Auto OEM becomes a trend, car companies become “toolman”?

In 2021, Baidu, Xiaomi and other cross-border giants entered the car-making business one after another, further escalating the melee in the domestic auto industry.

The first threshold for new players to enter the game is mass production delivery. Compared to their new predecessors, Baidu and Xiaomi have developed a more aggressive delivery plan – three years to achieve mass production.

Behind the aggressive delivery goals of the new players is the evolution of the automotive industry’s production and manufacturing landscape. “In the past, it took a long time for car companies to build production lines, recruit people to build teams, and open up supply chains, but now finding car companies to OEM can save a lot of effort.” A traditional car company engineer said to “Tanque Tanker”.

For example, Baidu and Geely set up a joint venture company, Jidu Automotive, Geely as a strategic partner, will provide support in hardware, in accordance with Baidu’s design requirements for the product, manufacturing production and other related work. In addition to traditional car companies, Foxconn, a foundry giant in the cell phone field, has also set its sights on automotive foundry.

Following the product side, the production business mode of the automotive circle is gradually approaching the cell phone field. When the foundry mode becomes popular, the access threshold of the auto industry will be further lowered and the Chinese car-making industry will enter a new era of chaos.

Why OEM is emerging

“If a company is still waiting and watching, then it may not even be able to drink the soup.” Li Zheng, an insider of a new energy car company, said, “In the environment of a big boom in the car-making industry, there are too many companies that want to enter the auto OEM business.

On May 18, according to foreign media reports, Nidec will form an alliance with 20 parts companies to enter the OEM business of pure electric vehicles in China.

And in April this year, BYD also said its e platform has taken the OEM order of DDT. According to Drip’s related plan, it will achieve a target of 1 million shared custom vehicles by 2025, a figure that is more than twice as large as BYD’s annual sales in 2020 (BYD will sell 427,000 units in 2020).

Traditional car companies are transforming, and new players are continuing to circle. On the same day that Nidec entered the market, Foxconn made another city for car manufacturing.

Stellantis, the new group formed by the merger of Fiat Chrysler Automobiles (FCA) and Peugeot Citroen Automobiles, announced on May 18 that it had signed a non-binding memorandum of understanding with foundry giant Foxconn to form a joint venture, Mobile Drive, with a 50:50 vote for each side.

Mobile Drive’s primary business is software, developing digital cockpits and personalized connectivity services, with a focus on infotainment, telematics and cloud services platform development, the announcement said, adding that the Netherlands-based joint venture will operate as an automotive supplier, providing software solutions and related hardware to Stellantis and other interested automakers.

And before that, on January 13, Foxconn signed a strategic cooperation agreement with Geely, under which the two sides will set up a joint venture to jointly provide OEM production and custom consulting services for global automotive and travel companies. The cooperation covers the entire industry chain and process of automotive vehicles, components, intelligent control systems, automotive ecosystems and electric vehicles.

Auto OEM becomes a trend, car companies become "toolman"?

Car companies have opened up their production capacity to the public, giving rise to the foundry model, which all stems from the supply chain changes after the electrification of cars.

Li Zheng said, the original traditional car because of the existence of transmission, engine and other core components, OEM mode can not fully meet the individual needs of car companies, and car companies are not willing to leak their own core technology. But in the three electric system (electric drive, battery, electric control) instead of the engine, car companies worry less, the difficulty of car OEM is also declining objectively.

“The car was originally known as the ‘jewel’ of modern industry because of the complex manufacturing process and the many parts involved, Toyota could become a brother through its sophisticated manufacturing capabilities in the early years, but now the rules of the game have changed, and now car companies are competing to rely on product design and the level of intelligent network connectivity.” Li Zheng believes that the change in the nature of automotive products has ultimately changed the rules of the game for automotive production.

In addition to the changes in the auto industry, changes in the external environment have also contributed to the rise of the foundry model. “The popularity of OEM mode is due to the serious overcapacity in China’s auto industry on the one hand, and the difficulty for new enterprises to obtain car manufacturing qualification on the other hand, and the need to rely on the original car enterprises to obtain production qualification.” Wang Xianbin, an analyst at Gaixia Automotive Research Institute, told “Tanque Tanker”.

