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Barron's Article: Why More EV Makers Aren’t Making Cars at All

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Sean Callahan
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https://www.barrons.com/articles/ev-makers-asset-light-tesla-gm-foxconn-magna-stock-price-51671144997?st=06rpo9yltv16csq

Manufacturing excellence has been critical for car makers ever since Henry Ford popularized the assembly line. Now, some auto makers believe they can win by not making cars at all.

A growing number of auto makers are tapping outside firms to assemble their electric vehicles, saving scarce capital to focus on designing and marketing. It sounds like a good idea, but success in gaining a foothold in one of the largest, most technically complex industries on Earth isn’t assured.

Fisker (ticker: FSR), Polestar Automotive Holding (PSNY), and Sono Group (SEV) are among the electric-vehicle upstarts turning to contract manufacturers. Even traditional auto makers such as BMW ( BMW . Germany) and Mercedes-Benz Group (MBG.Germany) use outsiders to make some of their niche vehicles. Analysts at Goldman Sachs predicted in a recent report that the market for outsourced auto assembly will grow to $36 billion in 2025, and quadruple to $144 billion in 2030.

Tech companies have outsourced production for years. Apple AAPL –1.59%  (AAPL), perhaps the most successful outsourcer, turns to other companies to make computers, iPhones, watches, and chips. Apple is working on an EV, and the betting is that it won’t be made in-house.

Going asset light, as Wall Street calls it, requires less cash. If sales and earnings can be produced without a lot of assets, it means higher return on investment and, in theory, stronger growth. Such companies “are generally viewed as more efficient than their asset-heavy competitors,” says corporate accounting expert Robert Willens. “Their earnings should be less volatile since they don’t have the fixed-cost structure that their competitors are burdened with.”

In the auto business, that has prompted EV upstarts with little manufacturing experience to enter the market. Here’s a look at the global auto landscape, along with the potential winners and losers.

Outsourcers

Fisker, based in Manhattan Beach, Calif., started producing its first all-electric sport-utility vehicle, dubbed Ocean, in November. Canadian auto-parts giant Magna International MG –0.42%  (MGA) is building the Ocean at its manufacturing facility in Graz, Austria. Fisker has also signed a deal with Hon Hai Precision Industry (2317.Taiwan), better known as Foxconn, to build its second EV, dubbed Pear. 

Gothenburg, Sweden–based Polestar Automotive started as part of Volvo and is using its parent to build the Polestar 2 electric sedan, now available around the world, and the Polestar 3 SUV, due out in 2023. Polestar plans to roll out a new vehicle each year for the next few years. The company hasn’t announced who will build the Polestar 4 or 5. 

Revving It Up

Here’s how the global auto industry compares to two of its largest players and two of its aspirants.

E=estimate; Note: Numbers for major global auto makers account for about 70% of global car production.

Sources: FactSet; company reports

Munich-based Sono Group, another start-up, is using Finnish auto supplier Valmet Automotive to build its first EV, a solar-powered, low-price hatchback called Sion. That car is due to hit European roads in late 2023. “We want to be asset light, we want people to do their work who know how to build cars,” says Sono co-CEO Laurin Hahn. “Do we really want to [go through] production hell? No.” 

EV Builders

Production hell is what some asset-heavy, experience-light EV start-ups seem to be going through. At the start of the year, Wall Street expected Rivian Automotive ( RIVN ) to ship about 40,000 all-electric trucks this year. The company has struggled to ramp up production and will produce closer to 25,000 units.

Analysts expected 20,000 units to be shipped by luxury EV start-up Lucid Group ( LCID ) in 2022. Lucid’s initial guidance, given in February, fell short of those expectations, coming in at about 13,000 units. Lucid cut guidance in August to 6,000 to 7,000 units.

“If you think about it…there are at least 1,000 fairly big parts in a car,” Fisker CEO Henrik Fisker tells Barron’s. “If three parts are a millimeter wrong, you can’t open the door.” 

Even Tesla TSLA –0.24%  ( TSLA ), the biggest EV maker, has had its share of production hiccups. “Prototypes are easy, but production is hard,” CEO Elon Musk said in January. He believes that a competitive advantage for Tesla is its manufacturing ability.

