Change! Apple may spend 130 billion to develop cars and poach Tesla's factory in China?

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As the mobile phone business gradually loses its appeal, especially as its share in the second largest market is crushed by Huawei, Apple needs a new story to support its valuation, stock price and imagination space.

Morgan Stanley analyst Katy Huberty predicts that Apple will invest nearly $19 billion (equivalent to more than 130 billion yuan) in automotive research and development this year. Apple's disclosed performance shows that the iPhone business began to decline in the fourth quarter of 2019, and the epidemic has accelerated the downturn in Apple's traditional business. Net profit fell by 3% in the second quarter of 2020.

As Apple's mobile phone market share gradually shrinks, especially as more and more Apple users in China choose Huawei phones, Tesla cars are booming in China and are welcomed by the Chinese market and consumers. Cars seem to be an exception in the Sino-US trade war, which may also attract Apple's interest. More importantly, Apple has long been planning its car business and has poached more than 300 Tesla employees. Even before Tesla planned to build a factory in China, there were reports that Apple was considering building a car factory in China.

Apple's stock price needs a new story

Morgan Stanley analyst Katy Huberty expects Apple to spend nearly $19 billion on car research and development this year, compared with $80 billion to $100 billion for the entire auto industry, according to Huberty. The influx of money into car research and development is one reason Apple and other tech companies are likely to disrupt the auto market.

Huberty revealed that Apple sees automotive technology as "a huge market," similar to how it views health and financial technology, and predicted that Apple's ultimate goal is to develop a "vertically integrated solution" in automotive technology.

As of May 25, Apple's market value was $1.38 trillion (about 10 trillion RMB), and the core foundation of its huge market value is its mobile phone business and its attached app store. However, as competition in the mobile phone business intensifies around the world, especially in the sluggish Chinese market, coupled with the low threshold of mobile phone technology, which has attracted more and more participants, Apple needs a new huge business to maintain the imagination space of its stock price and market value.

Especially in the fourth quarter of 2019, iPhone achieved revenue of US$33.362 billion, a decrease of 9% from US$36.755 billion in the same period of 2018. Mac achieved revenue of US$6.991 billion in the fourth quarter of last year, a decrease of nearly 4% from US$7.34 billion in the same period of 2018.

Affected by the epidemic, Apple's performance in 2020 became worse. Apple released its second quarter results for fiscal year 2020 in May this year. The report showed that Apple's net revenue in the second quarter was US$58.313 billion, an increase of 1% from US$58.015 billion in the same period last year; net profit was US$11.249 billion, a decrease of 3% from US$11.561 billion in the same period last year. Apple's revenue in Greater China in the second quarter was US$9.455 billion, down from US$10.218 billion in the same period last year.

All signs indicate that if Apple fails to maintain product innovation, it may lose its appeal, thus affecting its valuation. However, the innovation of traditional feature phones into smartphone business has actually reached its ceiling. Only relatively traditional cars are just beginning to embrace the Internet. Due to the further impact of factors such as the trade war and the epidemic on the mobile phone business, Apple urgently needs a new story.

Apple continues to poach technical executives from car companies

Apple has long been interested in the automotive business. In 2013, Apple announced its entry into the automotive field and announced the iOS in the Car plan. After the iOS in the Car plan was announced, Apple attached great importance to this system. In 2014, Apple officially renamed iOS in the Car to CarPlay. The release of Apple CarPlay sent a strong signal to other technology companies, that is, to compete for the smart car system market, especially to convey that cars will become larger smartphones.

If you think that Apple just wants to provide car networking entertainment systems, you may underestimate Apple's ambition. Apple has been accumulating talents in traditional automotive hardware since 2015, when Apple recruited Doug Betts, the former senior vice president of Chrysler Automobile Group. Previously, he was responsible for the quality and service of global leading products at Chrysler. According to his profile on Linkedin, he officially started working for Apple in July 2015.

After that, Apple set its sights on poaching Tesla. In 2017, Apple absorbed a large number of former Tesla employees, covering areas including manufacturing, security and software engineers. By August 2018, data from LinkedIn alone showed that Apple had poached 46 employees who originally worked at Tesla and then jumped to Apple.

According to LinkedIn data, as of the end of 2019, Apple had poached 170 employees from Foton Motor, and Tesla has become the core of Apple's poaching, with more than 300 Tesla employees poached by Apple. Today, this number has exceeded 500.

The core members poached include Tesla's chief car designer Andrew King, Tesla's vice president of drive Michael Schwekutsch, Tesla's former senior vice president Doug Field, and Tesla's vice president of engineering Steve MacManus. Since the above four Tesla core personnel are in charge of the four fields of car body design, car power system, vehicle R&D engineering, and car interior, this actually means that Tesla's poaching is aimed at the entire vehicle, rather than just becoming a supplier of a certain component or entertainment system for major car companies.

