A couple of weeks again, we wrote in regards to the potential for electrical autos (EV) to unlock new manufacturing methods for automobiles, then we famous that Foxconn is positioning itself effectively for this future. Glenn Mercer had a couple of ideas which he shared with us.
Mercer is aware of what he is speaking about having been an auto trade analyst for so long as now we have been semis analysts. He has a substack, it’s best to subscribe to.
Editor’s Word:
Visitor writer Jonathan Goldberg is the founding father of D2D Advisory, a multi-functional consulting agency. Jonathan has developed development methods and alliances for corporations within the cell, networking, gaming, and software program industries.
He didn’t precisely disagree with the whole lot we wrote, however he added a number of essential nuance. He agreed to allow us to share his feedback, and on this publish we are going to study them to determine the place we may very well be incorrect and the place there could also be room for the paradigm to shift.
First, Mercer identified that auto corporations already outsource a number of their manufacturing…
“A standard OEM is about 35% vertically built-in, outsourcing about 65% of the automotive.”
Autos have been round for a very long time, and automakers (OEMs) have tried each manufacturing mannequin. Finally, the OEMs realized that there have been 4 causes to carry onto that final little bit of manufacturing.
- Some merchandise are too capital intensive and the danger of vendor failure is just too excessive to threat. This consists of engines and steel stamping of the auto physique to call two. Each of those require vital upfront funding – R&D for engines, and tooling for each. Automakers deal with each of those themselves as a result of there isn’t a straightforward approach to twin supply them.
- That is one space that we predict is very weak to disruption. Engines in electrical automobiles are far much less mechanically complicated than inside combustion engines (ICE). The upfront funding is way decrease and the variety of potential distributors is thus a lot bigger.
- Whereas there are some corporations which have developed superior engines, for fundamental automobiles there are sufficient choices to assuage issues about vendor survival. As for the query about capital for tooling, that is an space already effectively explored within the electronics provide chain. For instance, Apple already subscribes to a big portion of Foxconn’s tooling in alternate for a number of concessions. There is no such thing as a cause why this mannequin wouldn’t work for autos as effectively.
- Then there may be the query of automation and scale economics. This touches on many areas like transport, portray and labor. Put merely, there isn’t a benefit for small factories, minimal scale is 250,000 models and appears to scale in a step-wise perform. The robots required for automating a lot of the manufacturing can solely go to date at present (though there are many corporations in China engaged on this), and a few quantity of manufacturing must be dealt with by people.
- Right here once more, we predict corporations like Foxconn have a viable edge. They’re very acquainted with massive scale manufacturing methods automation, and managing a big labor pressure (with some particular space for enchancment). Actually, the query is can Foxconn construct crops which might be economically viable beneath 250,000 models?
- They’ve entered agreements to provide automobiles in a dozen nations already (e.g. the US, Saudi Arabia, Malaysia). Having a 250,000 unit plant in all of those will likely be difficult, however not not possible. For us that is the large query – can Foxconn and their friends transfer the curve on auto manufacturing scale to accommodate smaller crops. This appears difficult however possibly doable.
- Ultimate meeting and High quality Assurance (QA) are additionally main points. Each automotive maker must deal with remaining meeting and have remaining say on a automotive’s readiness. Many corporations have tried to supply outsourced remaining meeting and all folded or get absorbed into the OEMs.
- That is yet another space the place Foxconn has a number of expertise. True, assembling one thing as massive as a automotive could be very totally different than assembling an iPhone, however our guess is that this can be a solvable drawback. For Foxconn to have survived this lengthy, their QA for electronics should be very excessive. When was the final time you bought a defective iPhone?
- The largest difficulty is legal responsibility. Within the occasion of accidents, OEMs are on the hook for defects in a automotive. Nobody dies when an iPhone is defective, however defective automobiles trigger deaths. And when that occurs, it’s at all times the OEM that will get sued. To make sure that they will settle for and handle that legal responsibility, the OEMs must have management of ultimate meeting and QA.
- That is one thing of a regional drawback. Product legal responsibility penalties work in another way in every single place with the US and possibly Europe being probably the most stringent. Extra importantly, this strikes us as one thing that may be negotiated round. Some mixture of extremely detailed contracts and joint OEM/ODM QA groups could present ample protection. The electronics makers do one thing like this already. This mannequin could not work in all nations, however can most likely work in most.
In all of this, we predict there’s a path ahead, however it can require a reasonably drastic rethinking of how the auto OEMs construction themselves. Because of this alone, it’s one thing that the large incumbents are prone to eschew.
It is going to additionally require Foxconn and its friends to radically rethink automotive manufacturing crops. All of this can be too far-reaching to realize. Nonetheless, the electronics trade as soon as confronted very comparable dynamics. {Hardware} makers knew they needed to do their very own manufacturing, till the not possible turned doable.
Ultimately, a longtime trade with large gamers and immense capital necessities could show too exhausting to alter. Mercer is true to level out that each one of this has been tried earlier than, and we defer to his warning on the matter. That being mentioned, if only one firm – Foxconn – can get it proper, it can in the end pressure everybody else to comply with.