All Signs Point to Apple (AAPL) Moving to Manufacture Its Own Electric Vehicle - Stifel (TSLA) (F) (GM)

March 20, 2015 6:59 AM EDT
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Stifel is out with commentary on Apple (Nasdaq: AAPL) amid recent speculation that the company may be looking to produce its own automobile.

The conclusion is that evidence points to Apple working on a Battery Electric Vehicle (BEV). Stifel noted the following key points to back the assumption:

* Manufacturing-Focused Capex. We believe Apple’s significant, and very focused, capex investments in manufacturing should be a key consideration – Apple’s cumulative capex over past 5-yrs. totaling ~$40 billion with 80 percent+ invested in manufacturing; similar to GM, Ford, & Daimler-Benz and vs. Tesla’s ~$1.8 billion in cumulative capex.

* Apple’s R&D Increase = What’s Next? While we would highlight the auto industry’s significantly higher R&D spend relative to Apple, we believe Apple’s accelerated quarterly R&D spend (>60 percent increase over past 5-qtrs) and absolute yr/yr increase will leave investors questioning the company’s next platform expansion move. Apple’s cumulative 5-yr. R&D spend at $19.6B compares to Tesla’s spend at ~$1.3 billion.

* Apple’s CFO Background & Recent Hiring. We are intrigued by Apple’s CFO, Luca Maestri’s, background at General Motors; particularly his role in establishing GM’s regional Asia-Pac operations, including manufacturing investments in China and Thailand. Other recent hires include:

-- Hugh Jay - worked on transmissions and gearboxes for motorsports, commercial, and aerospace products. His LinkedIn bio notes that he was at EMCO Gears from August 2012 to January 2015 and worked on the entire product lifecycle for 2 motorsports transmissions, 27 gearboxes, and various other products.

-- Johann Jungwirth - President and CEO of Mercedes-Benz R&D in North America. His LinkedIn bio highlights development work in connected cars, UI and telematics, autonomous driving, powertrain and eDrive, advanced exterior design.

-- David Nelson - While Mr. Nelson's LinkedIn profile lists Tesla as his employer, it also notes that this employment spanned from August 2011 to February 2015. His experience notes mechanical engineering manager at Tesla, responsible for prediction, modeling, and verification aspects of the motor and gearbox performance and efficiency.

-- Robert Gough - Mr. Gough was previously design lead for active safety car technology at Autoliv; employment listed from 2011 through January 2015.

-- John Ireland - senior power train test engineer at Tesla; prior to Tesla Mr. Ireland was a research engineer at the National Renewable Energy Laboratory (NREL). Mr. Ireland's LinkedIn profile still lists employment at Tesla. He worked at NREL from July 2010 to September 2013

-- Mujeeb Ijaz - previously Director of Automotive at A123; CTO and VP of Cell Products Group. Mr. Ijaz head of electric and fuel cell vehicle engineering at Ford, resulting in the development of Ford's Focus FCEV and the lead developer on Fords Lithium Ion plug-in hybrid, the Ford Edge HySeries. Mr. Ijaz's LinkedIn profile lists 18 issued patents ranging, most relating to battery systems.

-- Rui Guan - reportedly hired in October 2014 as a hardware engineer; Mr. Guan was previously a drive train engineer at Ogin Inc, a company focused on wind turbines and other clean energy solutions. He previously worked at Vestas, a company focused on wind turbines.

-- David Perner - a former Ford engineer; worked as a product engineer on Ford's hybrid electric vehicle systems, including transmission work for Ford's hybrid F-150.

-- Dillon Thomasson - a former lead design engineer at General Dynamics; noted to have been previously focused on aerospace and defense products.

-- Lauren Ciminera - joined Apple in September 2014; previously working at Telsa as a Lead Recruiter for the hiring of manufacturing and mechanical engineers globally.

-- Anh Nguyen - Mr. Nguyen is listed as joining Apple in November 2014 from Tesla where she was in recruiting from October 2013 - October 2014.

* Regulations, Distribution, & Electric Vehicle Adoption. Stifel auto industry analyst, Jamie Albertine, commented, As it is being widely reported that Apple may be taking steps to deepen its position within the auto industry, which may or may not include the manufacturing of vehicles, we thought it timely to provide a high level overview of the key steps a new auto manufacturer must take into consideration before embarking on vehicle production. Three key areas, include: 1.) requisite regulatory approvals, 2.) distribution/service, and 3.) addressable market for alternatively fueled vehicles.

