Why Not Acquire Tesla?

Given Apple's interest in transportation and Tesla having the most popular, highest-rated car on the road, many have positioned Tesla as an Apple acquisition target. Apple's strong balance sheet adds fuel to the fire. With $129B of net cash, Apple could pay $70B+ to acquire Tesla and instantly become a player in the auto space.

However, Tesla isn't a realistic acquisition target for Apple. More importantly, Apple doesn't need to acquire Tesla in order to meet its goals. The best way to understand why is to look at the key components of Apple's M&A philosophy:

A strong brand and product aren't enough for an Apple acquisition. There has to be more to an Apple acquisition target besides strong branding and a popular product in the marketplace.

There has to be more to an Apple acquisition target besides strong branding and a popular product in the marketplace. Apple doesn't use M&A to acquire revenue. Apple doesn't use M&A as a tool to grow revenue.

Apple doesn't use M&A as a tool to grow revenue. Apple doesn't use M&A to acquire users. Apple doesn't acquire companies simply to grow its user base. This tenet has become that much stronger in recent years as Apple's user base has grown. Apple currently has one billion users. When considering how the vast majority of those users comprise the premium segments of the smartphone and tablet markets, Apple has no need to acquire what ends up being its own users.

In essence, Apple isn't interested in buying its way into new product categories. Instead, Apple positions M&A as a tool to either enhance its existing product line or plug holes in the product development process. M&A is used to a tool to supplement, not replace, Apple's design-led product development process. Accordingly, there are two things Apple looks for when acquiring companies:

Apple uses M&A to acquire technology. Apple looks at M&A as a tool for plugging holes in its asset base. Given how Apple is constantly working on new products, one hole is often the need for new technology.

Apple looks at M&A as a tool for plugging holes in its asset base. Given how Apple is constantly working on new products, one hole is often the need for new technology. Apple uses M&A to acquire talent. One area in which Apple is resource constrained is talent. As Apple moves from one industry to another, the company is always on the lookout for teams of talent that help boost knowledge and expertise.

A look at Apple's acquisition history demonstrates these core M&A tenets. Acquisitions such as P.A. Semi, AuthenTec, LinX, and Metaio were about technology and talent. Even acquisitions that included consumer-facing products like Beats, Beddit, and Shazam (pending approval) were ultimately about the technology behind the products.

Netflix

Netflix represents a great example of how Apple doesn't use M&A. In a Netflix acquisition, the two primary things Apple would have bought are a strong brand and lots of users, neither of which is enough to justify an acquisition. In addition, Apple users already had full access to Netflix. It's unclear how Apple owning Netflix would lead to an improvement in Apple products. Positioning Netflix's technology as justification for an acquisition is quite the stretch. Netflix is a media company, and the company's content library is grossly overrated when moving beyond the 15 to 20 marquee series.

Instead of spending $100 billion to acquire Netflix, Apple opted to poach talent from the entertainment industry and build something on its own. The result is a new "Apple Studios" division overseen by former Sony Pictures Television executives. Apple is reportedly planning to launch its new Apple Video streaming subscription service sometime next year.

Arguing that Apple should acquire Tesla because it has a great brand and popular product in the marketplace is faulty thinking. Instead, Tesla would need to provide resources that can either strengthen Apple's existing product line or plug holes in Apple's design-led product development process. Some will say that Tesla's fleet of human-driven cars ends up being the company's secret weapon when thinking about the race to autonomy. I'm not so sure about that claim. Others think Tesla's charging network or factories represent the company's crown jewels. Both claims are questionable. Instead, those items could end up being viewed as liabilities, which is one reason Apple embraced contract manufacturing nearly two decades ago.

Poaching

A Tesla asset that Apple may have an interest in is talent. Given Apple's ambition, Project Titan can benefit from having employees with experience developing cars that people love. However, instead of acquiring Tesla to bring on tens of thousands of employees, which would raise many red flags, a better strategy would include Apple selectively seeking out talent that would be the best fit for Titan.

When selling prospective hires on the Titan message, Apple is ultimately selling two things: vision and process.

