A $21 Billion Wager on Who Will Build the Apple Car

For a great primer on Magna and its earlier car development work with Apple (those discussions didn’t ultimately go anywhere) do read this piece from 2016 by my Bloomberg Opinion colleague Alex Webb and Bloomberg News writers.

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, is the really interesting piece. It builds niche premium vehicles at a factory in Graz, Austria, including the Mercedes G-Class 4×4, 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 – more than many carmakers produce — and generated $6.7 billion of revenue from these activities. Together with 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 company. 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 bedeviled 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’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. 

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 4×4 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 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 start-ups who may fail or decide to insource 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%. Apple’s is 24%.

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.