Who will build the Apple car?

A current trend in the car industry is for new entrants such as Fisker 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 construction?

If Apple is indeed seriously considering 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 is 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 does not deal with Magna, the supplier is already advising tech groups and start-ups looking to enter the automotive business, and investors have taken notice. Magna's shares have almost trebled since March, giving it a $21 billion market value.

Magna is the world's third-largest auto supplier, having generated nearly $40 billion of revenue in 2019 from products such as transmissions, vehicle cameras, mirrors and seating, according to the Automotive News list of the top 100 global parts suppliers.

Austrian success

Its contract manufacturing subsidiary, Magna Steyr, builds premium vehicles at a factory in Graz, Austria, including the Mercedes-Benz G-Class, the electric Jaguar I-Pace, the BMW Z4 sportscar and its platform sibling, the Toyota Supra.

Typically, automakers choose to outsource production of niche models, rather than retool or build a new production line, because the sales volumes are relatively small.

In 2019, Magna built almost 160,000 vehicles -- more than many automakers produce -- and generated $6.7 billion of revenue from these activities.

Together with joint venture partner Beijing Automotive Group (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 customer list already extends well beyond the traditional automakers. Henrik Fisker's Ocean electric SUV will be built by Magna.

A manufacturing and vehicle engineering partnership with Magna is key to Fisker's asset-light approach. Fisker often compares this to the Apple-Foxconn relationship and hopes that this will avoid the production nightmares that troubled Tesla.

Magna Steyr is reportedly in talks about producing vehicles for Canoo, a SPAC-backed car start-up, while in China it has started producing the Arcfox for BAIC's electric vehicle offshoot.

Other projects include helping Alphabet's Waymo subsidiary integrate self-driving technology into vehicles and working with Sony to produce the futuristic Vision S prototype car.

"It's not a secret that almost every non-OEM interested in realizing its own complete vehicles is contacting us," Frank Klein, Magna Steyr's boss, told investors last year.

Neutral business

You can see why new entrants may choose to work with a neutral party like Magna rather than partnering and sharing plans with an existing automaker 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 SUV into reality. 

The vehicles Magna builds in its factories usually include more of its own components and systems than is the case for cars it does not 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 percent 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 percent 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 start-ups who may fail or decide to in-source the work themselves.

If Apple 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 percent. Apple's is 24 percent.

Still, Magna's shares 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.