A Tesla spokesperson pointed out at the time that Apple's financial strength was "100 times" that of Tesla's, making it difficult for the company to gain an advantage in the competition for salary and benefits.

"The company wants a better future for its employees, and choosing to work at Tesla is a challenge. Apple has 100 times more money than we do, so of course they can afford to pay more. We are competing extremely hard with traditional car companies, which also produce 100 times more than we do, so this is a very difficult task. We don't even have money to advertise, hire spokespeople or offer big discounts, so we have to survive on the quality of our products. Despite this, we believe in our mission and sacrifice time to fight negativity. We want to lead the world in the transition to sustainable energy, and we have to do this," said a Tesla spokesperson.

So why has Apple increased its investment in automobile research and development? Market insiders believe that Apple has always regarded Tesla as its main competitor. When Tesla delivered the Model 3 to users for the first time on January 7, 2020, and the production of the Shanghai Super Factory reached a new high, Tesla's business in China has made Apple jealous.

Because of the tense relationship between the United States and Huawei's mobile phone and 5G business, Huawei's mobile phone business has become the winner in the Chinese market. Apple, which relies on the Chinese market, may face certain uncertainties in the context of the trade war if its core business continues to be tied to the mobile phone field.

Will cars make Apple popular again?

As Huawei has lost the US market and Apple's position in the Chinese market is also precarious, mobile phones have become a key area in the trade war, but automobiles seem to be an exception in the trade war. Tesla's automobile factory has been welcomed in China and even received financing support from a Chinese bank consortium.

Canalys data shows that Apple's iPhone sales in the domestic market in 2019 were 27.5 million units, and its market share also dropped from 8.7% to 7.5%, a 21% drop compared with 2018. In contrast, Huawei's mobile phone shipments jumped from 104.8 million units a year ago to 142 million units in 2019, an increase of 35.5%.

Mobile phones have clearly become a key area in the trade war, affecting consumer choices. According to Alibaba's online channel data, more than 40% of Chinese buyers of Huawei's Mate 30 series are Apple users.

Completely different from mobile phones, cars are clearly not affected by the trade war, as evidenced by the Tesla China factory and the financial support from Chinese financial institutions behind it. Some market insiders believe that China's auto business is not only a huge and profitable market, but Apple also hopes that it can regain popularity among Chinese consumers like Tesla cars.

On the evening of May 22, Fulin Precision announced that the company recently signed an agreement with Huawei. The company was identified as a supplier of Huawei's new energy vehicle reducers and related components. The two parties will cooperate in the field of new energy electric drive assemblies in the future around core technology products and industrial resources.

According to the Securities Times, a person from Huawei's brand department responded that the company has no plans to build complete vehicles, and it is not clear what the procurement purpose of the parts mentioned in the announcement is, and the information is being verified internally. Another person familiar with the matter analyzed that the cooperation should be limited to the three-electric field of new energy vehicles and will not involve complete vehicles.

Although Huawei denied the vehicle plan, Huawei's layout in the automotive business has been gradually advancing. Earlier this month, Huawei officially announced that it had recently joined hands with the first batch of 18 car companies to officially launch the "5G Automotive Ecosystem" to accelerate the commercialization of 5G technology in the automotive industry and jointly create consumer-perceived 5G cars, including FAW Group, BAIC Group, BYD, Yutong Group, Dongfeng Group, etc. It is understood that since the release of the world's first 5G vehicle-mounted module MH5000 in April 2019, Huawei has provided ecosystem partners and many car companies with products and technologies such as the 5G vehicle-mounted module MH5000 and the 5G vehicle-mounted terminal T-Box platform to support the application innovation of 5G cars and 5G+C-V2X intelligent networking.

Because Chinese consumers are more supportive of Huawei products during the trade war, the fact that Huawei does not involve the entire vehicle business layout may give Apple's car plan a sigh of relief.

Some market insiders believe that if Apple decides to launch the Apple car, its business focus will still be on China, the world's largest automobile market. This means that Apple is likely to imitate Tesla and build a super factory for Apple cars in China. There have been reports that Apple hopes to build a car factory in China, and has had contact with CATL on the supply chain, intending to cooperate in the field of power batteries.

Zeng Yuqun, chairman of CATL, also said recently that CATL will officially supply Tesla in the second half of this year, and the supplied products will not be limited to lithium iron phosphate or ternary batteries. This means that if Apple's complete vehicle plan is advanced, Chinese A-share companies such as CATL may be able to get the best of both worlds between Tesla and Apple.