Regulatory considerations: U.S. vehicle manufacturers are subject to a large number of governmental standards and regulations, which broadly fall into three categories: (1) Environmental, (2) Safety, and (3) Distribution. Environmental laws and regulations relate to fuel economy, emissions controls, hazardous substance controls, and industrial environmental protection laws. Vehicle safety refers to the numerous regulatory requirements established by the National Highway Traffic Safety Administration (NHTSA), including U.S. federal motor vehicle safety standards (FMVSS), and automobile disclosure rules with which manufacturers must comply. Lastly, states regulate the manufacture, distribution and sale of vehicles and require separate licenses for manufacturers and dealers. Some states, like Texas and most recently NJ, have implemented laws that prohibit manufacturers from obtaining a dealer license to sell its vehicles directly to consumers. As a result, there is some level of heightened scrutiny new manufacturers must endure prior to introducing a direct to consumer selling channel. However, it seems TSLA legal efforts and subsequent state-by-state victories would conceivably provide a lower hurdle for further entrants, potentially including AAPL.

Competitive Landscape for Alternatively Fueled Vehicles. According to LMC Automotive, there are roughly 85-90 million vehicles produced globally per year, with an existing vehicle carpark approaching 2 billion units. By various estimates, and inclusive of hybrid-electric propulsion vehicles, we believe even the most aggressive measure suggests 3-5 percent market share for alternatively fueled vehicles in terms of global annual sales (higher penetration in the U.S. vs. abroad). Looking ahead, we believe the impact of new safety and emissions standards and further technological advancements will underpin increased competition from established automobile manufacturers. The question remains, what will drive increased alternatively fueled vehicle penetration, or will there simply be a crowding out among competitors fighting for 3 percent-5 percent of global automotive market share? We note per existing environmental regulations, zero-emission vehicle (ZEV) standards mandate substantial annual increases in the production and sale of these vehicles for the 2018 - 2025 model years, implying that by 2025, for example, alternatively fueled vehicle offerings will need to approach 15 percent of a manufacturer’s total California unit sales volume. Suffice it to say, more products are coming, but we ask whether consumer demand will respond accordingly, driving a substitution away from the traditional vehicle fleet.

Currently, plug-in electrified vehicles (PEVs) make up approximately 0.72 percent of U.S. new light duty vehicle sales in 2014, according to In August 2014, reported that the cumulative number of PEVs surpassed 250k units (we note the U.S. carpark is just over 250 million units), which includes all U.S. PEV sales since 2008. Through February 2015, 300k (+66 percent y/y) PEV/Plug-in Electric Hybrid Vehicles (PHEV) had been sold, according to data compiled by the Electric Drive Transportation Association (EDTA). Hybrid vehicle sales have ramped from 314k in 2008 to 452k in 2014, while PEV and PHEV sales have scaled from 345 units in 2010 to roughly 119k in 2014, according to EDTA. EDTA currently estimates 24 models of plug-in and fuel-cell powered vehicles currently available in the U.S., with 20 additional model introductions expected through 2016.

Per Automotive News, we are able to isolate certain alternatively fueled vehicle (AFV) sales data at the nameplate level. Our subset includes the Tesla Model S (Automotive News estimates), the Nissan Leaf, the BMW i3 and i8, the Chevrolet Volt, the Toyota Prius, the Mercedes-Benz B-Class, the Cadillac ELR, and the Ford C-Max, among others. We estimate market share AFVs, using our subset above, has grown from roughly 1.0 percent during the period spanning 2008-2010 to roughly 1.5 percent market as of February 2015 (latest data). We note share has fluctuated over time, averaging 1.76 percent over the past 5-7 years and peaking at 2.6 percent during the month of July in 2013. We note these figures are inherently conservative as Automotive News nameplate data is limited given certain plug-in hybrid offerings are not broken out by OEMs in some cases vs. their gasoline-powered platform equivalents (e.g. Ford Fusion/Focus sales are not broken out by gasoline vs. plug-in offerings).

Industry growth trajectory. According to LMC Automotive, penetration rates of vehicles equipped with alternative power sources are expected to grow exponentially to 2020 and beyond both in the U.S. and abroad. In aggregate, U.S. sales of alternative vehicles, which made up 3.47 percent of U.S. unit sales in 2014 (still predominantly hybrids), are expected to reach 8.41 percent market share by 2020 and 10.72 percent by 2024. On a global basis, alternative vehicle penetration, which made up 2.83 percent of global sales in 2014, are expected to reach 5.42 percent market share by 2020 and 8.63 percent by 2024. We believe this also reflects the relative strength of the alternative vehicle market in the U.S. versus broader global adoption rates, which may be hampered by the prevalence of diesel-powered vehicles whose fuel economy ratings are often much higher relative to gasoline/petrol-powered vehicles.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Apple closed at $127.50 yesterday.

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