Contract Manufacturing: Asset-Light Approach to the Auto Market
In the automotive space, all incumbent OEMs have in-house assembly capabilities. However, they sometimes outsource specific programs because their volumes are too low — and would disturb large plants — or would require a new manufacturing unit which OEMs may not be ready or financially able to invest in. Conversely, emerging OEMs often lack the means, volume and/or expertise to set up their own assembly unit. They may also resist adding a manufacturing risk (see Tesla’s “production hell”) to the necessary engineering, product-market-fit and go-to-market risks. Contract manufacturing addressed the resulting needs.
Three models emerge to handle contract manufacturing. The most straight-forward approach consists in establishing a dedicated unit, which can be supported by contract engineering capability — Magna Steyr for instance. A second approach consists in simply offering fabless OEMs manufacturing capacity and expertise otherwise used for in-house needs — China’s JAC Motors for example. Last and most interesting, new players that have developed an electric skateboard may design and manufacture vehicles to clients’ specifications — UK’s Arrival for instance. We will look at these three models below.
These various approaches to producing vehicles come at a time when the mobility space is undergoing a radical transformation. A number of startups are trying to become full-blown automotive brands, new mobility concepts such as robotaxis and autonomous shuttles are emerging, and electrification enables new ways to design and build vehicles.
Dedicated Contract Manufacturing
In the electronics and space, Foxconn — the largest producer of Apple’s iPhones — or Flex are well known for producing under contract for their often fabless clients. Such players invest in generic manufacturing asset and expertise, and offer their assembly and supply chain management services.
In the automotive space, the largest contract manufacturer is Magna Steyr, a subsidiary of mega-Tier 1 supplier Magna. In its original plant in Graz, Austria, the company currently produces vehicles for Mercedes-Benz (G-class), BMW (5-Series, Z4), Toyota (Supra), JLR (e-Pace, i-Pace). The company has also opened a unit in China where it produces an SUV for Beijing Electric Vehicle Co. and is considering one in the USA. The existing plants have an annual capacity for 170k and 180k vehicles respectively.
Magna Steyr is uniquely positioned as “Tier 0.5” supplier as it can rely on its parent company’s components / systems business. This enables the unit to offer vehicle engineering and sourcing on top of vehicle assembly and supply chain management. Thanks to this unique combination, Magna Steyr will engineer and produce Fisker’s first vehicle, the Ocean (above), on Magna’s platform, as the California-based startup lacks the capital to invest in its own manufacturing.
You may also recall Sony’s concept car, Vision-S (above), presented at CES 2020. At this year’s event, the company doubled down and presented some of its industry partners, including Magna Steyr for vehicle engineering and manufacturing. Sony has a strong brand, a wide range of electronics and SW capabilities, but no automotive engineering or manufacturing expertise. Apple could very well be next, with a similar game plan.
The other established contract manufacturing player is Valmet Automotive, which has shipped 1.7 million vehicles to date. The Finnish company currently produces vehicles for Mercedes-Benz (A-class and GLC-class), after assembling for Porsche or Fisker (Karma). The company has also developed an expertise in EVs, both in engineering and manufacturing (e.g. battery packs).
Foxconn is the new player here, as smartphone volumes are plateauing. The Taiwanese company starting supplying the automotive industry with connectors and displays over 10 years ago, but drastically boosted its ambition recently. Over the past few months, Foxconn presented its own EV platform (below), announced contract manufacturing deals with Byton (for the M-Byte) and Fisker (for its second vehicle), and is reportedly in talks with FCA to establish a manufacturing JV in China.
Since the Taiwanese giant is still mostly inexperienced in the automotive space, it also formed a 50-50 JV with Chinese OEM Geely (owner of Volvo, largest Daimler shareholder and more) to provide automotive consulting services related to complete vehicles, drive systems and components, combining their automotive and manufacturing expertise. This initiative will help Foxconn, or its JV with Geely, become a strong competitor to Magna Steyr.
Sharing Manufacturing Capacity and Expertise
Automotive manufacturing is a very capital intensive business, a fully blown plant costs in the billion dollar range. Volume is critical, capacity utilization is a core metric. A search for higher utilization and asset ROI can lead OEMs to assemble vehicles under contract for other players, yet avoiding direct competitors if possible.
This approach is currently used by China’s JAC Motors, which partnered with NIO to produce the emerging EV maker’s vehicles after the latter canceled plans to build its own capabilities. This drastically reduced NIO's need for capital and provided an incremental volume of 44k vehicles to JAC last year. Now that NIO is gaining market traction and financial strengths, it is planning to leverage its partner to jointly control manufacturing. Contracting was a stepping stone.
Similarly, Geely is now offering contract manufacturing. The fast growing OEM’s capacity utilization across its 11 plants dropped from 85% in 2017 to 59% in 2019, and likely further below in 2020. Notwithstanding where its breakeven point stands, this low utilization leaves significant room for higher financial returns. A first contract came with Faraday Future to produce the on-again / off-again startup’s F91 sedan (below), in partnership with Foxconn.
It is also interesting to note that Geely just announced Jidu Auto, a JV with Baidu, Chinese Google rival and majority shareholder, to design, manufacture, sell and service EVs. Geely will contribute its engineering (leveraging its open source EV architecture) and manufacturing capabilities whereas Baidu will provide in-vehicle software, including the open autonomous driving stack developed by its Apollo division.
Last, we have recently heard rumors of talks between Apple and established OEMs such as Hyundai-Kia and Renault-Nissan-Mitsubishi to (possibly engineer) and assemble their hypothetical future vehicle. Similarly to Sony, it definitely would not make any sense for Apple to get into vehicle engineering or manufacturing, as these activities require deep expertise and would dilute the company’s stratospheric gross margin — capital is not the issue here.
The Electric Skateboard-Based Approach
The most radical and innovative approach to contract manufacturing relies on the new concept of the electric skateboard, which has quickly gained traction across the industry, whether at incumbents or startups. The electric “rolling chassis” has become a white branded foundation on which to attach use case- and brand-specific “top hats”.
The most striking example of this approach is the contract Amazon signed with emerging US OEM Rivian for 100k electric delivery vans. The vehicle will leverage the skateboard underpinning Rivian’s forthcoming R1S SUV and R1T pickup. The company is engineering the van to Amazon’s specification and will begin production this fall.
Similarly, UK-based Arrival introduced a versatile electric van. It is associated with the concept of micro-factories which require about $50 million in investment to assemble up to 10k units / year. This offers the option to deploy capacity in multiple locations and address local needs with tailored products. The company has already received an order from UPS for 10k vans.
Other startups are approaching this from a slightly different angle. Israel-based REE and Applied EV (above) in Australia, plus a couple other companies have developed electric — and sometime autonomous — skateboards. Whereas these companies may not necessary engage in contract manufacturing per se, their products are a great foundation on which others can design and assemble application-specific vehicles. Reducing the engineering, tooling and assembly scope to the “top hat” greatly reduces the need for capital and expertise.
The contract manufacturing approaches reviewed above result in lower barriers to entry into the automotive market, offering access to capital-intensive assets and expertise. The combination of contract engineering and possibly the use of white-branded electric skateboards enable new players to enter the market, which will provide more product diversity and greater competition.
Managing Director, Orsay Consulting
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