Foxconn, Apple interest in EVs point to dramatically different future for automakers

For a new venture with little revenue, Foxconn‘s nascent automotive business is off to a big start this year, inking partnerships to develop new electric cars with Chinese start-up Byton and Hong Kong-based automaker Geely to make electric vehicles. And in between came a headline related to Apple‘s long-hyped and slow-developing EV initiative: a statement from South Korea’s Hyundai Motors about a joint venture expected to begin producing cars in 2024 that involved Apple, though the company later walked back the specific mention of Apple among its potential partners — Apple’s demands for secrecy from partners are well-known. 

Deals like those are likely to be only the beginning of sweeping change sweeping the car business over the next decade, as electric vehicles move toward the 28% market share Bloomberg New Energy Finance projects for 2030 from around 3% now, and as self-driving, or autonomous, cars and trucks move toward long-promised fruition. The new technologies open the business to new players with different core skills than traditional leaders that excelled at physical manufacturing, as cars become more software-driven, even to the point of driving themselves.

Some of these changes will be obvious to consumers, while others will be more subtle, transforming global supply chains that only later deliver cars and trucks to suburban driveways. Analysts believe some alliances will mean cars coming from companies familiar from other industries, especially technology, with Alphabet‘s Waymo division and perhaps Apple delivering cars that include their technology, and maybe their brand names.

Big deals have kept coming through the month. On Jan. 19, General Motors announced that it had invested or raised a fresh $2 billion for its Cruise autonomous-driving affiliate, including funds from Honda Motor and Microsoft, which will also provide cloud computing services to Cruise and its anticipated ride-hailing service competing with Uber and Lyft. And electric truck start-up Rivian, which expects to ship its first vehicles by this summer, raised $2.65 billion from investors including Amazon.com’s Climate Pledge Fund and from T. Rowe Price and Fidelity Investments, mutual fund firms whose presence could point to an upcoming initial public offering by Plymouth, Michigan-based Rivian.

Others will feature companies like Foxconn, which makes iPhones for Apple now, branching out into helping new carmakers master license basic software and hardware quickly, and use it as a platform for their own innovations.

“Apple would never get into it if it weren’t both an electric vehicle and an autonomous vehicle,” CFRA analyst Angelo Zino said. “Transportation will go through massive disruption.”

So, how fast will it go, and how big can the change be for some of these companies? At press time, Foxconn and Apple had not responded to a CNBC.com request for comment on these reports.

In Foxconn’s case, the change will likely be gradual, Kuala Lumpur-based CFRA Research analyst Hazim Bahari said. 

The core idea at Foxconn is to become to the car industry what the Android operating system has been for cell phones — a lower-cost platform of basic technologies that partners can add to to create new vehicles, Bahari said. Announced in October, Foxconn’s parent Hon Hai says as many as 200 automakers have expressed interest in partnering to use the company’s MIH platform, and that it hopes to provide components or services to 10% of the world’s EVs by 2027. MIH can include everything from autonomous-driving software to batteries to manufactured components, Foxconn’s parent Hon Hai said in an analyst presentation in October.

The MIH platform includes unibody chassis platforms, suspensions and battery pack designs that can be tailored to different automakers, Foxconn says. The company hopes to introduce solid-state batteries by 2024, which advocates say will eventually be safer, faster-charging and longer-lasting than today’s technology, but so far have been dauntingly expensive.

The company hopes that building a new market supporting automakers will help offset maturing unit sales of cell phones, but progress will be slow, Bahari said. He expects that the project will generate only about 1% of Foxconn revenue, currently about $175 billion from all sources, within three to five years. 

“The names I’ve heard (that Foxconn is working with) are mostly lesser-known, especially in China,” Bahari said before the Geely deal was announced. “How fast it happens all depends on the extent of sharing done on the platform technology. They will not all be sharing every technology they have.” 

The Hyundai headline about Apple remains uncertain — Apple CEO Tim Cook said this weekend when asked in a TV interview about an “Apple Car” that he does not comment on rumors — but analysts do expect several alliances, possibly including one with Volkswagen, and the Cupertino giant can develop an Apple-branded EV during this decade, Wedbush analyst Dan Ives says.

“I’d expect it to be something like [Apple’s] wearables business,” Ives said, referring to the growing business that includes the AirPod headphones and the Apple Watch. “Over the next five to seven years, EVs could be 5% to 10% of total revenue.”

The usual skepticism about Apple entering the car business is that making autos produces much lower profit margins than Apple is used to — General Motors‘ profit last year was about 4.4% of sales, compared with almost 24% for Apple. But financial concerns about Apple’s car bet may be mistaken or just outdated, analysts said.

Zino points out that EV makers like Tesla command much higher stock prices, relative to their profits, than do even well-run phone and services companies like Apple, whose stock is trading at 32 times earnings estimates for this year versus more than 200 times for Tesla. Letting investors think of Apple as an EV maker can boost its price-to-earnings multiple by an amount the market will determine, Zino said.

GM recently hit a record stock price as Wall Street and investors become more confident in its EV investment strategy.

And Morgan Stanley’s Apple expert, Katy Huberty, argues that Apple’s familiar pattern of vertical integration, controlling the software and design of all of its products even as it typically farms out actual manufacturing, can likely pull its profit margins in the auto business above 10%. She says the company has already invested heavily in batteries and other components of an Apple-branded electric vehicle.

“A noticeable percentage of Apple’s revenue comes from products and services that didn’t exist three to five years ago,” Morgan Stanley analyst Katy Huberty said on a webcast with other Morgan analysts. “Smartphones are a $500 billion annual [market]. Apple has one-third. The mobility market is $10 trillion, so Apple would need only 2% to be the size of their iPhone business.”

But focusing on a handful of big consumer-facing names underplays the changes about to sweep through automaking over the next decade, says Brett Smith, director of technology at the Center for Automotive Research in Ann Arbor, Mich.

CAR’s research shows that companies from fields as diverse as semiconductors to consulting, as well as existing auto giants like General Motors and Ford, are re-evaluating how they work together in the vehicle industry, in a pattern the research firm calls Industry X. Indeed, Ford‘s recently-introduced electric Mustang has won praise as the first true competitor for Tesla’s Model Y crossover, and GM made a series of announcements at the Consumer Electronics show, saying it would begin selling electric delivery vans later this year and floating plans for a flying taxi that would carry the Cadillac brand.

But CAR’s report emphasizes how early-stage and uncertain the transformation is. After studying nearly 50 companies, the think tank says the industry does not yet have a consistent approach to strategy for digital transformation, or to coordinating information technology with technology used on the factory floor.

The one industry-wide point of agreement is that the data generated in car production and harvested from monitoring cars as they’re driven will become as valuable as cars themselves, Smith said. This can happen in lots of ways, from using data to streamline supply chains and production itself, or by following Tesla’s lead toward developing services based on data gleaned from individuals’ cars and how they’re used, he said. 

“It’s too complex for any one company to be the expert,” Smith said.

The pace of change will likely be more noticeable in Asia than in North America, because existing car companies are less entrenched, outside of Japan, and there’s more room for start-ups to grow, said Bahari.

But it’s coming. Some changes will be more obvious than others, but within a few years the roster of cars and car makers dominating the market may be barely recognizable. And that’s before you get to the point where car owners question whether to chuck having their own ride entirely, in favor of services like Lyft and Uber.