How Serious Is Apple About Cars? We Went to See Its Secret Campus

Nothing is there yet, but the site is enormous — bigger even than Apple's new headquarters.

Editor's note: When a market shifts, how the leading company of the moment finds its future is a perennial question. The company facing that question now is Apple — the iPhone can no longer sell in ever greater numbers.

We can watch Apple run a series of experiments in search of that future: internet services, a smartwatch, a car.

Apple is a great company. It has changed the world twice, through the personal computer and the smartphone. But the shift it has to make today has few successful precedents.

As the spread of the mobile internet comes to an end, other leaders will run into similar challenges. Apple's experiments are worth learning from. We are following Apple's attempts in a three-part series; this is the second part.

"What are you shooting?" a construction worker in a reflective vest shouted at me, on a patch of vacant land beside the San Jose airport in Silicon Valley.

"I heard this is an Apple construction site. I wanted to take a look," I answered, then asked, "So is this Apple's new campus?"

"I can't tell you that. Please leave immediately." That was the last thing I got out of him.

Nearly everyone I met at this new site, code-named "Zeus," was just as guarded. If I'd had any doubt about how seriously Apple takes secrecy, the crew's wariness settled it.

"Zeus" is still in the early stages of construction — weeds everywhere, and vacant lots strewn with building debris.

But there is no question what this plot, the size of 53 soccer fields, is for. According to municipal documents obtained by Biz Journals, a Silicon Valley news outlet, Apple bought the 38-hectare parcel in 2015 and named it "Zeus."

Besides "Zeus," Apple has recently taken a string of other new parcels nearby, several of them also named after Greek gods — "Athena" and "Medusa" among them.

These sites sit some distance from Apple's famous spaceship-shaped new headquarters.

The biggest of the Apple projects reported recently is the car. The Wall Street Journal has revealed that Apple's car project is code-named "Titan" — also from Greek mythology, the world that gives us Zeus, Athena and Medusa.

Apple has taken eight parcels of land for its car project

The Zeus campus is a bit more than ten minutes' drive from downtown San Jose, in southern Silicon Valley. I took a cab to Charcot Avenue in north San Jose, the southern edge of the "Zeus" site.

The moment I got out, my attention went to a long green fence and a huge sign with the letter "H."

Holder Construction is an American firm founded half a century ago. It built data centers for Apple earlier on, and is said to be the company in charge of construction at Apple's "spaceship" campus too.

Across the road is another site under reconstruction, with a few cranes and piles of debris; the fence there carries Holder's name as well. Next to it stands a City of San Jose public notice saying that a real estate firm, Dean Rubinson Partners, is using the land.

Earlier reports said Apple uses part of its San Jose campus through leases — quite possibly through this developer.

I walked along Orchard Parkway, which cuts across the whole "Zeus" site from southeast to northwest. The land nearby once belonged to the chipmaker Atmel; it is all fenced off now.

On a vacant lot nearby stands a government notice board stating plainly that Apple is acquiring the land, though there is no sign of construction yet.

Simply walking across the "Zeus" site along Orchard Parkway takes nearly 30 minutes. In that time you could walk two full loops around Apple's current headquarters at 1 Infinite Loop.

The whole "Zeus" site covers a full 38 hectares, about the area of 53 soccer fields. Add the two idle parcels next to it that Apple has very likely taken as well, and the area reaches 58 hectares.

And that is only "Zeus." Eight Apple sites have come to light so far, and most of the other seven have names tied to Greek mythology too: Rhea (Zeus's mother), Athena (Zeus's daughter), Pegasus, and Medusa (the monster who turned people to stone).

For a company just entering the auto industry, that is no small commitment. Tesla's office campus, by comparison, covers only 5 hectares.

As office space alone, the land Apple has bought would be far too large — enough to pack in 100,000 people. As a site for car research and production, the acreage makes much more sense.

Toyota's main research center in Toyota City, for instance, covers about 50 hectares and contains a test track.

