Sirwin
Sirwin

Why Did Apple Give Up on Producing Electric Cars?


The other day, a bombshell news hit Bloomberg terminals. Apple is abandoning the Titan project. In other words, Apple has accepted that it cannot produce a smart electric car. It is said that there are over 2000 employees in this regard and that they will be transferred to other departments. It is difficult to know how much money Apple spent on this project, but since it was a project that lasted for 10 years and only 2000 people worked, a serious amount of money has been wasted since Apple also employs very high-cost people. Now that Apple has given up on this business, this question has come to people's minds. I wonder if the electric car business is a waste? If even a company like Apple thinks that they cannot achieve this task, does it mean that electrics are dying? Especially the recent news that Mercedes was going to switch to full electric by the end of 2030 and gave up on it, a similar news from Audi the day before, Ford's great difficulty, and when all these came together, people started to say that electricity is probably dying. Today, I have prepared very interesting information for you on this subject based on super numbers, data, statistics and automotive history, and at the end of my presentation, you will see that most of the things talked about are empty topics and unfortunately, the automotive press is quite lacking in information, just like rote economists.

Bloomberg's headline: Apple abandons its 10-year journey. Now the team is being shifted to other projects. One of these projects will be artificial intelligence, says Bloomberg. Apple devoted a lot of resources and time to this work. But he couldn't get out of it. In my opinion, there are two main reasons for this. First of all, Apple is not a very ambitious company in artificial intelligence. There is no data on the autonomous driving side either. I would not expect a company that has not yet demonstrated serious success in artificial intelligence without data to compete with companies such as Tesla, which has advanced in fully autonomous driving.

Secondly, producing cars is a difficult and costly business, and more importantly, a scale business must be below 25,000 dollars. Electric car prices are high because the big market is there and electric cars are approaching there step by step. They will approach by scaling. The first person to figure out that the main issue in automobiles is scaling and that connecting people with economical vehicles is the main way to grow is Henry Ford and the car he created, Ford T. Before Henry Ford's miracle of the production process in Fords, cars were produced in small workshops around the world.

We can see that Mercedes is the main inventor of fossil fuel cars. Even he produces these cars in workshops. They produce at extremely high costs and are produced with intensive labor. For this reason, automobile prices are quite high and that is why they are not very popular. You may have seen the photo full of horse carriages taken on New York's 5th Avenue in the early 1900s, which is very famous. Because buying a car is very expensive. At that time, the struggle between electric or fossil fuel was still ongoing. Then Henry Ford ensures that fossil fuels win the game. There were so many horse carriages that New York had a serious horse fouling problem at that time, by the way. Tenders are being opened to clear this. New York always stands out as the problem.

Henry Ford, who believes that automobiles are a better vehicle than horses, asks how I can solve this problem. By lowering the prices of cars and simplifying their use. This is still the basis of every innovation. If you reduce the cost of something and simplify its use, the number of people using it increases. You too will create a giant business. When Henry Ford asked how to solve costs, he came up with the idea of moving from workshop-type production to assembly lines. In other words, instead of workers going to the car, they are considering a new model where workers stand still, assembly lines flow in front of them, each worker specializes in something, and coordinators provide coordination and efficiency over these specialized workers. By the way, he is doing very ambitious work.

For example, he wants the vehicle to travel less distance within the factory in order not to waste time. For this reason, he wants the parts to move less and comes up with crazy ideas such as putting ships inside the factory, and eventually launches the Ford T as a result of this work. When the Ford T was launched, it faced reactions similar to the ones electric cars receive today. People who are used to much higher quality, more comfortable cars are looking at this vehicle. They say this is a bit fake or something. But the tool is so economical and so easy to use that it suddenly begins to spread rapidly. It is one of the slogans that even women can use.

Of course, it is easier than using a horse carriage, it is cleaner, there is no horse poop in it, and most importantly, it is cheap. When it was first released in 1909, the price was around 950 dollars. It can sell 12000 vehicles that year. It then drops to $780. 19000 vehicles are sold that year. In 1916, they produce with greater efficiency, so their sales grow as they reduce prices. I don't know if it sounds familiar, but I think the journey of Tesla, BYD and some other Chinese companies is similar to this. When we look at it over the years, the cost decreases along with it.

