Apple appears to be shiftings gears. On Monday, Bloomberg reported that Apple, at least for now, is pulling back on building its own car. (I’m sorry for the pun. But not really. I can’t help myself.)
Apple is on pace to have spent about $24 billion in research and development, from fiscal years 2014 through 2016. Who knows how much of that was directed to its car project. Clearly they’ve spent billions of dollars in this area. And now they might be winding it down.
Should the car project reflect badly on Apple’s leadership?
That must be embarrassing for Apple, right? Will Oremus at Slate sees a silver lining:
Yet, in an odd way, it could be a sign of health that the company was willing to cut bait on such a large and highly publicized project at this juncture. One of Apple’s great strengths has always been its focus. In contrast to a company like Google that seems to pursue every idea at once, Apple does a few things, and it does them far better than anyone else.
That’s one angle, that if you’re going to fail, fail quickly. And I agree, it’s good that Apple can acknowledge a bad bet, before it carries that bet all the way to market.
I think the good news goes even further upstream, though. Apple has built an incredible war chest through its past success. At the end of its most recent quarter, Apple had $61.8 billion in cash and short-term securities. What’s the biggest advantage of that kind of cushion? The ability to place big, disruptive bets.
And Apple doesn’t have to be right on all of its bets. Again, that’s a huge advantage of their cash position. The super conservative route would be for Apple to hand over as much cash as possible to shareholders. (Admittedly, Apple does give huge amounts of cash to shareholders. In its most recent quarter, Apple gave away $32.8 billion: $23.7 billion in stock buybacks, and $9.1 billion in dividend payments.)
Still, the company has retained enough cash to place meaningful bets in areas where there is no guarantee of success. Publicly, we don’t have much information about what exactly those bets are. The car project has received an enormous amount of attention, much more than most “secret” projects at Apple.
Criticize decisions based on what was known at the time, not what came afterward
The Apple car scenario reminds me of poker. If you’re serious about Texas hold ’em, you know your odds of making different hands. You place a bet knowing your odds, and knowing the size of the pot.
You can make the right decision and still lose the hand. There might only be one card in the deck that saves your opponent. If that one card just happens to appear…you lose. You made the right decision with the information you had. Luck conspired against you.
If you play enough hands of Texas hold ’em, and you make the right decisions, you’ll eventually win. The expected value of your bet is positive. Make enough such bets, and you’ll overcome bad luck. That’s why we have professional poker players, people who win way more than strict luck would allow.
The same idea holds in business. You know what bets are available. You estimate their cost. You estimate their probability of hitting. You estimate the gain you’d make if your bet hits. Do the arithmetic, and if the expected value is positive, and you have enough cash to absorb a loss, you should make the bet.
Apple’s cash cushion allows them to make these kinds of bets, even when win probabilities are well below 100%. The car bet might have been considerably below 50%. But if the bet hit, if Apple was able to revolutionize the auto industry…the gain would have been enormous. Knowing their cash wasn’t doing a whole lot for them anyway, Apple’s leaders decided to place the bet.
Personally, I’m completely on board with them making that kind of bet. I’m a shareholder myself. I’d much rather them swing for the fences that way than throw that cash my direction. I’m confident enough in their judgment and ability to execute that I trust them to make those calls.
The car bet hasn’t lost…yet
The Bloomberg piece mentioned that the decision isn’t just between building a car and not building a car:
Mansfield explained that he had examined the project and determined that Apple should move from building an outright competitor to Tesla Motors Inc. to an underlying self-driving platform.
Apple could, instead of building its own car, design the platform that would power someone else’s self-driving car. In other words, Apple could supply a blended hardware/software solution that someone else would build a car on top of.
That’s another example of the value you can get from placing these kinds of bets. Even if the bet doesn’t work out the way you hoped, it might open other avenues that you wouldn’t have otherwise considered.
I think of the book Obliquity by John Kay, in this context. John Kay is an English economist. His short book offers an interesting perspective on success. His argument is that success is often best pursued indirectly, or obliquely.
The Apple car project may be the seed for some other enormously successful effort. The importance of the car effort is that Apple tried something new. It explored something outside of its comfort zone. In short, it allowed a greater chance for serendipity to intervene and expose a promising new opportunity.
It takes considerable leadership skill to harvest this kind of value. You can’t miss the forest for the trees. You can’t be so wedded to the project that you miss the chance to pivot in a related, but substantially different direction.
Apple’s car bet shows the opportunity cost of giving all your cash to shareholders
I’ve already written about large companies that borrow money from the bank, just so they can turn around and hand that money to shareholders. That’s absurd. It’s a broken management philosophy.
Apple strikes a balance. They give tens of billions of dollars to shareholders. But they retain a large enough cash cushion to place speculative bets. If they go down, they’ll go down swinging. That’s much more satisfying than slowly whittling away your liquidity as you placate shareholders.
Pay attention to your own company. As scientists and engineers, our careers are uniquely impacted by this predicament. Does your company retain enough cash to fund some potentially disruptive research and development efforts? Or does your company hand its cash cushion over to shareholders? Knowing the answer will give you some perspective on your long-term career prospects.