Contract Assemblers

In addition to Fisker’s Ocean, Magna makes G wagons from Mercedes-Benz and Supra sports coupes from Toyota Motor (TM), as well as BMW’s 5-series sedans and Z4s. What those cars have in common is low volume. The four vehicles that Magna assembles for traditional auto makers sell roughly 40,000 units a year in the U.S.

Foxconn, a major manufacturer of iPhones, wants to move into cars. The company purchased a former GM plant from Lordstown Motors RIDE –9.23%  (RIDE) earlier in 2022. Foxconn unveiled two EV prototypes in October to demonstrate its design and engineering prowess for global auto makers.

MomentumElectric vehicles are steadily gaining ground.Sources: Goldman Sachs; IHS; Barron's estimatesNote: ICE=internal combustion engine
Outsourced EV unitsInsourced EV unitsICE and hybrid vehicles2020'25'30020406080100million units

“In the next 10 years, Hon Hai in the EV industry will redefine [manufacturing] in the automotive field,” said Hon Hai CEO Young Liu in a news release when the company unveiled its prototypes.  

Foxconn aims for 10% of the market for manufacturing EVs by the end of the decade. Achieving that would require tens of billions of dollars. The major auto makers have $3.1 trillion in assets, generating about $200 billion in annual cash from operations that support more than $100 billion in annual capital spending. Wall Street estimates that Foxconn will generate about $8 billion in cash from operations and spend $3 billion on plant and equipment.  

Giants, Old and New

The traditional auto industry isn’t standing still. General Motors (GM) plans to spend $50 billion for EV assembly and its own battery-cell manufacturing capacity. That’s the amount committed from 2020 to 2025. GM declined to say how much it has been spent already, but roughly $30 billion should be needed in the coming three years. GM hopes to be an all-EV seller, like Tesla, by 2035. 

Tesla, the largest seller of all-electric vehicles, is expected to generate more than $15 billion in cash from operations annually over the coming few years. It is expected to spend about $7 billion to $8 billion annually on maintaining and growing its EV business.  

Size has advantages. “Scale providers are going to get better pricing,” says GM Chief Financial Officer Paul Jacobson. “If you’re a smaller-scale producer or a contract manufacturer, you might be left…paying a huge premium for [EV] raw materials.” 

The Wild Card

Apple’s EV-car ambition is one of the worst-kept secrets in business. The company has been working on a car since 2014. Former Apple executives who had played roles on the Apple vehicle project are now scattered across the auto industry. Former Apple executive Doug Field now leads the development of Ford’s EV and digital-system development.  

Apple declined to comment on its plans for a car. If it does eventually announce an Apple-branded vehicle, it isn’t likely to build it. But the company can afford to support whichever manufacturer it chooses to assemble the vehicle. Analysts forecast that Apple will generate more than $100 billion in free cash flow annually as far out as they project, according to FactSet. That’s roughly the same amount as all major auto makers combined. 

“I worry about everyone,” says GM CEO Mary Barra. “You underestimate a competitor at your own peril.” 

The Best Bet

For investors, a solid way to gain some exposure to an outsourcing trend is through Magna. The Canadian auto-parts giant has been building cars for more than two decades. Contract manufacturing accounts for roughly 15% of Magna sales and a similar proportion of its operating profit.

The company’s shares trade for about 10 times estimated earnings, lower than the average 15 times that has prevailed over the past few years. That’s too cheap for Benchmark analyst Mike Ward. “The company is the third-largest supplier globally [and] enjoys a leading competitive position in most of its key product offerings,” says Ward, adding that Magna is well positioned to benefit from industry trends such as electric and self-driving vehicles.

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BayouBob
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I find it astonishing how the Polestar PR machine manages to convince publications like Barrons to shamelessly obfuscate and hide the fact that Polestar is a Chinese company and all of its vehicles are built in China. "Polestar Automotive started as part of Volvo and is using its parent to build the Polestar 2 electric sedan, now available around the world" Uh, no. Polestar 2 is built entirely at the Geely Automotive plant in Luqiao China. It is built by another subsidiary of its parent company - Zhejiang Geely - using the Geely common powertrain technology that also is used in Volvo, Zeeker, and Geely brands. It is owned by Li Shufu, Chinese billionaire (#62 on Forbes global list) who purchased Volvo in 2010 and he launched Polestar as a separate brand in 2017.


   
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