As production increases, many numbers change due to learning curves, that is, people learning how to do the job better, and changes in purchasing power, and the cost of the automobile constantly decreases. Henry Ford also sees that the way to constantly reduce costs is to not change the model much. By the way, he says that if we always produce the same model, workers will become more specialized. We deal with fewer types of parts. Production lines become simpler and continue with a single model for many years. Then it diversifies it a bit, but when you look at it, it's just minor bodywork changes that sit on the same base.

Henry Ford has a famous saying: "I can produce any color you want from me. As long as it's black." His idea of scale is now ingrained in the minds of Tesla and Chinese automobiles. There need to be few models. You need to make your production processes very efficient and you need to reach very high volume with these small quantities. Henry Ford's cost struggle is paying off. In 1913, just 13 years after the famous photograph, there was not a single horse carriage left on the same street in New York. Cars are everywhere. But during these 13 years, people continue to argue why horses are better and automobiles will never be successful, as is currently happening with electrics. However, the issue is actually fundamental. If something is more efficient, easier to use, easier to experience, and more affordable, people will eventually gravitate towards it.

The law of descent of costs that I just mentioned is called Wright's law. The basic idea is that every time you double the cumulative production of any product, the cost will decrease by a certain multiplier. For example, in the automobile industry, if you continue to produce the same vehicle without changing much, the production cost of the 2 millionth car is 15% below that of the 1 millionth car. So far Tesla has produced around 5 million electric cars. That's why I leave it to you to calculate how many times it reduces this cost.

The production units of the competitors are very low, so there are not many traditional automobile manufacturers that can follow the same path that was once followed by Ford, now by Tesla, BYD, and there is another manufacturer, Li Auto, we will talk about it. That's why not many people can make a profit. I agree that it can be discussed here how luxurious different luxury electric cars, namely Model Y and Model 3, are. But in terms of pricing, they were considered in the luxury category, at least for a long time. For example, BYD has very cheap cars. These are sold only to the Chinese market. Despite this, sales figures were much higher than those of expensive European models.

So, right before our eyes, BYD is doing this in the Chinese market. Tesla, on the other hand, does it on a more global scale. They are constantly trying to move backwards in price and move up the scale. This is an issue that is killing electric car startups. Because, unlike traditional automobile manufacturers, they do not have an alternative source of income. The only place they will make money is electric car production. However, think about BMW and Ford, for example. Sales of fossil fuels are not over yet. They manage the situation from there. But there are real problems with pure electric vehicles.

For example, when you look at the costs of Rivian, which I also like very much, according to the last announced balance sheet, Rivian loses 113000 dollars in every car it produces. Rivian produces around 55,000 cars a year and does not expect significant growth in 2024. In the meantime, it would be useful to take a look at the beautiful Lucid. Lucid is losing $377,000 per vehicle it produces, and the number of vehicles it could produce was around 2400 in the last quarter. It will produce 7000 - 8000 vehicles next year. So they're very, very far off the scale.

When we put Tesla against these figures, Tesla produced 1800000 cars last year. It will produce at least 2 million cars this year. BYD's electric car sales volume has caught up with Tesla. BYD also has hybrids and fossils. In other words, the scale has reached a serious level in BYD. Li Auto is also walking towards there. In order to produce surplus cars, you need to establish factories. This is something that requires serious investment and requires you to spend cash up front.

When we look, we see that the majority of automobile companies have negative cash flows. Rivian's is getting worse and worse. It's constantly burning cash. It burns 1.5 - 2 billion dollars per quarter. Here we can see that only Tesla paints a positive picture. So, what is the situation with traditional automobile manufacturers? They are scaled, they are large, but unfortunately, no point of that scale is almost useful in electric ones. The materials used are different, the optimized production lines required are completely different, the skills that workers must have are different.

