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Business News/ Opinion / Columns/  Magna should be in the race to manufacture cars for Apple
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Magna should be in the race to manufacture cars for Apple

This Canadian company seems well placed to bag such a contract

Apple might opt to outsource the job of manufacturing its car (Photo: Getty Images)Premium
Apple might opt to outsource the job of manufacturing its car (Photo: Getty Images)

A red-hot trend in the car industry is for new entrants such as Fisker Inc to hand over the complicated and capital-intensive work of engineering and building vehicles to a contract manufacturer. Increasingly, cars are judged on their software and electronics, so why bother wasting time and money on metal bashing?

If Apple Inc is indeed serious about launching its own vehicle, as press reports suggest, then it will almost certainly decide to outsource, as it does with the iPhone. Apple designs the phone and its operating system, but employs Foxconn to assemble components into a handset.

There’s at least one big contract manufacturer ready to take advantage of these seismic industry changes: Canada’s Magna International Inc. “If Apple is serious about building a car… Magna Steyr should build it," says Evercore ISI analyst Chris McNally. Even if Apple doesn’t come knocking, the manufacturer is already advising tech groups and startups looking to enter the automotive business, and investors have taken notice. Magna’s share price has almost trebled since March, giving it a $21 billion market value.

Magna is one of the world’s biggest car-parts suppliers, having generated nearly $40 billion of revenue in 2019 from products such as transmissions, vehicle cameras, mirrors and seating. The contract-manufacturing subsidiary, Magna Steyr, builds niche premium vehicles at a factory in Graz, Austria, including the Mercedes G-Class 4x4, the electric Jaguar I-Pace and the BMW Z4 sportscar. Typically those companies choose to outsource the work, rather than retool or build a new production line, because the sales volumes are relatively small.

In 2019, Magna assembled almost 160,000 vehicles and generated $6.7 billion of revenue from these activities. Together with its joint-venture partner Beijing Automotive Group Co (BAIC), it recently added another facility in China, which is capable of producing 180,000 vehicles yearly. A north American plant might be next.

Magna’s client roster already extends well beyond the traditional automakers. Henrik Fisker’s eponymous car venture, for one, went public in October after merging with a special purpose acquisition firm. A manufacturing and vehicle engineering partnership with Magna is key to Fisker’s asset-light approach. The latter often compares this to the Apple-Foxconn relationship and hopes that will avoid the production nightmares that bedevilled Tesla Inc.

The Austrian Magna subsidiary is reportedly in talks about producing vehicles for Canoo Inc, another SPAC-backed car start-up, while in China it’s started producing the Arcfox for BAIC’s electric vehicle offshoot. Other projects include helping Alphabet Inc.’s Waymo subsidiary integrate self-driving technology into vehicles and working with Sony Corp to produce the futuristic Vision S prototype car.

“It is not a secret that almost every non-OEM (original equipment manufacturer) interested in realizing its own complete vehicles is contacting us," Frank Klein, Magna Steyr’s boss, had told investors last year.

You can see why new entrants may chose to work with a neutral party like Magna rather than partnering and sharing plans with an existing carmaker that might be a potential rival. As well as providing production capacity, Magna says it can handle the entire vehicle development process. The company was hired to turn chemicals billionaire Jim Ratcliffe’s Grenadier 4x4 into reality.

The vehicles that Magna builds in its factories usually include more of its own components and systems than is the case for cars it doesn’t make. It can also take a financial interest in the companies with which it works. If it does what it promises, Magna could end up owning 6% of Fisker. Last year, it invested $100 million in Waymo .

These are welcome sweeteners because contract manufacturing’s economics are tough. The vehicle-building subsidiary produced a 2% operating return on sales last year—much lower than the average in other parts of Magna’s business.

And there are risks in adding manufacturing capacity for startups that may fail or decide to insource the work themselves. If Apple Inc were to become a Magna customer, it would drive the same hard bargain as it does with Foxconn, whose operating margins have shrunk to about 2%. Apple’s figure, by comparison, is 24%.

Still, Magna’s shares currently look less dauntingly overvalued than many companies with one foot in the electric-vehicle future. Even after its blistering recent run, the stock is priced at less than 12 times forward earnings. The Canadian manufacturer has its attractions even without a Tim Cook order.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies

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Published: 06 Jan 2021, 08:57 PM IST
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