GM) and Lyft have promised to create a test fleet featuring thousands of self-driving Chevy Bolts, with GM also aiming to launch driverless ride-sharing services in 2019. Intel and Nvidia, each of which have several self-driving partnerships with major automakers, have also been building out test fleets.
In addition to a very competitive environment, Apple -- as suggested by the NYT's report -- has to deal with the reluctance of many automakers to surrender control of major aspects of the user experience. This has been a problem for Waymo as well: The Alphabet unit hasn't yet inked a deal that would involve its self-driving systems being included in a third-party car that would be sold to consumers or businesses.
The Self-Driving Market's Potential
Self-driving systems currently cost many tens of thousands of dollars to make, after accounting for the cost of both their powerful computing hardware and sensor arrays. Costs will undoubtedly drop over time thanks to technical advances and greater economies of scale -- auto parts giant Aptiv (formerly Delphi) wants to bring costs down to $5,000 by 2025 -- but there's clearly a big opportunity for both system and chip suppliers.
Moreover -- as some concept cars shown off at CES 2018 made clear -- self-driving cars could feature far more powerful in-car computing systems for consumers to use for both entertainment and productivity tasks. This might particularly hold for fully driverless cars featuring no steering wheel or pedals to get in the way. In theory, Apple, with its tremendous chip, hardware and UI expertise, could become a major supplier of such computing systems if it convinced automakers to embrace its vision.
A self-driving mass-market certainly isn't going to appear overnight. Though it might not be too long before driverless taxi services begin running along some urban routes, cars supporting Level 4 autonomy (the ability to drive themselves in most, though not all, conditions) aren't expected to be sold to consumers for another two-to-three years. Still, it's not hard to see the market's enormous long-term potential.
Does an Acquisition Make Sense?
Speculation that Apple could bid for Tesla has been around for years. Buying Elon Musk's company would turn Apple into a top electric car maker overnight. It would also give Apple control over a major ADAS/autonomous driving initiative, a unique infotainment software platform, large battery and assembly plants and a global network of showrooms, service centers and charging stations.
But even if Musk was willing to sell (not a given considering what his pay plan looks like), a Tesla acquisition wouldn't be cheap. The company currently sports a $46 billion market cap, and it's not hard to imagine an M&A premium bringing a deal price above $70 billion. Moreover, Tesla has close to $10 billion in net debt and has struggled mightily to eliminate its cash burn.
A cheaper and less ambitious move would be to buy a self-driving startup or two. A firm like Zoox, which obtained a $1.5 billion valuation in 2016 and is working on a home-grown robo-taxi, could do much to further Apple's self-driving efforts without breaking the bank. Pony.ai, which raised $112 million earlier this year and has a strong Chinese presence, is another option.
Regardless of what Apple chooses to do, however, time is of the essence, given how much of a lead some rivals have and how quickly they're moving.