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Leander Kahney, who publishes the Cult of Mac website, displays some of his family's Apple devices. (NOAH BERGER FOR THE GLOBE AND MAIL)
Leander Kahney, who publishes the Cult of Mac website, displays some of his family's Apple devices. (NOAH BERGER FOR THE GLOBE AND MAIL)

Apple’s drive for world auto dominance spooks the industry Add to ...

The Leander Kahney family in San Francisco is exclusively an Apple household. At last count, they have six iPhones, eight iPads, three iMacs, two MacBooks, more iPods than Mr. Kahney can count and assorted accessories, such as Apple TVs and the WiFi-based Time Capsules.

Now that its much-ballyhooed watch is just weeks away from hitting the market, the question is what’s the next big thing for the world’s leading technology marketer. And the answer could well be its boldest venture yet: an Apple car.

Loyalists like Mr. Kahney, 49, can hardly wait to get his hands on one, if his wife lets him. “I also might have to mortgage my house to do it.”

The once-fleeting notion that Apple Inc. might disrupt the automotive sector the way it successfully assaulted the markets for music, cellphones and tablets has become more concrete in recent weeks. It has electrified the Apple community and Mr. Kahney, publisher of Cult of Mac, one of the biggest websites in the world devoted to everything Apple.

“I’m really excited about it, it’s really intriguing,” he says. “What kind of car are they going to build? Will it be an electric car, a self-driving car or a regular car with a really nice interface? Even just from a sheer design standpoint, it’s fascinating.”

Similar questions – and the ultimate issue of whether an Apple iCar, iRoadster or iRagtop will hit the road early in the 2020s – are also very much on the minds of senior executives of the world’s auto makers.

Reports about Apple preparing to enter the auto market surfaced last month, leading to frenzied speculation about whether it plans to sell its own car, partner with auto makers or try to grab more of the electronic and software content in vehicles amid growing consumer demand for better connectivity and the approach of autonomous cars.

Apple is keeping mum, but enough information has leaked out about its extensive research – including the code name Project Titan – to indicate that the tech giant is determined to win a bigger piece of a global market that generates $1.6-trillion (U.S.) in revenue a year from new car sales alone.

Nothing has the potential to transform the auto industry quite like the entry of the world’s most valuable company into the market.

Apple’s cash pile of $179-billion is 20 times the annual capital spending of Ford Motor Co. Its profit is nearly four times higher than that of Toyota Motor Corp., even with the depreciated yen. And its global clout and market value in excess of $740-billion would qualify it for membership in the Group of 20 if it were to become a nation.

Whatever form its vehicle plan eventually takes, it represents an existential threat to the auto club – some of whose members barely survived a brush with death a few short years ago.

The industry is already dealing with tectonic shifts.

The internal combustion engine, a technology that put the world on wheels more than a century ago, is being challenged as never before. Auto makers are spending tens of billions of dollars on battery propulsion and fuel cell systems to meet regulations that will come into force over the next decade and require lower emissions.

Drivers are demanding in-vehicle entertainment, electronic and communication systems that connect seamlessly with those in their homes and offices, as well as such navigational devices as active cruise control, lane departure warning systems and apps that find restaurants and gas stations.

As an example of how swiftly the industry is moving, electric vehicle maker Tesla Motors Inc. said this week that a software upgrade will permit owners of its model S car to drive without touching their steering wheels as early as this summer.

Looming on the road ahead is the autonomous vehicle, which will require game-changing leaps in technology.

But all of that pales in comparison to the disruption that would be caused by Apple, with its massive resources and a huge and loyal customer base exemplified by people like Mr. Kahney and his family. “The issue here is these guys are monsters,” says veteran auto industry executive Tom LaSorda, former chief executive officer of Chrysler LLC. “They’re big, they’re effective, they have cash. I bet you this is being discussed in every boardroom. And if it’s not, they need to give the board a shakedown.”

To understand how an invasion by Apple upends an existing market and forces companies to swallow tough medicine in a hurry, there’s no need to look any further afield than Research in Motion Ltd., now called BlackBerry Inc., after the smartphone that once dominated the market but is now struggling to stay relevant.

Jim Balsillie was co-chief executive officer of RIM when Apple and Google targeted the company’s lucrative hold on the smartphone market.

