Thursday, July 23, 2015

Is Tesla acquisition by Apple reasonably possible? Short answer NO


Contents
  • Introduction
  • The iCar
  • We still want the iCar, what are the options?
  • Apple needs a strong partner capable of setting up a mass production in a record time
  • Apple Cash Resources
  • Is Tesla acquisition reasonably possible?
  • The idea recently published by Gene Munster
  • Summary
  • References

Introduction
An old idea of a Tesla acquisition from Apple has been recently reignited by a published article where this topic is addressed, but is this idea possible?  The answer is No.
The iCar
We would love to see something like this:
Apple-iCar.jpg
Dream iCar [1]
And I said We, because if ever Apple decided to produce the iCar I personally would love to have one. Does it have to be electric and produced by Tesla, I really don't care, if it is the Apple iCar I want it.  How many current Apple customers think the same? It’s a question Tim Cook has to ask himself and put the company towards that direction.
If Apple was able to sell cars people would buy them just because of the brand.  Apple is very well positioned in the market, and if they decided to venture into the car industry,  Apple enthusiasts would become potential unconditional customers who would be willing to camp outside the dealer’s doors days before the official launch (I am more patient, I can wait).
But this is the caveat, Apple doesn't build cars, and building a car from scratch is a venture that could drain a huge amount of capital.  Assembling iPhones is one thing, assembling cars is a completely different story.   And this is what it has fueled a long time ago the idea of an acquisition of Tesla to enter into the car industry.  But this is more wishful thinking than a real plan.   Since 2012 [10 ] the idea of a take over Tesla has been floating around, but this has never been seriously considered.

Remember, big announcements related with corporate decisions are never made by analysts and they are never made during market hours, those are kept under strict confidentiality because of the high level of volatility they create. They are aired as “rumors” during market hours when there’s someone with a very specific agenda who wants to trap investors at a specific position.

Does Apple need the iCar to absolutely be electric? No, as a matter of fact it can have any technology, either internal combustion, electric, hybrid, etc. Apple can choose which technology to incorporate. Does it have to be built by Tesla?, no, and actually it could be problematic if Tesla would partner with Apple in this project, considering the status Tesla has, both at the financial and at the infrastructure level. Apple would acquire problems instead of solutions.

We still want the iCar, what are the options?
Apple won’t take the challenge of competing in an industry that is dominated by old companies who are stubborn and determined to stand their ground.  Apple can be the expert in electronics, but it doesn’t know a thing about the auto industry and its rules and the competitors could easily make it learn the business rules the hard way and at a huge cost.  So building an assembly line, getting the auto parts from the suppliers, and going through the hurdles inherent to this industry is a big No for Apple.  Apple is not willing to reinvent the wheel. They would be putting a huge amount of capital at risk.  Thinking more in a partnership with any auto maker is more a win win situation.  Apple is not constrained to sell a fully electrical vehicle, it can be any technology, and Apple doesn't have the restriction to build it from scratch, it can actually partner with any auto maker to produce a special line for the iCar. Apple could just provide the name and the gadgets and the auto maker the assembly lines, and logistics to build the car.  This way having iCars rolling out from the plant would  be very fast and way less painful.  Tesla wouldn’t be the best partner because they are a starting company and they are struggling with their own production lines, their forecasts and estimations are directly related with the model S and the model X and they are restricted to exclusively the use of the lithium ion batteries technology.

Apple needs a strong partner capable of setting up a mass production in a record time
In 2014 Tesla estimated they would be ready to produce 100,000 vehicles per year which later was downgraded to 55,000.  This is the equivalent of 150 vehicles per day, and the numbers as of July 2015 are still to be verified,  In 2014 Ford sold north of 2,480,000 vehicles, which is about 6,800 vehicles per day.  And Ford can produce not only regular internal combustion vehicles, but also compressed natural gas, flex fuel, hybrid, plug in EV’s, or Hydrogen vehicles [2].  I mention Ford, just because this was the first one that came to my mind at the time I wrote this article, but there are several others strong automakers in the market who could potentially partner with Apple in the iCar project.

