Is it good to be a car OEM?

October 18th is the 72nd birthday of Hon Hai Group founder Terry Gou. At 10 a.m. on this day, this "old man" who is over 70 years old drove a red Model B into the venue. His first words after getting off the car were: Just "This car is beautiful, I want to drive it home now."

For the melon-eating masses, this kind of polite talk is just fine. The real point lies behind. Liu Yangwei, who succeeded Terry Gou as chairman of Foxconn, said he hopes Foxconn can replicate its success in the ICT field in the electric vehicle industry. "We will start with a small goal and capture approximately 5% of the market share by 2025."

This is no small goal. Last year, Tesla sold 930,000 units, accounting for 13% of the global electric vehicle market. BYD accounted for 8.6%, and the Volkswagen Group only captured 4.6%. And this is not over yet. Subsequently, During the interview, Liu Yangwei added: “I hope I can OEM for Tesla in the future.”

As soon as this statement came out, public opinion exploded.

Seven years ago, Musk categorically stated in an interview with German media that cars are much more complex than mobile phones and watches. “You can’t go to a supplier like Foxconn and say: Build me a car. "Car", but now Foxconn is actively ogling Tesla.

Although it is suspected of being a hot topic, Foxconn's statement also makes people think seriously about several questions: What kind of business is automobile OEM? What is the difference between fuel vehicle OEM and electric vehicle OEM? How many types of OEM models are there?

01

Non-mainstream in the era of fuel vehicles

When it comes to automobile OEM, the first thing people think of may be JAC + NIO or Xpeng + Haima, but in fact, automobile OEM has been around since the era of fuel vehicles, and it is mainly divided into three categories:

The first is resource sharing within the group, such as the Porsche 718 Boxster being produced at the Volkswagen factory; the second is cross-group technology output, such as cooperation between Suzuki, Nissan and Toyota; the third is a professional third-party organization representing the company It is Magna. The models it has OEMed include the Mercedes-Benz G-Class, BMW Z4 and 5 Series, Jaguar's I-Pace and E-Pace, Toyota's Supra and other models, so it is also known as the "OEM King".

The main reason why large companies such as Mercedes-Benz, BMW and Toyota choose to outsource vehicle projects is that these products are relatively niche and cannot be directly adapted to the original production lines. They require money and time to transform the factory. However, these The output of the product is not high, so outsourcing is more economical.

But no matter which one it is, OEM is still a small business in the era of fuel vehicles. The main reasons are three:

First, a traditional fuel vehicle has 20,000 to 30,000 parts, and the product complexity is very high. Complex products often require complex production processes. The two are highly interdependent, resulting in a very long gap between design and manufacturing. It is difficult to achieve decoupling , and the degree of vertical integration is relatively high, so it is impossible to process incoming materials or samples like the clothing or cosmetics industry;

Secondly, the most important parts of a fuel vehicle are the engine, gearbox and chassis. These are the technical foundation of car companies and cannot be bought just by looking for them. Looking for third-party OEMs means that the core technology may be leaked;

Finally, Magna is one of the top five auto parts giants in the world. Its business spans body, chassis, exterior decoration, seats, lighting and ADAS systems. It can do almost everything except glass and tires, and most importantly, it has It has been manufacturing the Big G for Mercedes-Benz since 1979. It has a factory in Austria with an annual output of 200,000 vehicles. It has rich production experience and outstanding scale effect. Such a "one-stop service provider" is the only one in the era of fuel vehicles. .

However, the strong rise of electric vehicles has changed the above conditions.

On the one hand, the mechanical structure of electric vehicles has been greatly simplified compared to fuel vehicles, and the number of parts has been reduced from 20,000 to 30,000 in the past to about 10,000. Moreover, the dominance of key parts has also been transferred from within the car company to external suppliers. For manufacturers, standardized products such as batteries can be purchased on a large scale in the market, which has greatly reduced the technical threshold for car manufacturing and spawned a batch of new forces to join the game.

On the other hand, the performance of traditional fuel vehicles is mainly defined by hardware, such as displacement and horsepower, but the differentiation of electric vehicles is more defined by software (including chips), such as assisted driving and cockpit interaction. This change will allow new forces to put more resources into these areas where consumers have stronger perceptions.