Tesla is the textbook case of a technology company coming into car-making. Its office campus in Palo Alto, California, covers only about 5 hectares. But its assembly plant in Fremont, California, runs to 110 hectares — Apple's new plot is about half that.

The Fremont plant was once a Toyota factory with an annual capacity of 500,000 vehicles, and Tesla still has not made full use of it: the company built fewer than 60,000 cars last year. Much of the site today sits idle as parking lots and rail unloading yards.

Tesla's Fremont site also contains a test track, which any carmaker needs: whatever you build, it has to run on the road.

"Zeus," for its part, sits near San Jose International Airport, so noise complaints are not a problem. It even keeps prying drones away — the area around every U.S. airport is a drone no-fly zone.

Apple has been preparing far more than land

A Morgan Stanley report shows that Apple's research spending rose by as much as $4.7 billion between 2013 and 2015.

By comparison, Apple added only about $200 million in research spending between 2004 and 2006, while it was developing the iPhone; $600 million while preparing the iPad; and $2 billion for the Watch and its new internet services.

All of those together fall short of the increase of the past three years. Apple's product line is much bigger than it was a decade ago, true, but many of its hardware products do not get a major upgrade every year: the iPhone is substantially redesigned only every two years, and the gap is longer for the iPad and the Mac.

Even if only half of that new $4.7 billion goes to the car project, it is an astronomical sum by the standards of electric vehicles — more than Tesla's $444 million in research spending, and more than the combined electric-vehicle research spending of the world's 14 largest traditional automakers.

Besides money there are people. Apple has hired away a long list of technical executives from other carmakers in the past few years.

Former Mercedes-Benz research chief Johann Jungwirte; Robert Gough, a former technology executive at the automotive safety systems company Autoliv; Hugh Jay, a former executive at the auto supply chain company EMCO Gears; former Tesla mechanical engineering manager David Nelson; former Tesla battery engineer John Ireland; former Fiat senior vice president Doug Betts; Nvidia research head Johnathan Cohan, who knows Tesla's chip systems well; and on and on.

Apple has taken so many people from Tesla that Tesla CEO Elon Musk said in an interview last year that everyone Apple hired away was someone he did not want, calling Apple "the Tesla graveyard."

Then, two months ago, Chris Porritt, the vice president in charge of all of Tesla's vehicle engineering, was confirmed to have joined Apple too.

Between the land, the research spending and the hiring, it is clear that "Titan" is the most important and the largest project Apple has taken on since Tim Cook became CEO.

The first challenge in making cars is manufacturing

Former General Motors CEO Dan Akerson has publicly said he is skeptical about Apple entering the car market: "Before they get into the guts of the automobile industrial system, they'd better think hard about it. Smelting steel, stamping metal, building cars — Apple has no idea how hard the industry they want to enter really is."

Tim Cook does not agree. In an interview he said cars can be assembled the way phones and computers are. To get into the business, Apple planned earlier this year to work with the Austrian contract car manufacturer Magna.

Magna is one of the largest third-party car assemblers in the world, with businesses in seats, interiors and assembly — nearly every system a car has.

Magna has assembled the MINI Paceman and Countryman for BMW and the G-Class off-roader for Mercedes-Benz. Its plant in Graz, Austria, is due to expand to 200,000 vehicles a year by next year, four times Tesla's 2015 capacity.

There were earlier reports, too, that Apple would set up a car research lab in Berlin, and that it has already hired away a dozen-odd engineering, software, hardware and sales specialists from other European carmakers.

For a precedent of a technology company entering the auto industry, look at Tesla. Founded in 2003, it built its first mass-produced electric car, the Roadster, in 2008.

At that rate, Apple — which has spent this much money and hired this many people since 2013 — should have no great trouble building a car.

But cars today are not the money-maker the iPhone is

Akerson's other point, though, holds up: cars are a low-margin, manufacturing-heavy industry, nothing like the high margins Apple is used to.