Previous data from the China Automobile Association showed that the capacity utilization rate of China’s passenger cars in 2020 decreased to 48.45% from 66.55% in 2017, and the vacant capacity of tail-end enterprises is very serious. Geely, which cooperates with Baidu, also faces overcapacity, Geely’s prospectus shows that Geely’s capacity utilization rate fell from 84.96% to 45.18% from 2017 to the first half of 2020.

“The operation of a factory requires the payment of a large number of employee salaries, utilities and miscellaneous expenses, as well as the calculation of equipment and plant depreciation. The factory built is in the overcapacity stage because of poor sales, which naturally puts huge pressure on the company, and this is when OEM becomes a two-for-one solution.” Li Zheng said.

As early as 2018, the domestic policy side of the automotive industry access threshold “loosened”. 12, 2018, the website of the Development and Reform Commission released the “automotive industry investment management regulations”, the document provides that the new pure car enterprises in the case of independent intellectual property rights in the last two years cumulative sales of 30,000 pure electric passenger cars or pure electric car sales of 3 billion yuan can The document stipulates that a new pure car company can obtain a car manufacturing qualification if it has accumulated sales of 30,000 pure electric passenger cars or 3 billion yuan of pure electric vehicles in the last two years with its own intellectual property.

This means that new players can find a company to complete the sales standard and obtain the qualification. The implementation of this policy has also accelerated the rise of OEM model.

Who is “fattened” by OEM?

OEM mode is common in the manufacturing industry. In the field of cell phones, for example, Apple and other manufacturers take most of the profits, leaving Foxconn and other foundries with minimal profits. Under the guidance of the discourse of profit distribution, the foundry is gradually reduced to the “toolman” of cell phone manufacturers.

But in Li Zheng’s opinion, this phenomenon in the cell phone foundry field does not happen in the automotive foundry field. “In the long supply chain of parts, suppliers have already eaten up a lot of profits, so it is unrealistic for new players to hold a huge supply chain voice like Apple. The new energy vehicle powertrain parts are less, and the value-added process of manufacturing has become shorter, which leads to an increase in the discourse of manufacturers seeking OEM.” He said.

In the current foundry model, the foundries and car companies are also playing a calculus with each other.

Long before Geely and Foxconn, there have been companies that have taken the foundry model through. In the early stage of development, the new power of car-making, Azera and Xiaopeng have chosen to step over the threshold of mass production by means of OEM. Xiaopeng once searched for Hima Motors to OEM, and Azera chose to OEM through JAC in a cooperative mode. As of today, Azera’s partnership with JAC continues, while Xiaopeng chose to build its own vehicle factory once it passed the initial sales creep phase.

It’s not hard to understand why Azera and Xiaopeng chose OEM, namely to deliver in mass production in the fastest way possible. “The new power development can reduce the capital pressure by way of OEM, but also can use the mature process of the foundry to ensure the quality of the models and make themselves less detours.” Wang Xianbin said.

However, there is no shortage of voices questioning the foundry model among the new forces in car manufacturing. Shen Hui, the founder of WEMA, has said publicly that the actual foundry operation is too different from the theory, as the R&D, process and sales channels are in their own hands, but the production process has to be handed over to others, in which various problems may occur. Shen Hui also said frankly that he could not sleep every day because of his concern about the quality of OEM mode.

But in Li Zheng’s opinion, Shen Hui’s concern is only about the manufacturing level of the foundry. “If Toyota had OEMed for Vimas, Shen Hui would not have complained.”

But in practical terms, the foundry model is only a stopgap measure for both Azera and Xiaopeng. After looking to Hema for OEM, Xiaopeng was also physically honest and chose to build its own factory. In the cooperation between Azera and JAC, the foundry was also established in cooperation between the two and did not choose JAC’s original production line. It was the control of the OEM model that gave Azera’s founder Li Bin the courage to say, “Azera’s JAC factory is not inferior to Porsche in terms of production quality”.

With the benefit of hindsight, it is easy to see that the new forces such as Azera and Xiaopeng chose the OEM model more for the cost of factory construction and production qualifications, and chose to keep the definition of the product firmly in their hands. Wang Xianbin also believes that the new forces in the process of choosing OEM is also in the process of familiarizing with the various aspects of car manufacturing, to accumulate experience for future independent car manufacturing.