In addition, many modular pure electric platforms have emerged in the automotive industry, which can provide mature hardware architecture and open software interfaces. Companies like BYD can even directly provide three-electric products, which is very important for manufacturers looking for OEMs. Said, it means that the product development time can be greatly shortened, while ensuring sufficient differentiation of the product.

But the question also arises: What company is willing to OEM cars for others? What are their considerations?

02

OEM contempt chain

From the current point of view, automobile OEMs can be divided into three categories. The first category is the "qualified tool people" at the bottom of the contempt chain , and the representative company is Jianghuai.

NIO and JAC began cooperating in 2016. The two parties invested in the construction of a new factory. JAC was responsible for land approval, factory construction and worker recruitment, while NIO was responsible for the equipment procurement and debugging on the production line. NIO was also responsible for Hundreds of employees are deployed to strictly manage the production process. The cooperation model between the two parties is more like the relationship between Apple and Foxconn. The latter is more like a "consigned processor of incoming materials."

This kind of cooperation is for both parties to get what they need. Weilai quickly realized the production and delivery of products without having production qualifications. For JAC, under the background of unfavorable development of passenger car brands, OEMing for NIO is a business that is sure to make a profit. In 2020, JAC's profit from OEMing a car for NIO exceeded 10,000 yuan, which is a figure that many domestic second-tier car companies cannot achieve.

The second category is the “traditionalists” with OEM genes . Representative companies are Foxconn, BYD and Magna, but the business models, advantages and disadvantages of the three are different.

As a worker supported by Apple, Foxconn is undoubtedly the most willing to do OEM work. Its advantage is that it is an independent third party and there is no possibility of competing with customers for business. However, its disadvantages are also obvious. Although it entered the market in 2005 Although it has entered the automotive industry, it is only a small supporting supplier after all. It lacks vehicle development experience and supply chain bargaining power. The competitiveness of the MIH platform that cooperates with Yulon (the largest automobile company in Taiwan Province of China) remains to be seen.

BYD also has many years of OEM experience in the consumer electronics industry. It still OEMs mobile phones for Xiaomi and Huawei, and iPads for Apple. It is neither unfamiliar with nor rejecting the OEM model. It previously launched the D1 in cooperation with Didi It can be regarded as a test of the foundry model.

Completely different from Foxconn, BYD's advantage in manufacturing automobiles lies in its strong integration capabilities in three-electric technology and components, including but not limited to batteries, motors and IGBTs. It can directly provide "turnkey" like MediaTek in the feature phone era. "Service, but its biggest problem is that it has the dual identity of "coach and athlete" at the same time, which will make customers afraid.

As the originator of vehicle OEM, Magna will certainly not miss the Chinese market.

In 2018, through the establishment of a joint venture with BAIC, Magna moved its vehicle OEM services from Austria to Zhenjiang, Jiangsu Province. Its advantage lies in its ability to provide one-stop services from design, R&D, engineering, manufacturing to testing and verification, and its quality Guaranteed, but the shortcoming lies in the development of pure electric platforms, and there may be insufficient investment in some new technologies. The sales of the Polar Fox Alpha S/T in cooperation with BAIC have been mediocre in China.

The third category is the "big factory faction" that has no OEM experience but has a mature modular platform . The representative car company is Geely, and it is different from JAC's "consigned processing". This model will go deep into product definition and technology research and development. , OEMs and merchants have a greater say, and the technology premium is also higher. It is essentially a kind of technology output, a bit like " Android in the automotive industry" .

Geely mainly relies on the SEA platform to provide "OEM" services for other car companies. The first customer is Baidu, and the biggest advantage of this platform is that it has the largest bandwidth in the world, supporting products from the smallest A-class cars to E-class cars. Types include sedans, SUVs, MPVs, station wagons, pickup trucks and even sports cars.

For new forces, this means a very wide range of choices, which can greatly speed up the pace of product launches. Proof of this is that Jidu only took two years from its establishment to the delivery of its first car.