Among the world's major carmakers, even BMW, which has the highest net margin, comes in under 8%. Apple's net margin across the company last quarter was 20.8% — its low point of the past year.

The car industry has finished dividing up its labor. Carmakers everywhere build cars much the same way: design a prototype, order parts from suppliers, buy the parts in, cast the core pieces such as the engine block themselves, put it all together, then sell it.

At every link in the car supply chain, the margin is thin.

On top of that, a car can no longer give consumers any disruptive experience, so the price cannot go higher either. None of it compares with Apple, which makes a 20% net margin — and a gross margin above 40% — just from building phones.

The car industry has its eye on a coming trend, but it may not be the one Apple wants

The car industry has changed lately, because of electric cars and ride-hailing apps.

A consumer who has bought a car and a parking space still spends no more than an hour a day driving it, on average. The people who really drive more than ten hours a day are mostly Uber and Didi drivers. They care more about the monthly cost of running a car than the one-time cost of buying it, and that is where electric cars have a big edge.

That has changed how car companies think about selling electric vehicles. In the past six months, the three best-selling carmakers of 2015 — Toyota, Volkswagen and General Motors — have each put more than $10 million into ride-hailing apps. In January, GM went as far as investing $500 million in the American ride-hailing app Lyft.

Carmakers' investments and experiments in ride-hailing all revolve around their own electric-vehicle business, and they encourage leasing those cars out to owners for use as ride-hailing vehicles.

But with the promotional phase of ride-hailing over, Uber and Didi are already pushing driver pay down. Most of the people driving for these services today are low-income, not the "middle class" or the "startup CEOs" of the early days. Whether they buy or rent, what they want in the end is a cheap car.

Cheap — or "value for money" — has never been Apple's goal.

The question now is how Cook can remake the car industry

The phone business was once low-margin too. In 2007, Nokia at the height of its power had a margin of about 14%; Motorola's was 4%; most of the rest hovered around 0%.

With the iPhone, Apple turned phones into an unusually profitable business.

In that remaking, "the phone" became a small part of what the iPhone is. The iPhone is, at bottom, a networked personal computer you operate with your fingers.

On the strength of a large screen, touch interaction and the App Store, Apple was the first to remake the phone business, and it has held the middle and high end of it firmly ever since.

In 2015, Apple's profit exceeded the profits of Google, Facebook, Amazon, Microsoft, Baidu, Tencent and Alibaba combined. Most of it came from the iPhone.

Turning car-making into a richly rewarding business will take an iPhone-style disruption as well.

That will not be easy.

A car is, at bottom, a tool for getting a person from point A to point B.

Short of self-driving, its core function does not change much. However good the navigation or the entertainment system, it will not be much better than plugging an iPhone into the car.

And unlike a phone, a car is not a product you need 24 hours a day. Plenty of people do not need to own one at all, especially now that Uber and Didi are everywhere.

On energy, traditional carmakers currently lean toward gas-electric hybrids.

As a latecomer, Apple can hardly turn back and develop internal combustion engines, or hybrids that depend on them. Electric is close to the only choice, and hiring so heavily from Tesla is one sign of it.

According to the latest reports, Apple has set up a new wholly owned subsidiary, "Apple Energy," which will run solar power plants. An energy company plus a car business sounds exactly like Musk's (Tesla plus SolarCity).

Tesla has long been seen as the Apple of the car industry, able to make the best electric car. But unlike Apple, Tesla has not been able to produce its good product at scale.

Perhaps what Apple wants to do is precisely what Tesla could not: build the first genuinely mass-market new-energy car?

Whatever Apple is really thinking, it is now certain that it has settled on a direction — otherwise it would not be spending on this scale.

Whether the Apple car turns out to be the next iPhone, remaking a market and driving Apple's growth for the next decade, or the next iPad, out of momentum three years after birth, time will tell.