Industry Disruption In Germany, Apple Takes the Wheel

A car reportedly being developed by Apple could be a divisive game-changer for Germany’s automobile industry, pitting car makers against their own suppliers in the battle for the U.S. software giant's business.
The Apple chief executive, Tim Cook, at an event in California promoting the new Apple Watch. Is a Mercedes competitor in the works?

After the iPhone, iTunes and the iPad redefined the music, mobile phone and tablet computer industries, Germany’s auto industry might be next in line for a shake-up.

Apple's purported plans to develop its own automobile -- which would be the next evolution of its iOS technology from the pocket, to the wrist, to the dashboard, has the potential to upend Germany's auto sector, pitting carmakers against suppliers.

A big "if'' still surrounds reports of Apple's automobile plans, which surfaced in February after an electric battery maker and supplier to the auto industry,  A123, accused Apple of trying to hire away some of its top engineers.

Apple, which rarely speaks publicly about its plans, has characteristically declined to comment on the reports. But in Germany, the world's fourth-biggest auto market and home to Volkswagen, Mercedes, BMW, Audi, Opel and parts makers Continental, Bosch and ZF Friedrichshafen, the reports are being closely watched.

“One should take this seriously because Apple with its reputation can’t afford starting something which is meaningless,” said Peter Fuss, an Ernst & Young auto consultant based near Frankfurt.

For the car sector we should not rule out anything when it comes to Silicon Valley’s innovation power. Peter Fuss, Ernst & Young consultant

The stakes are high for Germany’s automotive sector, which had global sales of €361.6 billion, or $397.8 billion in 2013, one eighth of Germany's GDP, and employs a 756,000 workers, according to the VDA German Automotive Industry Association.

Germany trails only China, the United States and Japan in production of cars and commercial vehicles, according to the International Organization of Motor Vehicle Manufacturers. As autos have become more digital, the industry has shifted its emphasis from heavy manufacturing to software, computer and battery design.

That is giving the big centers of technology design and development -- foremost the U.S. computing and software giants in Silicon Valley -- an increasing incentive to enter an industry long dominated by industrial concerns.

Should Apple press forward and actually develop its own branded automobile, most experts expect the software giant to do what it usually does with its other products -- outsource their production to centers around the world.

 

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Under this scenario, the U.S. software maker may try to hire or partner with global auto parts makers to develop the unique components that Apple will build into its car of the future. In Germany, parts makers such as Bosch, ZF Friedrichshafen and Continental, are all potential Apple suppliers, experts said.

That could cause a sudden competition for resources among Germany's established auto giants, which have typically had long-term, established relationships with a group of domestic and foreign suppliers for years or decades.

“We should not rule out anything when it comes to Silicon Valley’s innovative power,” Mr. Fuss said. “We’ll need to wait and see how big this operation will become, but Apple can’t do it on its own. It will need cooperation partners.”

Cars are already dependent in part on software and electronic sensors, for instance in those vehicles that can automatically park with driver assistance. For these cutting-edge features, technology firms are likely to have an edge on industry incumbents.

Google has been experimenting with its own self-driving car and Tesla Motors, founded in Silicon Valley in 2003, launched its first fully electric car in 2008 and is increasingly seen as an up-and-coming rival to the big automakers in Germany.

Daimler, the Stuttgart-based maker of Mercedes, was a shareholder of Tesla until last year. Some analysts believe that German car part makers will be eager to supply Apple's vehicle, just as Asian factories produce much of its consumer electronics.

“Apple will not build a car on its own,'' said Willi Diez, an auto industry expert at the IFA Institute of Applied Sciences at the University of Nürtingen-Geislingen.

German Chancellor Angela Merkel opened the Frankfurt Motor Show in 2013, standing next to a new BMW i3 electric car. Will it be an Apple iCar in a few years time?

 

Car parts and household appliances maker Bosch, based in Stuttgart with 2014 sales of €48.9 billion, is already a supplier to Google and Tesla, but the firm declined to say whether it was currently cooperating with Apple.

