Recent reports have cast doubt on Apple's automobile ambitions. With Apple shifting its focus to auto software and autonomous driving, many have interpreted the move as Apple giving up on building its own car. I look at the situation very differently. Apple remains interested in transportation, and the case for an Apple Car continues to build.

Apple's Initial Car Strategy

Apple management began to think about the feasibility of designing and selling its own car in early 2014, and early musings likely stretched as far back as late 2013. This was right around the time that management was becoming confident in Apple Watch becoming a commercial success. It is conceivable that Apple had begun to contemplate new product categories after Apple Watch.

As seen in the photos below, what had seemed like Tim Cook innocently checking out BMW's new i8 electric car outside of Apple HQ in June 2014 took on a whole new meaning eight months later when the Financial Times was the first publication to break the story of Apple thinking about selling its own electric car.

I suspect Apple's initial car strategy was to design and build a premium-priced car that would be bought or leased by consumers. An Apple Car would stand out from peers due to the compelling experience produced by combining Apple hardware, software, and services.

The plan included Apple's Industrial Design (ID) group coming up with prototypes. Product designers and hardware engineers would then work with ID to turn a prototype into a product capable of being mass produced. In terms of manufacturing, Apple would rely on the same playbook used with most of Apple's other products. Instead of building the car themselves, Apple would have a third-party contract manufacturer assemble the car. Apple management reportedly visited Magna Steyr, BMW, and Daimler to see the feasibility of using contract manufacturing in the auto industry. Apple would then be in a good position to sell an Apple Car through its Retail store network around the world.

In mid-2015, Apple went on a real estate shopping spree, quickly buying or leasing enough land to build another Apple Campus 2 near San Jose International Airport. I suspect the land purchases were related to Project Titan. Apple also bought various heavy manufacturing facilities around Sunnyvale and Santa Clara, a very obvious sign of its growing automobile ambitions. (More information on each Project Titan building is available here). Project Titan seemed to be firing on all cylinders. The team was given approval to expand to 1,800 employees, and all indications seemed to suggest the pieces were coming together for some type of automobile product in a few years.

Hitting the Brakes

In what turned out to be the first sign of major trouble, news broke in January 2016 that Steve Zadesky, head of Project Titan, was stepping down. Apple product managers were increasingly battling with those hired from the auto industry. In a stark contrast to iPhone development, Apple had relied on outside hires to boost its auto expertise, especially when it came to auto hardware expertise. This ended up producing a culture clash as each side had a different view on how best to achieve goals in a timely manner. To make matters worse, the goals themselves were changing. Senior Titan managers were reportedly having doubts as to how an Apple Car would be able to leapfrog existing competition from Tesla and BMW.

As we later discovered, things had deteriorated so much with Project Titan in early 2016 that Apple convinced Bob Mansfield, former SVP of Hardware Engineering, to come out of retirement in April 2016 to take over the project. (A complete Project Titan timeline is available here.) Up to that point, one of the major clues pointing to Apple's growing interest in automobiles was the sudden rise in R&D expense. However, something changed this past summer. As shown in Exhibit 1, Apple R&D expense growth slowed dramatically beginning in July. In fact, Apple reported the slowest R&D expense growth in nine quarters. On a sequential basis, 4Q16 was the third-weakest quarter for R&D growth since 2009.

Exhibit 1: Apple Year-Over-Year (YOY) Quarterly R&D Expense Increase

As reported in September, Apple had begun to curtail parts of Project Titan this past summer. Dozens of employees, including many focused on automobile hardware, were let go or moved to other divisions within Apple. Ultimately, Apple hit the brakes on Project Titan because the auto industry was rapidly changing and Apple had lost sight of the car "puck."

Skating to the Puck

In January 2007, one of Steve Jobs' final slides of his iPhone unveiling keynote included a Wayne Gretzky quote.

"I skate to where the puck is going to be, not where it has been."

Jobs held the quote in very high regard, saying that Apple had always tried to follow it and that it would remain Apple's goal forever. Over the years, the "puck" quote has been used so frequently that it has lost much of its meaning. Skating to where the puck is going to be does not mean having to predict the future to be right. If that were the case, the probability of success would be quite low. Instead, success is achieved by reading the market and positioning oneself as the catalyst that leads to market change. If we return to the hockey analogy, Wayne Gretzky's skill was found in his ability to read the current situation and position himself to increase the probability of impacting game play.

Jobs included the quote in the iPhone keynote because Apple felt confident that the iPhone would not just change the smartphone industry in 2007, but would also become the catalyst for change in the coming years. The iPhone would alter the smartphone's trajectory. Apple ended up being right. The iPhone's revolutionary user interface and groundbreaking software positioned Apple well for the eventual app revolution, which only solidified iOS as the most profitable mobile platform.

A more recent example of Apple skating to where the puck will be involves Apple Watch. While many companies remain unsure of where the wearables puck will be in a few years, Apple is laying the groundwork for being a leading wearables player with Apple Watch and soon, AirPods. Apple is betting that it will be well-positioned for the inevitable trend of wearable devices handling tasks that we used to give to smartphones and tablets.

The Apple Car Puck

When it came to skating to where the car puck is going to be, Apple made a miscalculation. Much of the change now taking place with Project Titan is a result of Apple trying to rectify that mistake.