Vision. Explaining Apple's mission to come up with products that can change the world. Even though new hires aren't likely given the full lay of the land when joining Titan, the Apple mission can still be telegraphed.

Process. Explaining the process in place for turning vision into reality.

It's not that Apple has necessarily struggled appealing to new hires for Titan. Instead, Tesla likely had the stronger message up to now. In the early 2010s, Tesla was successful at picking off members of the Mac, iPod, iPhone, and iPad teams looking for the next big challenge. At the time, Apple's focus was on Apple Watch, a product that ultimately had a relatively small development team. Project Titan was still a few years away. Doug Field was one of these employees who always had an interest in the transportation space and jumped at the Tesla opportunity.

Around the time Apple began ramping up Project Titan hiring in 2014 and 2015, the Apple versus Tesla talent wars began in earnest. Tesla was much farther along than Titan, with cars already on the road.

However, the environment has changed. The past few months have been a tough stretch for Tesla. The company's long-term goal is to usher in the era of sustainable transport. To reach such a goal, Tesla needed to take a luxury detour and sell cars to those most willing to pay top dollar for a high-performance electric sports car (which happens to have more than two seats). The problem is that Tesla finds itself having trouble getting back on track. A truly mass-market Model 3 remains missing in action. Tesla has become a case study of a company led by a product visionary struggling to turn vision into reality.

Elon Musk has consolidated power, and it's not clear that this is for the better. It's one thing for a product visionary to focus on details. It's a completely different story when a product visionary is being stretched too thin. Recent comments Musk gave to The New York Times regarding him being the only person that can solve Tesla's manufacturing problems is worrying.

These challenges may give Apple a potential opening for poaching Tesla for talent. Meanwhile, after leadership changes and some shaky times, Project Titan is now in a much more orderly state. Apple would make the case that it has a better process in place than Tesla. It's relatively easy to design a great car. The challenge is to build tens of millions of that car and to then be able to develop new versions over time.

Tesla's problem is ultimately its desire to do everything on its own. While such a decision was made given the lack of alternatives, Tesla faces less flexibility and financial capacity as a result. This has opened the door for Apple in terms of appealing to Tesla employees. Other factors may include being attracted by Apple ideals such as protecting data privacy and security, which will become a crucial topic in the auto space.

Doug Field

Tesla critics have been quick to point out the growing list of executive departures as a sign of major issues within Tesla. While the turnover does raise an eyebrow, Doug Field's departure stands out.

Field was Tesla's second-highest ranked engineer, behind CTO JB Straubel. Field was responsible for vehicle engineering and Model 3 production. Back in 2013, his hire from Apple was positioned as a huge win for Tesla. With experience that included Segway's CTO and Mac product design, Field had experience in both personal transport and shipping consumer products at scale.

Field's job at Tesla was to turn Musk's vision into reality. As recently as this past April, Musk viewed Field as one of the most talented engineering executives in the industry. Accordingly, it's telling that Field ended up quitting Tesla to join Titan. It will be interesting to see if any of Field's deputies at Tesla make the same move. Such a defection would end up being a major coup for Titan.

Elon vs. Jony

There will be a role for cars in the new transportation paradigm. Two visionaries to keep an eye on are Elon Musk and Jony Ive. Each is taking lessons learned from other industries with the goal of rethinking transportation. It is no surprise that Musk has thrown a few snide comments and jokes Jony's way in recent years.

Two of the more interesting things to watch in the auto space remain design and manufacturing. Instead of asking questions about legacy auto's software expertise, the more valuable question to ask is, Who is that company's Jony Ive? While auto manufacturers have teams of talented designers, such talent ends up being wasted as upper management and boards mitigate design risk out of fear of losing sales.

Over at Tesla, a company more geared towards engineering than design, Musk and company are learning the harsh realities of auto manufacturing. Many of Tesla's decisions won't be repeated by others.

Meanwhile, Apple's Project Titan is becoming a testbed of new technology that can be used to power new vehicle concepts from Apple's industrial design group.

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