“We are an interesting talking partner, especially to new players in the market,” said Bosch spokesman Stefan Kraus. “They do not have the deep knowledge of how to build a car that established car manufacturers have. This is a chance for us as a supplier to deliver system know-how.”

Hanover-based Continental, the world’s largest car parts supplier with 2014 auto industry sales of €34.5 billion, has cooperated with Apple on integrating mobile devices into cars, a Continental spokesman, Enno Pigge, said.

“When it comes to linking networks, the crossroads of technology, end-products and users, it would be an enrichment if technology firms can open up this market,” Mr. Pigge told Handelsblatt Global Edition.

The phone and computer maker certainly has the clout to roil the auto industry, in Germany and elsewhere. Apple redefined the mobile phone industry with the launch of its first iPhone in 2007, and iPad tablet computer in 2010.

 

 

With a current market value of $724 billion, Apple, with $179 billion in cash and cash equivalents on hand, is the world's most valuable company.

Car parts supplier ZF Friedrichshafen, which last year agreed to buy American rival TRW for $12.4 billion, said it was willing to cooperate with Apple but had not received any requests from the U.S. company.

I don’t see the company benefiting from this sort of activity. In the bigger picture, we are actually beyond the age of conglomerates. Dieter Zetsche, Daimler chief executive

German automakers sought to downplay possible competition from Apple, with executives either welcoming the U.S. company to the rough-and-tumble auto business, or makers, on the other hand, saying it would enhance their own sales.

Martin Winterkorn, the chief executive of Volkswagen, the world's second-largest car maker, said he was pleased with Apple’s initiative.

“I highly welcome the involvement of Apple, Google & Co. in the automobile sector,'' Mr. Winterkorn said in March at the Geneva Auto Show. "I am convinced this involvement will help acceptance of our core product by young, Internet-savvy people.”

 

 

Dieter Zetsche, the Daimler chief executive, said he was “surprised but not shocked."

“I think it’s more likely Apple's supposed plans will not materialize as predicted. But if they do, we welcome the competition,” Mr. Zetsche told Handelsblatt last month.

At the same time, Mr. Zetsche said he could not see the logic of Apple making cars.

“I don’t see the company benefitting from this sort of activity,'' Mr. Zetsche said. "In the bigger picture, we are actually beyond the age of conglomerates.”

Spokesman Mathias Schmidt of BMW, the world’s largest maker of luxury cars based in Munich, declined to comment on Apple’s potential car, calling reports of Apple's entry into the auto industry speculative.

BMW is in talks with Apple and other technology companies on connectivity topics -- linking mobile devices, watches and computers to onboard vehicle systems -- but actual vehicle development and production are not part of the discussions, Mr. Schmidt said.

Industry experts do not rule out that Apple will join forces with a carmaker.

Google might become a rival to German carmakers if it succeeds in developing a self driving car.

 

“It could happen that a car manufacturer says: ‘We’ll make an Apple car together with Apple.’ Some 20 years ago, Daimler and Swatch developed a car that is now called Smart,” said Mr. Diez from the Nürtingen-Geislingen auto institute.

The Swiss watch maker and Mercedes developed the Smart in the mid-1990s, and Daimler took control of the firm in 1998.

Apple, with its own proprietary connectivity technology, could be a threat for German rivals such as Bosch. Apple's CarPlay system enables drivers and passengers to use an iPhone on the go.

“ZF Friedrichshafen might be not affected so much but Bosch will probably view this critically, because it is strong in the fields of autonomous driving and electronics,” said Mr. Diez.

Whatever route Apple chooses, the automotive industry will be watching. German auto executives are acutely aware of what happened to Nokia, the Finnish mobile phone maker, after Apple launched its iPhone in 2007.

Nokia's in-house Symbian operation system couldn't compete with Apple's iOS, and the Finnish company tumbled from its perch as industry leader, before its much-weakened mobile phone business was bought by Microsoft.

Steve Jobs, the late Apple founder, liked to say "One more thing" when announcing a new product. His successor, Tim Cook, may soon use the phrase again as he climbs behind the wheel of an iCar, starting another race that, for German auto makers and their suppliers, might turn into a bumpy ride.

Video: This is how people believe the icar will look.

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the author:  [email protected]