For Geely, there are two main benefits of choosing an open technology platform. First, it can dilute the 18 billion yuan investment in SEA in the early stage. Second, the SEA factory located in Hangzhou Bay, Ningbo has an annual production capacity of 300,000 vehicles. Through technology Output can not only improve production capacity utilization, but also improve the bargaining power of the supply chain through stronger scale effects, achieving cost reduction and efficiency improvement.

It can be seen from the above that there is a big difference between automobile OEM and consumer electronics OEM. On the one hand, the technical threshold is higher and integration is more difficult. On the other hand, if the OEM can go deep into the upstream product definition and technology research and development, etc. , the profit rate will be much higher than the latter.

03

Limitations of the Smile Curve

In 1992, Shi Zhenrong, founder of Acer Group, proposed the famous "smile curve", which refers to the fact that in an industrial chain, the links with the highest added value are usually front-end R&D and design, and back-end brand marketing, while the middle manufacturing This is the most thankless part.

The background for proposing this theory was that the global industry entered the era of great division of labor. Many large European and American companies outsourced production to professional factories in Asia, and concentrated their funds and energy on both ends of the curve. A typical example is Apple.

After joining Apple in the 1990s, today's CEO Cook carried out drastic reforms in the supply chain. He closed factories in the United States and Ireland, reduced the number of suppliers, and used Asian manufacturers to promote the company. The asset-light path has also cultivated a large number of excellent foundry companies.

However, Apple's strength and success in the consumer electronics industry does not mean that "OEM" is a business with no future. TSMC in the chip industry and Shenzhou International in the apparel industry are two "counter-examples."

Take TSMC as an example. In the third quarter of this year, TSMC’s revenue was NT$613.1 billion, with a gross profit margin of 60%. During the same period, its net profit reached NT$280.9 billion, with a net profit margin of an astonishing 45.8%, beating Qualcomm and Intel. Companies at both ends of the smile curve, such as Nvidia and NVIDIA, even surpass Moutai.

Shenzhou International is known as the "TSMC" of the apparel industry. Through its vertically integrated business model, huge investment in technical equipment, and know-how accumulated over many years, Shenzhou International has changed the low added value and low profits of the apparel OEM industry in one fell swoop. A meager stereotype, the net profit margin in the first half of this year reached 17.4%, surpassing Anta and almost the same as Li Ning.

The examples of TSMC and Shenzhou International indirectly prove that Foxconn is not the only way to do OEM in the manufacturing industry. In fact, OEM in the automotive industry has more natural advantages than the consumer electronics industry.

On the one hand, the automobile industry is much more fragmented than consumer electronics products such as mobile phones. It is as strong as Volkswagen and Toyota, and its global market share is only about 10%. It is not like Apple, which accounts for half of the high-end market, and Foxconn. There is an unequal situation of "I eat hot pot and you eat hot pot base" .

On the other hand, automobile production is much more complex than that of mobile phones. It emphasizes the collaboration between different links, and affects the whole body. Capable OEMs are very scarce, and scarcity means bargaining power.

Take Magna as an example. Last year it OEM produced 125,600 complete vehicles, bringing the company revenue of US$6.1 billion and profit of US$287 million (before interest and taxes). If the depreciation of fixed assets and interest are not taken into account, the company Factors in, the average profit of OEMing a car is as high as US$2,280.

To a certain extent, the OEM model in the consumer electronics and clothing industries is due to the international division of labor and the pursuit of rapid expansion by enterprises, while the OEM model in the electric vehicle industry is caused by the technological revolution that reshapes the industrial structure. How much profit a foundry can make depends on whether it can go deep into product research and development and even the product definition process.

Perhaps, in the future, "Foxconn" and "TSMC" will be born in the automotive industry at the same time.

04

end

On June 30 last year, at the SAIC Group’s shareholder meeting, when asked by investors whether he would consider cooperating with third-party companies such as Huawei in autonomous driving, Chairman Chen Hong said: “This is like a company providing us with an overall In this way, it becomes the soul and SAIC becomes the body. SAIC cannot accept this result. "

Chen Hong's words revealed an obvious signal that traditional automakers are unwilling to become vassals of new car-making forces such as the Internet or ICT companies and become their foundries.

But to be fair, in the past thirty years or so, most local companies in joint ventures have been unable to participate in the core product definition and development, so don't they also play the role of "OEM" in the joint ventures?