Foxconn could be game changer in electric car market

19 Jan

China Harmony Auto Holding Limited announced on December 24 that they would issue 128,734,000 shares to Foxconn for 600 million HKD, giving Foxconn a 10.526% stake in China Harmony. Foxconn is now China Harmony’s second-largest shareholder. China Harmony will use Foxconn’s cash to invest in new-energy automobile manufacturing.

The purpose of the tie-up with Foxconn is to strengthen China Harmony’s luxury car retail network and expand its electric car business, says Feng Changge, China Harmony’s chairman. Yet market observers are wondering if Foxconn truly intends to become involved in auto manufacturing.

Entering the auto sector

Last July, rumors about Foxconn supplying car parts to Tesla began to circulate, but eventually, Foxconn agreed to supply parts to BMW and Mercedes Benz. Those parts are not just for entertainment systems, but also include components for safety and other high-tech systems in Mercedes and BMW automobiles, according to one market insider, who believes Foxconn will profit handsomely from this business.

Foxconn signaled its increasing interest in the automotive sector by establishing an exhibition hall in its headquarters to showcase the latest electronic systems used in electric cars. That, analysts say, shows Foxconn will be more than an OEM for the automotive sector. Indeed, it will be involved deeply in the production of the electronic control systems of electric cars.

At the same time, Foxconn says it will invest at least 5 billion yuan (811 million USD) in its factories in northern China’s Shanxi province to develop electric car production capacity. Foxconn has been in Shanxi for a decade and has invested 20 billion yuan there to produce optical lenses, robots and precision tooling.

Foxconn can utilize China Harmony’s strong distribution channels once China Harmony begins production of electric cars. Based in Henan in central China, China Harmony is the Middle Kingdom’s largest luxury car distributor. Brands in its dealership portfolio include BMW, Lexus, Rolls-Royce, Mini, Land Rover, Jaguar, Aston Martin, Audi, Ferrari and Maserati.

A good match

Given that Foxconn is the world’s largest contract electronics manufacturer, it has considerable resources it can deploy and experience to draw upon as it enters the new-energy auto sector. It also makes sense for Foxconn to enter this nascent sector as its margins are increasingly squeezed in the saturated mobile devices market. Foxconn can gain a foothold in electric cars because the industry’s supply chain is simpler and more open than that of petrol vehicles.

The core technology for electric cars can also be purchased, unlike for petrol vehicles. That makes it easier for new entrants to enter the sector. For instance, Tesla only designed its vehicles and integrated the different components. It purchased the rest of the parts from other manufacturers. It bought batteries from Panasonic, electronics parts from Tomita and many other components from Mercedes Benz’s supply chain. Following Tesla’s example, Foxconn may be able to turn the electric car sector in its new “blue ocean.”

A potential game changer

Foxconn should steer clear of the traditional automotive sector. In that sector, there are irregularities in the supply chain, such as upstream suppliers doing their own R&D work on car structure. In China, certain large firms also own each other’s shares, which makes it very difficult for newcomers to enter the market. For instance, an upstream supplier in China may have the components a certain manufacturer wants, but will be prevented from supplying those components by one of the existing giants, which prefers to supply the parts itself or through one of its affiliates.

By contrast, the electronics sector is much more open. Qualcomm can sell chips to any firm. Sharp and Samsung can do the same with their televisions. Foxconn can serve as an OEM for any brand and build sufficient scale to cut costs. If Foxconn can use the OEM model in the electronics sector which has served it so well for electric cars, it may be able to revolutionize the auto industry. Foxconn will earn large profits and consumers will benefit from the products.

The challenge: immature technology

While the electric car sector has been developing fast, there is still a long way to go before these vehicles become mainstream consumer products. Charging speed is still slow. The charging system is still not in place. Lithium batteries needed for electric cars are also costly. Charging time for electric cars needs to be comparable to the amount of time it takes to gas up a petrol vehicle before electric cars can go mainstream. Tesla’s luxury electric car is an exception. Since the electric car market is currently small, Foxconn needs to initially set modest goals as it enters the sector.

Still, there was much regarding electric cars to be optimistic about in 2014. Research at MIT is proceeding smoothly. That research found that charging times will decrease in the future, which will make electric vehicles a viable alternative to petrol cars. To that end, Spain’s Graphene Battery had a breakthrough in regards to the cost of battery charging and its new battery is now being tested at its German plant. Once battery issues are resolved, the path will be clear for electric cars to ultimately replace petrol cars. This will be a major opportunity for Foxconn. Indeed, perhaps one day, Maserati, Mercedes Benz, Audi and Jaguar will all be produced by Shanxi Foxconn and there will be an iCar or Xiaomi Car.

(The article is authorized to post from Lei

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