If we look at where the car industry was in early 2014 when Apple began to investigate the feasibility of building a car, the world was a very different place.

Tesla had sold only 21,000 Model S cars.
BMW had just begun to sell its i3 electric car.
Google had just announced it would create a self-driving car without a steering wheel or pedals.
Uber was valued at only $3.5 billion.

From Apple's perspective, the goal for Project Titan was to capitalize on declining battery costs and new manufacturing techniques involving new materials, including carbon fibre. Apple looked at Tesla and BMW as inspirations. The plan was to do to the car industry what Apple had done to the phone industry, namely, use software and manufacturing to rethink the car. Over time, Apple could include self-driving capabilities.

However, after only a few years, the auto industry had undergone significant changes.

Tesla is now producing cars at a rate of 100,000 per year but is increasingly focusing on building the low cost ($35,000) Model 3.
Elon Musk expects to have a fully autonomous car by the end of 2017. Tesla has begun equipping all of its new cars with self-driving hardware.
BMW's i series electric car program has lost all momentum.
Ridesharing adoption is exploding around the world.
Uber is valued at $65+ billion, Didi at $35+ billion.

Putting the pieces together, we see that the car industry has embraced ridesharing much more quickly than it appeared to be a few years ago. Meanwhile, autonomous driving is no longer looking like a pipe dream that will take 10 to 20 years to become a reality. In a world with self-driving electric cars that are part of a ridesharing fleet, relying on a traditional buy/lease model for a premium-priced electric car doesn't sound like the puck worth tracking.

The Blackberry of the Auto Industry

Electric car sales remain quite niche in the auto industry. In 2015, electric car sales represented only 0.66% of all car sales in the U.S., down from 0.74% in 2014. Optimistic sales forecasts have had to be dialed back time after time.

There has been much speculation that Tesla's Model 3 will significantly alter the auto industry, serving as the catalyst that will finally place electric car ownership in the mainstream. This would impact not only legacy automakers struggling to sell electric cars, but also Apple's car plans. I suspect Apple's original goal with Titan was to sell an electric car to consumers, helping to expand electric car adoption. However, the world is changing.

Electric car ownership may turn out to be the "Blackberry" of the auto industry, a near-term phenomenon that will end up being a head fake and not representative of the future. The combination of ridesharing and self-driving cars threatens to undermine car ownership as car utilization would be improved. (Currently, the average car is not used 96% of the time.)

Titan Reset

According to published reports, Bob Mansfield is overseeing significant changes to Apple's car strategy. Project Titan has been rearranged into three teams:

Software
Sensors
Hardware

The focus has been put on autonomous driving, and auto hardware has been put on the rear burner. These changes reflect a type of reset as Apple rethinks were the car puck is headed. By placing autonomous driving as Project Titan's focal point, Apple is giving us a clue that it now thinks ridesharing is the future worth betting on. It is worth pointing out that Apple made its $1 billion investment in Didi soon after Bob Mansfield had announced major changes to Project Titan with a focus on autonomous driving. The timing between these events surely doesn't seem coincidental.

Instead of owning cars, consumers will share cars. It is just too difficult to make a case for owning a self-driving electric car in the future. Even Tesla is showing early signs of embracing a different kind of business model in which Model 3 cars could be used to form a ridesharing network. If Apple is unable to come up with autonomous driving, the company's successes in auto hardware or manufacturing would be wasted.

While Apple has reportedly scaled back its auto hardware ambitions, much of this reduction does not preclude a future revamp if Apple's autonomous driving research proves successful. However, Apple may approach auto hardware differently next time in an effort to improve odds of ultimate success. We know that Apple held talks with McLaren concerning some type of strategic investment. (My complete thoughts and observations on McLaren are available here.) These talks reportedly occurred after Mansfield had refocused Titan, which included de-emphasizing auto hardware. This tells me that the odds of Apple partnering or acquiring an established team of auto hardware experts have increased.

The Big Picture

All of the evidence still points to Apple being extremely interested in transportation. The company apparently has retained all of the buildings and land associated with Project Titan, including the massive amount of open land near San Jose International Airport. Apple is now doubling down on auto software and autonomous driving talent, which includes rebuilding the QNX team in Canada. Recent Apple M&A related to augmented reality has been tied to the company's autonomous driving efforts. Apple has a seat on Didi's board. In addition, Apple ID has the freedom to continue working on car ideas.

As to where Apple thinks the car puck is headed, a self-driving smart room on wheels is the leading contender. In the beginning, these self-driving cars may be limited to specific routes or geographies with the expectation of being rolled out to additional locations over time. Apple would need to embrace new business models and partners. Apple can leapfrog the competition by keeping focus on the user experience attached to the product.

Ford 021C concept car from Marc Newson, a key member of the Apple ID group.

In a world where we share cars, there will be a significant desire for the ability to change the inside of a car for the current occupants. With control over various services including mobile payments, communication, mapping, and entertainment content, Apple will be one of the companies better positioned to come up with a premium experience in the auto industry. And of course, we can't forget Apple ID's contribution to such a product as design contains the most power to alter the car industry. Apple is still thinking about where the car puck is headed.

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