He recalls how RIM went from being the disruptor in the cellphone arena, effectively blowing up such competitors as Nokia and Motorola and building a $20-billion business, to a disruptee.

“There was not an appetite for strategic chemotherapy at RIM, because organizations hate it,” Mr. Balsillie says. “In tech, you have a window in time [to adapt to the new marketplace reality]. If you wait too long, then it becomes palliative.”

The auto industry now faces a similar assault and the Fords, Toyotas, Volkswagens and General Motors of the world have to ask themselves if they’re prepared to undergo their own strategic chemotherapy, he says.

For the moment, in public, they are adopting the sober stance that they are paying attention to the Apple threat, while many former auto executives and industry pundits drone on about how Apple can’t possibly succeed in this business because car manufacturing is a hugely capital-intensive, low-margin enterprise that is dramatically different from the industries it has already disrupted.

“We take anybody with that kind of capability and cash and technological prowess [entering] our industry seriously,” says Joe Hinrichs, Ford’s president of the Americas. “But of course, our focus has been on how do we make sure that we are part of the disruption, that we are part of the solutions of the future.”

The cloud

Apple’s big advantage over traditional car makers is simple, yet hard to overcome, and it lies in the cloud.

The cloud consists of remote servers that store vast amounts of data and run applications, giving everyone on the planet with a connected device access to unlimited computing power essentially for free. It is also revolutionizing the way companies do business by instantly providing them with vast amounts of customer data. And it means Apple would not need to acquire car manufacturing capacity or build assembly and distribution networks in order to create chaos in the club.

It’s an advantage few traditional manufacturers, including auto makers, fully grasp, let alone have the ability to exploit.

Cloud computing has such transformative power “it makes the Gutenberg press look like a non-event [in terms of technological change],” says Francis McInerney, managing director of North River Ventures in New York and an adviser to Japanese electronics makers and other companies faced with a rapidly changing competitive landscape.

In Apple’s case, its huge server capacity enables all of its products, processes, applications and communication tools to link together, producing a single flow of information that the company can tap into quickly.

Everything it produces, from iPhones and iPads to Macs and the new Apple Watch, is just another means of connecting seamlessly to its cloud. Vehicles would be treated the same way, essentially turning them into tablets or Macs on wheels.

“Apple thinks from the cloud out,” says Mr. McInerney, who would definitely line up for an Apple vehicle. At least then, he says, he would be assured of a better communications interface than the clunky one in his new upscale German model.

“If you’re an Apple or a Google, it allows you to use the same power to manage your supply chain that you use to manage your customers,” he says.

“That’s a revolution in thinking that allows you to identify all the cash-wait states [where money sits idle] and to collect a stunning amount of customer information in real time. Put the two together and you’re turning that information into cash at an accelerated rate. Car companies don’t think like that.”

What Apple’s astute boss Tim Cook, a logistics expert, realizes is that it takes a certain kind of business model to enable the company “to roll up all the industries that it’s rolling up, as it hooverizes one after the other,” Mr. McInerney says.

Simply put, Apple’s formula for continued rapid and profitable growth amounts to “cloud plus logistics,” he says.

Suppliers

Many of Apple’s electronics suppliers also work with auto makers and they are salivating at the thought of doing more business with the computer giant, which is renowned for determining all of its parts needs and paying for them in full a year or more in advance.

This much is certain: Apple will not make or sell vehicles the traditional way and it has no interest in pursuing a low-margin business of any sort.

“Apple typically starts with the supply chain and works backwards,” Mr. McInerney says. “The product itself is less important.”

But it would be logical to start with electric cars, because they involve fewer moving parts, which will make them cheaper to produce reliably once Apple can get the high cost of batteries down. Part of its engineers’ secret research is believed to be focused on car batteries.

Mr. LaSorda notes that the prevailing method of developing vehicles in the auto industry is to start with a great exterior design and work inward. The centre stack that holds the electronic interface is then drawn up to fit into that space.

Apple, he says, is likely to start from the centre stack and work out, because that’s really where the driver interacts with the car. The key electronic and entertainment systems that need driver input will be voice-activated.

“They can just create a voice over to the car that says ‘put No. 3 speed on my air conditioner, get me to 70 degrees. I want to go to this store, where is it?’ The navigation system takes over; I don’t plug anything in.”

