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(Bloomberg) – Apple Inc. has a proven approach to launching new products: The company designs in-house, purchases its own components, and works with a contract manufacturer to assemble it for sale.
As the tech giant prepares for a foray into the auto market, it could adopt a similar strategy – working with a lesser-known contract manufacturer – after talks with some stalled branded automakers.
To build a vehicle, Apple has three main options: partner with an existing automaker; build its own manufacturing facilities; or team up with a contract manufacturer such as Foxconn or Magna International Inc.
The Cupertino, Calif.-Based company reached out to automakers, including Hyundai Motor Co., but talks did not go well. In this scenario, Apple would develop an autonomous system for the vehicle, interior and exterior design, and in-vehicle technology, while leaving final production to the automaker. Such a deal would essentially require an existing automaker to get rid of its brand and become a contract assembler for a new rival.
A longtime official at Apple and Tesla Inc. said it would be as if Apple asked US rival Samsung Electronics Co. to make the iPhone. Apple wants to challenge assumptions about 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 such a potentially disruptive competitor, said the person, who asked not to be identified to discuss private matters.
Indeed, discussions between Apple and the automotive industry seem to have stifled in recent months. Hyundai and Kia Motors Corp. confirmed discussions about developing an electric car, but backed out soon after. Apple’s self-driving car team met with representatives from Ferrari NV last year. It is not known what was discussed, but talks have not progressed, 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 entering the industry. BMW AG’s chief financial officer recently said he was sleeping peacefully.
For its computers, phones and tablets, Apple relies on contract 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, worker compensation and training, as well as new responsibilities and complex agreements with local governments.
Factories are generally low-margin businesses. Apple leaves that to partners, while focusing on product design and development. The company’s profit margins exceed those of suppliers such as Foxconn and Pegatron.
Tesla, the most successful electric car maker to date, has lost billions of dollars operating its own factories and has only recently started generating steady income. Last year the company reported nearly $ 700 million in profit. Apple made over $ 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 investor note. Some luxury brands, like Ferrari, are more profitable, but these are “extreme cases and potentially difficult to replicate at higher volumes,” analysts added.
Apple is more likely to choose a contract manufacturer because that’s the business model it’s used to, said Eric Noble, chairman of consulting firm CarLab. He believes partnering with an existing automaker would be a power struggle as both companies are used to tightly controlling their supply chains.
That’s why Foxconn and Magna are two main contenders for Apple’s business, according to industry insiders.
Foxconn, also known as Hon Hai Precision Industry Co., has an existing relationship with Apple as the primary assembler of iPhones. And the Taiwanese company is already entering the automotive sector. In October, it launched an electric vehicle chassis and software platform to help automakers get their models to market faster. Last month, he unveiled an agreement to assemble more than 250,000 electric vehicles a year for startup Fisker Inc.
An Apple employee involved in manufacturing said Foxconn was used to Apple engineers telling him what to do and the company’s factories were already filled with Apple-designed equipment. The person asked not to be identified to discuss sensitive issues.
Magna also has a history with Apple. The two were in talks to build Apple’s car when the iPhone maker embarked on this route about five years ago. Magna is also much more experienced in building cars. He assembles luxury models for companies such as BMW, Daimler AG and Jaguar Land Rover.
The CEO of a well-known self-driving car company was surprised to see Apple talking to existing automakers when an option like Magna exists.
Magna is the more logical choice, said Noble, who has worked with the Canadian auto supplier on projects in the past and calls the company “unbelievably good” at what they do.
For its part, Apple seems to design its car with production in mind. The company recently posted a job posting looking for an “experienced manufacturing engineer” for its special projects group, the team that runs its work on a car. The candidate will be responsible for growing a team of engineers focused on manufacturing strategy and supply chain. The person should also have experience working with aluminum, steel and composites, key materials in cars.
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