Apple Cash Resources
Apple has the money, this is the good news, in January 2015 Apple had an estimated $158 B [3] which later grew to $178 B [4] the bad news, is that most of it is offshore, and they are not willing to bring it back to the US because the IRS is going to keep 35% of a huge mountain of cash when it comes back home, so Apple has decided to keep its offshore money out of reach of the taxman.

Offshore and Domestic Apple Cash [5]
Apple still has to pay dividends and maintain the share buyback program, which is possible using the domestic cash, totaling about $22 B [5] not enough to even pay for the $32+ B Tesla Market Cap.  So discard the idea from the financial numbers perspective, it didn't happen when Tesla was at $30 / share, it won't happen now that it's around $265/share.

Is Tesla acquisition reasonably possible?
Short answer is No.   Tesla needs Apple more than Apple needs Tesla.  Tesla is starving for fresh cash, the Gigafactory and their capital expenditures have been burning money at ludicrous speed, meanwhile Apple can partner with any other car manufacturer who can offer a large production at a record time with a reliable and fast assembly line and efficient logistics.
Long story short, theses are the reasons why the Tesla  Acquisition is not possible
  • Apple isn't constrained to the Electric Vehicle to enter the car industry
  • Apple can use any traditional or green technology available
  • Apple doesn't need to build the car from scratch and doesn't need to build a car factory
  • It can partner with a strong manufacturer who can plan and build the iCar in record time
  • Apple already has a large consumer base willing to buy whatever has the white apple logo
  • Apple doesn’t have the cash available in the US, it is offshore
  • A partnership with Tesla benefits only Tesla, not Apple.
  • Tesla plans a production of 55,000 vehicles for 2015, as a comparison Ford produced 2,480,000 in 2014 [2]
  • Tesla produces Lithium-ion battery EV’s only, other manufacturers can produce any kind of vehicle.
  • The idea has been around since 2012 when the Tesla share price was around 30's, in 2015 now that the share price is close to 270 this makes it an absolute no.
  • Tesla is overvalued, it is approximately 40X its book price, and it's not profitable.

The idea recently published by Gene Munster
Gene Munster [7][8] thinks it is Apple who has to  acquire Tesla based on the amount of cash Apple has, but he doesn’t consider the fact that most of this cash is offshore and Apple is not willing to bring it home shortly. Munster assumes that Apple has to build the vehicle from scratch and doesn’t consider that Apple can partner with an auto maker who already has a more robust and stronger infrastructure than that of Tesla. He said that the partnership could yield immediate benefits for Tesla, which is true, but he didn't consider that it could yield to immediate troubles for Apple. He said that Tesla’s battery technology could accelerate Apple’s entrance into the automotive space, but he didn't consider that entering the auto space doesn't have to be restricted to lithium-ion battery technology when there are many other technologies available both traditional and green technologies.
On the other hand, The Motley Fool published in an article its four reasons why they think Apple won't buy Tesla [12]: quote
  1. If Apple wants to build a Car it doesn't need Tesla
  2. Tesla is way overpriced, from Apple’s perspective
  3. Apple probably can’t buy the most important part of Tesla anyway
  4. Apple may be looking to leapfrog Tesla, not compete with it.
End of quote.

Summary
People want the iCar, and the Apple fans will be the first potential customers.  So Apple should consider to enter the auto industry.  The idea of a Tesla acquisition from Apple is discarded because of liquidity, financial and infrastructure problems from Tesla; Tesla's excessive valuation, Tesla's restriction to the use of EV's. So take Tesla out of the iCar picture.

References:
  2. Ford annual vehicle production.  https://en.wikipedia.org/wiki/Ford_Motor_Company
  7. Analyst thinks Apple should consider buying tesla http://www.businessinsider.com/gene-munster-apple-should-buy-tesla-2015-7
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