(Bloomberg) – Apple Inc. has a tried and tested approach to launching new products: the company designs in-house, supplies its own components and works with a manufacturer contracted to assemble them for sale.
As the tech giant plans a foray into the auto market, it could adopt a similar strategy – working with a lesser-known contract manufacturer – after negotiations with some brand manufacturers have stalled.
To build a vehicle, Apple has three main options: Partnership with an existing automaker; build their own manufacturing facilities; or join a contract manufacturer, such as Foxconn or Magna International Inc.
The Cupertino, Calif.-Based company contacted auto manufacturers, including Hyundai Motor Co., but the discussions did not go well. In this scenario, Apple would develop an autonomous system for the vehicle, the internal and external design and on-board technology, leaving the final production to the automaker. This deal would basically require an existing car company to change its brand and become a contracted automaker for a new rival.
A longtime manager at Apple and Tesla Inc. said it would be as if Apple asked rival Samsung Electronics Co. to manufacture the iPhone. Apple wants to challenge the assumptions of how a car works – how the seats are made, what the body looks like, the person said. A traditional automaker would be reluctant to help a potentially disruptive competitor, said the person, who asked not to be identified discussing private matters.
In fact, discussions between Apple and the auto industry seem to have broken down in recent months. Hyundai and Kia Motors Corp. confirmed negotiations on the development of an electric car, but went back. Apple’s autonomous car team met with representatives of Ferrari NV last year. It was not clear what was discussed, but the talks did not progress, according to a person familiar with the meeting.
In February, Nissan Motor Co. said it was not in talks with Apple. Volkswagen AG CEO Herbert Diess said he was “not afraid” of Apple’s entry into the industry. The CFO of BMW AG recently said that he sleeps peacefully.
For its computers, phones and tablets, Apple has contracted manufacturers such as Foxconn, Pegatron, Wistron, Flex Ltd. and Luxshare. The iPhone maker has avoided building its own factories, an effort that would cost billions of dollars in construction, payment and training for workers, along with new responsibilities and complex deals with local governments.
Factories are usually businesses with low margins. Apple leaves that to partners, while focusing on product design and development. The company’s profit margins exceed those of suppliers like Foxconn and Pegatron.
Tesla, the most successful electric car maker to date, lost billions of dollars running its own factories and only recently started generating regular income. Last year, the company posted a profit of nearly $ 700 million. Apple earned more than $ 60 billion in the same period.
“The auto industry’s profit margins are lower than Apple’s current model,” Goldman Sachs analysts wrote in a recent note to investors. Some luxury brands, like Ferrari, are more profitable, but these are “extreme cases and potentially difficult to replicate in larger volumes,” analysts added.
Apple is more likely to choose a third-party manufacturer because that is the business model they are used to, said Eric Noble, president of consultancy CarLab. He thinks that a partnership with an existing automaker would be a power struggle, because both companies are used to tightly controlling their supply chains.
That’s why Foxconn and Magna are the two main competitors for Apple’s business, according to industry experts.
Foxconn, also known as Hon Hai Precision Industry Co., has an existing relationship with Apple as the main maker of iPhones. And the Taiwanese company is already entering the automotive business. In October, it launched an electric vehicle chassis and software platform to help automakers get models to market faster. Last month, it revealed an agreement to set up more than 250,000 EVs a year for startup Fisker Inc.
An Apple employee involved in the manufacturing said that Foxconn is used to having Apple engineers telling it what to do and that the company’s factories are already full of equipment designed by Apple. The person asked not to be identified by discussing sensitive issues.
Magna also has some history with Apple. The two were in talks to build the Apple car when the iPhone maker started this path about five years ago. Magna also has much more experience in making cars. It assembles luxury models for companies like BMW, Daimler AG and Jaguar Land Rover.
The CEO of a well-known autonomous car company was surprised to see Apple talking to existing automakers when an option like Magna exists.
Magna is the most logical choice, said Noble, who has worked with the Canadian car supplier on projects in the past and calls the company “incredibly good” at what it does.
For its part, Apple appears to be designing its car with production in mind. The company recently published a list of jobs looking for a “senior manufacturing engineer” for its group of special projects, the team that leads the work on a car. The candidate will be responsible for the growth of a team of engineers focused on the manufacturing strategy and the supply chain. The person must also have experience in working with aluminum, steel and compounds, essential materials for automobiles.
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