The consumer electronics giants should ignore rumors this week that it is about to snap up the electric car manufacturerThe media has been ablaze this week with speculation that Apple Inc. ( AAPL) might buyout the electric car manufacturer Tesla Motors Inc ( TSLA). In many ways, this would seem to be a natural fit for the consumer electronics giant. Tesla produces the kind of cutting edge technology with which Apple is associated, it has a certain cachet which would appeal to Apple, the company has always fancied itself as having green and sustainable credentials, and the electric car market is expected to increase exponentially in the coming years. Sign up for our free daily newsletter. Apple, Tesla comparison Obviously there are also contrasts between the two companies. Apple is rated as the largest corporation on the planet by Forbes magazine in terms of market value, while Tesla is a new and relatively small carmaker by comparison. But Apple has been seeking out acquisitions owing to the amount of cash it currently has on its books, and the idea of branching out into another field could appeal to the Apple hierarchy. However, although technology writers and financial pundits may love to see the two companies effectively merge, there are very compelling reasons why Apple shouldn’t touch Tesla with a bargepole. Not because the company has no future, but due to the fact that it just isn’t a good fit for Apple, and indeed may never be. Manufacturing issues The first problem for Apple with this purchase would be in the manufacturing itself. Apple has of course made its name as a very successful manufacturer of consumer electronic devices, and in that sense if the situation isn’t considered in depth then it might appear that taking over Tesla's manufacturing operation would pose no particular problem. After all, Apple is a massive electronics giant, and they would merely be subsuming a minor auto manufacturer, right? Well, without meaning to pour scorn on the iPhone, which is undoubtedly an extremely sophisticated and high-quality smartphone, knocking out a mobile phone is rather different to producing a top quality motor vehicle. The latter of the two products is almost infinitely more complex to produce, and the problems and issues that one can encounter when producing a motor-vehicle simply dwarfs anything that Apple has experienced with the iPhone.
Then there is the issue that Apple doesn’t actually manufacture the iPhone itself. Although it is intimately involved with production of the device, it is actually manufactured in the Far East by companies such as Foxconn. Apple does have access to a massive production superstructure but it is highly doubtful that this will be of any use whatsoever in producing Tesla vehicles.Durability problems Another issue is that Tesla Motors Inc ( TSLA) vehicles are built to last. In fact, this is one of the major selling points of its current vehicle portfolio. These are not cheap cars by any stretch of the imagination, and the company has managed to attract consumers by promising a particularly durable vehicle. This is a car that can easily last a couple of decades as a viable vehicle. By contrast, the iPhone is pretty much obsolete within 3 to 4 years. Apple Inc. ( AAPL) simply doesn’t have any experience of manufacturing devices that are intended to remain important in people's lives for significant periods of time. Shifting from one area of business to a completely unrelated product line is never easy. Even a relatively minor new venture, such as Microsoft’s attempts to dominate the video games market, is a massive undertaking. Naturally there is far more similarity between manufacturing a video games console and computing than there is between consumer electronics and motor vehicles. Yet Microsoft has still faced significant challenges with its Xbox series, not least the fact that the Xbox 360 had probably the worst fail rate of any item of consumer electronics, of any nature, in all human history! There is no doubt that the current CEO of Apple, Tim Cook, is an extremely intelligent and capable person, who has in fact achieved near miracles with Apple in terms of its supply chain. Apple is currently achieving profit margins with its mobile devices that are the envy of all consumer electronics companies, and still shifting them by the bucketload. This has helped push Apple Inc. ( AAPL) stock back over the psychologically important $100 mark, and Cook's achievements definitely should not be underestimated. However, there is a big difference between dealing with products that are in the DNA of your company, and coping with a completely different and unfamiliar industry. If Apple is expecting that Cook could simply waltz into the supply chain of a car manufacturer and streamline its production, when the vehicle in question is required to be extremely safe, fast, attractive, and run on state-of-the-art technology, they are living in Cloudcuckooland. This is an extremely complicated and highly developed industry, and not one that should be entered into lightly without a huge amount of prior knowledge.
Financial considerationsAdditionally, Apple may have rather a lot of cash burning a hole in its pocket, but the numbers don’t necessarily add up for the company either. Apple would probably have to pay a premium of around $40 billion to purchase Tesla, base on its current market cap, yet it currently has a negative cash balance in United States. This would thus necessitate taking on more debt in order to purchase a company operating in an industry that it knows nothing about. Apple is unquestionably an innovative and visionary company, but what they don’t do is take gratuitous risks. Purchasing Tesla would precisely qualify for that definition. Sign up for our free daily newsletter. The post Why Apple Should Not Buy Tesla Motors appeared first on ValueWalk. -By Christopher Morris