From iPhone to iCar: How Apple Can Take Over the Auto Industry

SAN DIEGO (TheStreet) -- Whether Apple (AAPL)  builds an entire car from scratch or not, it will have a significant presence in the automotive industry in a few years, according to the latest note from Morgan Stanley, which put forth a plan of attack that could turn the iPhone maker into an iCar maker.

"The world's richest, most valuable company is taking on the world's most disruptable business," analyst Adam Jones wrote in the note. He cautioned investors not to be dismissive of the Cupertino, Calif., company's ambitions to build its own electric vehicle, as recent reports suggest Apple is doing.

Apple doesn't need to build a car from the ground up to assemble a new business more profitable than the iPhone. Up for grabs, per Morgan Stanley's calculations, is an auto market valued at around $10 trillion, with global new car sales totaling $1.6 trillion annually. "If Apple were to corner just 25% of the value of the car, it would be equivalent to the entire smartphone industry today," Jones said.

Apple's actual entrance into the car will involve a series of calculated steps, starting with CarPlay, an in-car dashboard that lets drivers plug in their iPhones for music, maps, messaging, calling, and Siri voice control. CarPlay will be rolled out to consumers this year through more than 20 carmakers including Ford (F) , Audi, and BMW, and reportedly will be available by year's end as a standalone console for older cars. 

"This is the first step to getting customers used to having the familiar Apple interface and ecosystem in their cars," Jones said.

Next, Apple's prowess in the infotainment business will spread to the rest of the automotive interior as the company applies its celebrated design credentials to everything from additional car interfaces to ergonomics, dials and controls. Though the company surely will take its time on interior design, it could theoretically go from concept to production in 12 to 18 months, according to Morgan Stanley. Apple will then grow its presence in the car from the inside out, the firm believes.

"Apple has the brand and the design talent to take on the best in the traditional auto industry today, and if the reports are true that it is amassing an army of engineers to tackle the challenges of autonomous driving and EV batteries, engineering will not be an issue either, especially if it relies on the existing automotive supply chain for non-critical components," Jones said.

Apple's auto takeover won't be happen overnight -- it could take five to 10 years to engineer a new electronic vehicle -- but Morgan Stanley sees Apple applying some of its phone-producing strategies to creating cars, meaning it will likely do the design and development work in-house, but outsource the production and assembly. Apple may also get its feet wet by starting with a co-branded car developed in partnership with an experienced automaker, much as it partnered with Motorola (MSI) in 2005 to launch the Rokr. The phone wasn't a hit, but it helped Apple learn about the wireless industry, Jones said.

But whether or not Apple goes all-in on cars, or just partially so, the company can use that stage to attract new customers to its brand, which seems to be the ultimate endgame.

"We believe Apple is in the midst of an iPhone super-cycle, as the new large screen iPhones are bringing new users to Apple's ecosystem," Jones said. "Looking beyond the next year and a half, cars, along with wearable devices, TVs and new services, provide opportunities for Apple to continue to drive revenue and earnings growth."

In its most recent quarter, Apple posted net income of $18 billion on revenue of $74.6 billion, with help from record sales of 74.5 million iPhones.

-- Written by Jennifer Van Grove in San Diego.

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TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate APPLE INC (AAPL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."

You can view the full analysis from the report here: AAPL Ratings Report

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