Auto OEM becomes a trend, car companies become "toolman"?

But with the entry of domestic head car enterprises such as BYD and Geely, the mode of auto OEM is very different from several years ago, and the logic of OEM is being rewritten.

Zhou Tao, an automotive analyst, told “Tanque Tanker” that with the innovation of the giant car companies’ R&D on the three electric systems of electric vehicles, the open platform of electric vehicles has become the new mode of OEM. At present, Geely SEA vast architecture, Foxconn HIM and BYD e platform have all become their foundry tools.

“In addition to the most basic foundry, the BYD e platform and other car-making architecture platforms will also have an impact on customers’ product design, and perhaps in the future Geely’s cars and Geely’s cars for Baidu’s foundry will only differ in terms of autonomous driving, intelligent network connection and LOGO.” Zhou Tao said.

And according to a Baidu Apollo insider, in the cooperation between Baidu and Geely, Geely will also provide engineering support in addition to manufacturing work, and the cooperation between the two sides will also be based on Geely’s SEA Vast Architecture.

Li Zheng believes that in the OEM cooperation between Geely and Baidu, Baidu can rely on Geely’s mature vehicle manufacturing process to achieve better integration of product hardware and software, while Geely can also accumulate experience in the application of intelligent technology, and Baidu’s technology accumulation in artificial intelligence and autonomous driving will also make Geely gain a lot.

In addition, to Baidu OEM also further amortizes the research and development costs of Geely SEA vast architecture, and the cooperation between the two sides also equals to make endorsement to each other’s quality.

The threshold of car manufacturing has dropped?

In the short term, the foundry model is a win-win situation, but the ceiling of auto foundry has been vaguely revealed.

“There will not be a giant like Foxconn in the auto foundry field, and the foundry model will not become the choice of all car companies.” Wang Xianbin predicted to “Tanque Tanker”.

“The United States and Europe have developed their automobile industry for nearly a century, and there has never been a family that can OEM all the products in their history. In the future, it will only be possible for me to find someone to OEM part of my production capacity or someone to OEM a certain model.” He said.

The complex business model of the auto industry predestines Foxconn to be unable to replicate its foundry legend in the cell phone field. However, the modular foundry method of car manufacturing represented by platforms such as Geely Hao Han and BYD e will also have a profound impact on the way of car manufacturing.

According to Wang Xianbin, the future mode of car OEM will be derived into three kinds. The first one is the pure “toolman” model of Hema for Xiaopeng; the second one is the transformation of enterprises into travel service providers through OEM mode, with the core competitiveness of mastering C-side resources, which is the future development direction of DDT and other enterprises; the third one is the OEM mode based on the modular car-making platform of Geely and BYD.

Such a classification will divide the manufacturers providing OEM into grades, and it also means that OEMs with more say will gain more revenue. The lowest-tier foundry model is completely reduced to “toolman” and becomes a necessary choice for new entrants, but can only earn revenue by expanding scale. The second and third models mean that the foundry companies will have influence on the design and manufacture of the foundry products.

“In such a case, most of the foundry’s car hardware distinction will be reduced, and it is the intelligent network function that will become the decisive key.” Li Zheng said. And this also puts more requirements on manufacturers who manufacture cars through foundry, similar to Baidu, Xiaomi and other companies, both to maintain a high degree of differentiation in the development of intelligent network connection, and to make innovations in hardware themselves.

Auto OEM becomes a trend, car companies become "toolman"?

“You make a new hardware and have to be as innovative as Apple Air pods to complete the upgrade iteration of the product because you don’t have the common parts in your hands.” He added.

In addition, in Wang Xianbin’s view, the rise of the foundry model does not mean that the entry barrier to the car-making industry has been lowered. However, as the foundry model gradually becomes mature, the trial and error space of car enterprises will be enlarged than before. “Before I want to build a car to put into production line, in case it does not sell the money will be lost, now the cost of foundry will be much smaller, which reduces the cost of trial and error for new players.”

And in Li Zheng’s view, the foundry model will become an important model in the automotive industry in the future, but it also means that the competitive landscape is becoming more intense.

“The competition has shifted from hardware security to software and hardware innovation.” A new battle in the automotive circle has been fought.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/auto-oem-becomes-a-trend-car-companies-become-toolman/
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