Therefore, for traditional automobile manufacturers, producing electric cars is no different from establishing a startup. Since Ford shares the most transparent data on this subject, we will look at Ford first. Then we'll go to Mercedes and try to understand why their electrics are in trouble, why they're so keen to get rid of it, to delay it. For example, we see a news story about Ford. He gave up the factory producing batteries for electric cars. Because Ford didn't like electrics. Because he's losing too much money.

When we look at the last quarter financial results, there is a 4% increase in Ford's turnover. It is very good, but we see decreases in EBITs of 59% and 3.5 basis points. Again, we see a decrease in cash flow and we also see a decrease in earnings per share. The main reason for this is their experience on the electrical side. Look, Ford is a brave company, I appreciate it. They concretely share how much trouble they have with electric cars. They cannot increase turnover in electric cars. On the other hand, profit margins are constantly going negative.

They cannot increase their sales volume either. Because of this, they are making huge losses and they say, yes, when we look at the annual basis, there is a 20% increase in volume. But our turnover increase was only 12%. Because we are faced with serious price competition. Our profit margins are not good either. We are dealing with very high costs. There is competition and so on. Because of this, Ford is losing around $2 billion on electric cars. Let's thank Ford again for this transparency. Here we see how difficult a traditional automobile manufacturer can be, and on the other hand, we see that it even deals a blow to the main model.

Well, this is the case with Ford, but the Germans. Germans know their business, right? Especially Mercedes knows its job much better. After all, there is a miracle in its star. So what's really going on at Mercedes? Remember what Mercedes said. He previously said that by 2030, we will convert all cars to electric. Then they said, we think there is not that much demand. We will be half in 2030. So is the lack of demand real or does Mercedes have another problem?

When we look at 2023, we see that Mercedes' turnover has almost not increased. There is only a 2% increase from 150 billion to 153 billion, and this turnover increase does not come from automobiles. When we look at EBIT, the stability has decreased from 20.5% to 19.7%, there is a serious decrease of 4%. When we look at the profitability per share, it decreased from 13.55 to 13.46, there is a 1% decrease, it is not very drastic. There is a significant climb in net cash flow, but this actually means they have postponed some investments. That's why it seems.

They have a concept called net industrial liquidity. I don't know what that means. They experienced healing there. It doesn't seem like it's going too bad, which is nice considering the numbers. Now we need to get into the details. I don't look at the headlines, I pay attention to the details. When we look at the automobile side, we see that sales remain constant. This is not a good sign. Remember, Tesla sold almost 50% more cars this year than last year. 2.04 million in 2022 and 2.04 million in 2023.

Turnover also remained stable, increasing from approximately 111.6 to 112.8. There is a 12% loss in profit margin on the automobile side. This is not good. When Tesla experienced similar profit losses, all hell broke loose. Here, they dropped from 16.2 EBIT profitability to 14.3. These are in billion euros. Why is this happening. Because the share of electric cars from Mercedes is growing rapidly. Mercedes sold 2044000 vehicles last year. 2041000 in the previous year. So there is almost no increase. The increase comes entirely from electric vehicles. The so-called Top End G's, Maybach's, AMG's, S's, EQS's, GLS's, EQS's, including electric ones. It doesn't increase much here, the numbers stay at the same places. There is not much increase in cars like C Class in the so-called core area. There may be a slight increase in entry-level vehicles.

The real increase comes from electric car sales. While the previous year sold 333000 vehicles, this year there is 402000 vehicles, an increase of 21%. This is not a serious increase, but there is still an increase. Mercedes Benz sees a shift in demand from fossil fuels to electricity, from which it knows how to make its main profit. They report it themselves, I don't. You know, there was a lot of demand for fossil fuels, but it remained the same. There is an increase in electric cars. But Mercedes is probably making a big loss on electric cars. They don't share it with us either. That's why it's so hard to know.

Mercedes Benz does not have a dedicated factory for electric car production. As far as I know, they are trying to produce these vehicles in their current factories. That's why they haven't achieved those production efficiencies that Henry Ford mentioned. Maybe they make as much loss as Ford. It's a company that manages to sell its vehicles at higher prices. Maybe that's why they maintain profit margins. But since he did not share this with us, the picture is not very good and here Mercedes itself says that I cannot grow fossil fuels anymore.