Apple is already active in the auto information and entertainment space with its CarPlay system, which uses Siri for voice-activated commands, but requires an iPhone to be plugged in.

The prize for developing its own car, or a complete electronic system that controls an autonomous car, would be a bigger slice of an industry that in new car sales alone is four times the size of the annual smartphone market of $400-billion and dwarfs the $266-billion personal computer market, according to figures compiled by analysts from Morgan Stanley & Co. LLC.

Dominance

In its remarkable growth trajectory, Apple gobbled its way through markets valued in the tens of billions of dollars, like music players and laptops, then moved into hundred-billion-dollar-plus businesses like smartphones.

Ventures like the high-tech watches and streaming TV may prove to be nice niches, but are too small to have much impact on the top or bottom lines.

At its current size, Apple can only expand to any significant degree by going after far bigger game. Mobile payment services hold promise, although competition will be fierce.

“They’ve got to be in the trillion-dollar markets. And there are only two that are worth looking at: health care and autos,” Mr. McInerney says. Apple is hard at work on both.

On the automotive front, the changes in electronics and technology now sweeping the industry represent an immense opportunity for Apple and Google Inc., in part because autonomous vehicles will provide more time for people sitting in vehicles and thus an even stronger demand to be connected. Google has a self-driving car in development.

“We estimate that the value of the automobile will evolve from being a 90-per-cent hardware device today to being a 60-per-cent software device once cars are fully autonomous,” Morgan Stanley analysts wrote in a recent report. “This is critical to Apple’s involvement in the car. Apple has both hardware and software design expertise and the rebalance of the hardware versus software equation in the car can create a void that only Silicon Valley (and a select few existing auto makers and suppliers) can fill.”

To ward off the attack of the tech monsters, Mr. Balsillie suggests a defence neither the auto industry nor competition watchdogs seem likely to embrace: Team up and deploy their combined market clout to head them off by coming up with their own value-added model.

“If I were the automotive guys, I would get together … without violating collusion [rules] and grab my competitor’s smartest strategic guy and tell him we have to co-operate before they divide and conquer us.”

Like the record companies and cellphone makers before them, auto makers are focused on besting their main rivals. “They don’t realize there’s a bigger competitor around the corner that can wreck everybody’s business model by introducing their own,” Mr. Balsillie says.

The music industry only needed three majors to team up to offer an effective downloading service like Apple’s. But two of them couldn’t even reach a deal. So Apple, which produces no music and employs no musicians, swooped in.

“They were stuck in their existing competitive world, and tech preys on that,” Mr. Balsillie says. “They count on the entrenched guys being so stuck in their models that they don’t rethink [them], and they know they’re not really capable of topping them on the innovation front.”

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THE BATTERY PLAN

The closest thing to a confirmation that Apple is working on a car comes not from the company itself, but from a lawsuit.

In February, Apple was sued by a company called A123, which specializes in lithium-ion batteries for passenger vehicles and similar uses.

The lawsuit, which claims Apple poached several of A123’s employees, claims the iPhone maker “is currently developing a large-scale battery division to compete in the very same field as A123.”

One of the most significant impacts of an Apple foray into the world of cars will likely be be a jolt to the battery industry.

For years, a host of researchers, startups and established companies have been working on developing batteries that are both cheap enough and efficient enough to make electric cars the norm, rather than an anomaly.

But none have the size nor the financial means of a corporate behemoth like Apple.

“Tesla validated the commerciality of the electric car and goaded major car makers the world over to get serious about them,” says Steve LeVine, a journalist and adjunct professor at Georgetown University whose latest book, Powerhouse, charts the latest efforts to build a better battery. “Apple’s entry is Tesla on steroids.”

As such, car companies that previously ignored or underestimated the electric car market – and the broader notion that cars will one day become moving smartphones, rather than basic transportation products – have a very limited amount of time to reassess.

In his meetings with dozens of car company executives, Thilo Koslowski, vice-president and analyst at the research firm Gartner’s automotive unit, says he has seen that the industry’s old guard is well aware of the transformation.

“The car industry has three to five years left to determine where they want to be in this new age of mobility,” he says. “This is a huge disruption.”

Omar El Akkad

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  • Updated April 21 4:15 PM EDT. Delayed by at least 15 minutes.

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