Odds are stacked against Foxconn in electric car market

SINGAPORE — When Apple seized leadership of the consumer device industry with the introduction of the iPhone in 2007, it created the conditions for a host of Asian tech names to grow in its wake. From assemblers such as Foxconn to apps such as Didi Chuxing, Asian companies rapidly grew to become significant players in the global tech industry.

Fourteen years later, some of these same Asian names are coming in behind another big U.S. tech name, Tesla. They hope electric vehicles will do for them now what smartphones did a decade or more ago.

Xiaomi, a Chinese smartphone maker still building a brand outside its home market, is the latest, saying in March that it would set up a wholly owned unit to build “smart electric vehicles” and invest $10 billion in the next 10 years. Xiaomi founder and CEO Lei Jun will lead the unit.

Early this year, Chinese internet giant Baidu also announced that it would enter the electric car market, in a joint venture with Zhejiang Geely Holding Group, China’s largest private automotive group. Ride-sharing company Didi has partnered with BYD, China’s large electric car producer.

The most ambitious may be Foxconn. The world’s largest contract assembler of consumer electronics, including the iPhone, aims to become an electric car assembler. The company plans to set up factories in China and North America and expects to mass-produce EVs in 2023. The goal is to capture 10% of the global market by 2025.

Foxconn is betting that it can successfully shift into the car industry because its smartphone production expertise will easily apply to EVs, allowing it to take on established automotive names.

Fully electric cars are far simpler than gas-powered cars. They do not need complex components such as engines, multispeed transmissions, or fuel injectors, which require decades of manufacturing expertise to mass-produce.

“With EVs, we have a chance to compete because there’s no engine in the car anymore,” Foxconn Chairman and CEO Young Liu told Nikkei in a recent interview. Instead, an electric car relies on batteries and computer chips, familiar territory for smartphone manufacturers.

These planned forays into the electric car market are also partly defensive. The smartphone market is growing saturated, and these companies need a new growth engine. Global smartphone shipments peaked in 2017, according to IDC. As a result, Foxconn reported a decline in net profit for a fourth straight year, which fell 12% to 101.79 billion New Taiwan dollars (US$3.62 billion) in FY 2020. On the other hand, the global EV market is expected to grow for years to come.

But there are many hurdles to overcome for Asian tech giants to succeed with electric cars as they did with smartphones.

One problem is that they are entering the race late. Tesla sold its first mass-produced Model S in 2012. According to the International Energy Agency, only 110,000 EVs were on the road globally that year. Tesla’s sole rival back then was Nissan’s fully electric Leaf. Auto giants like Toyota and Volkswagen did not take Tesla’s challenge too seriously. Instead, Toyota viewed hybrid and fuel cell technologies as the future of eco-cars. VW, before its emissions scandal, was still investing in diesel engines.

Nine years have passed, and the world is a different place. Every incumbent car company is now scrambling to switch to zero-emission models. They face tough CO2 emissions targets in Europe and China, and looming bans in some countries on fossil fuel vehicles.

Foxconn and other companies might have had a bigger chance if they had entered the market a few years back, when the major car players were asleep at the wheel. But now many of the world’s most-known automotive brands are going full-throttle to adapt to this change.

VW is investing 35 billion euros in e-mobility by 2025. General Motors has said it will only sell zero-emission vehicles by 2035. Even Toyota, which still weighs hybrid and fuel cell technologies ahead of electric cars, is changing quickly. On Monday it announced that it would launch 15 new battery-driven models and is also piling into research and development for more powerful solid-state battery technology, a potential game-changer for next-generation zero-emission cars.

Adding to all these players, Tesla, now the world’s fastest-growing and most valuable car company by market valuation, continues to invest heavily, with a new plant being built in Europe.

Another challenge is that the level of quality control required in vehicle production is much higher than for smartphones. Phones typically get replaced every few years. But most new cars sold will be on the road for more than 10 years.

The last problem is that electric cars are still not a very profitable business. High investment costs, increased safety standards, strict quality control, and fierce competition with many of the world’s largest corporations are all huge hurdles to market entry. Even Tesla, which enjoyed first-mover advantage and had no need to shift from “legacy” investments and technologies, took 17 years to report a full-year operating profit, in 2020. Its operating profit margin for the latest quarter was 5%, high for the auto industry but low compared to tech norms.

For Asian tech companies to improve their odds in the EV race, they need to focus on strategic partnerships with incumbent auto companies.

The deal that Microsoft sealed with GM may be an example. Instead of developing autonomous vehicles in-house, an approach that rivals such as Alphabet subsidiary Waymo and Apple are taking, the U.S. software giant and cloud computing powerhouse announced in January that it will invest in GM’s autonomous vehicle unit Cruise. Microsoft will provide software expertise and cloud computing capability, and GM will secure a much-needed R&D budget.

Foxconn is also seeking partnerships. In January, the company announced it would form a 50-50 joint venture with China’s Geely. It is seeking a similar deal with Fiat Chrysler Automobiles, but FCA lags in the race to electrification against auto giants such as VW, GM and Toyota.

To secure a place in the EV race, Foxconn has to prove to incumbents that it is a solid and beneficial partner — just as it proved to Apple when the California company required mass-production capability for its iPhone. If Foxconn can do this, a wider path to the EV market may open to other big Asian tech players.