Growth comes from electrics. In total, I cannot increase my number of automobiles at all, despite the contribution of around 70,000 from electric vehicles. What does it mean. There is a decrease of around 70000 in fossil fuel products. Look, this is Mercedes. There is actually one category that drives Mercedes' main growth: Vans. So this is the Vito we know. There is an 8% growth in units compared to the previous year. But the interesting thing about the growth here is that it comes from electric power. There is a growth of around 51% in electric.

Now do I really need to explain these numbers to you a little more? Mercedes itself states here that we cannot increase sales in fossil fuel products, we increase sales in electric products, and then the profit margin decreases. So let's reduce the electric ones a little bit. They are trying to escape. They run away to vans, they run away to luxury fossil fuel cars. They make strange, very luxurious electric cars called IQS to protect margins, but fate is inevitable. Because competitors, especially the Chinese, produce luxury vehicles that appeal to Mercedes' customer segment, much more economically and electrically.

We are looking at data from Bloomberg. We see that fossil fuel vehicles experienced their peak sales in 2018 - 2018 and have been declining since then. The decline continued in 2023. These declines will continue in 2024 - 2025 and 2026, and I think they will be even harsher than this. Because on the electric side, there are sharp decreases in battery costs. It will then become even more difficult for these traditional companies to sell fossil fuel vehicles.

Among you, I would never drive an electric car. There are people who say there is a range problem. I liken this to the comments of those who actually used horse carriages at the time. We use these cars for 40-50 kilometers on a daily basis and the range of these vehicles is more than enough for this. When you go on long journeys, you charge it once or twice a year on the road, if you are a normal car user. It accelerates during charging.

What really matters is the price, and we know from the developments in battery costs that the prices of electric cars are about to fall below fossil fuel ones. You will be surprised by the battery costs, but they are subject to Wright's law and as the number of batteries produced in the world increases, their cost decreases rapidly. There is super concrete news about this, shared by John Raymond Hanger on Twitter. CATL is China's largest battery manufacturer. He says we will reduce battery costs by 50% this year. So, for example, if your vehicle needs a 60 kW hour battery, the cost will decrease from 6776 dollars to 3338 dollars.

On the other hand, scaling in electric vehicles is achieved by Tesla and the Chinese. In other words, cost advantages are also achieved in the remaining elements of the vehicle. When we look at it this way, we see that electric is increasingly becoming a better option than fossil. This will be a breaking point. We will suddenly experience this breaking point. That suddenness comes in 2024 or 2025. At that point, the electric car will become so advantageous compared to the fossil fuel car that we will suddenly experience changes in cost similar to what Henry Ford experienced with horse carriages. We are very close to getting there, Tesla and the Chinese are at the top of this business.

Unfortunately, none of the traditional producers are even close to these scales. We just saw the numbers together, and after that moment happens, we will experience a change similar to what Henry Ford did to horses. There are brands that I see as strong in this change. One of them is of course Tesla, the other is of course BYD, and there are also a few players from China. One of them, Li Auto, interests me a lot. Li Auto is scaling up very quickly. It increases its gross profit and increases its operating profit. It's a really interesting option, but traditional automakers are in trouble. Since they already know that they are in trouble, they are looking for strange solutions.

One of the news that made me laugh the most this week is that Renault's CEO Luca de Meo says, "We Europeans must unite, just like we did with Airbus. If we unite, we can only deal with electric cars coming from China." Airbus and automobile are two completely different worlds and you are already too late. Because the Chinese invasion and the Tesla invasion continue at full speed. You'll be in even more trouble next year.

Now, all this I am telling you is based on numbers. I present data in all of them. You can go and believe any journalist you want, any commentator you want. But the numbers don't lie, Wright's law continues to work. Scaling continues in electric cars. Costs continue to go down, and there's nothing traditional automakers can do about it.

The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.

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