If Apple or Uber Really Build A Car, Here’s Where They Might Start

Magna International Inc.’s Advanced Car Technology Systems safety testing facility in Sailauf, Germany.
Photographer: Kiên Hoàng Lê/Bloomberg
Magna International Inc. helps many major automakers produce cars—will they do the same for tech companies?

At the end of a tree-lined boulevard in rural Ontario sits an imposing castle with steep slate roofs and white stone gables. Its landscaped gardens and spiral staircase are more Chateau de Fontainebleau than Detroit factory, but If Apple Inc., Google or Uber Technologies Inc. decide to build a car, this will likely be their first stop.

The entrance to Magna’s headquarters in Aurora, Ontario.
Photographer: Mark Sommerfeld/Bloomberg

It’s the headquarters of Magna International Inc., the world’s biggest contract manufacturer of cars, which helps steer automakers through the laborious stages of design, engineering and assembly. For years, Magna has eased production bottlenecks for Volkswagen AG, Aston Martin Lagonda Ltd and BMW AG. The carmakers go to Magna when they need assistance manufacturing high-end vehicles. Its engineers do everything from working out the complex jigsaw puzzle of components sourced from a plethora of suppliers, to designing the automated factory that can build the car. Now, the $16 billion Canadian company is ready to build cars for Silicon Valley’s biggest companies—and become the Foxconn for a new generation of automakers.

“Becoming a carmaker is extremely difficult,” Magna’s Chief Executive Officer Don Walker said. “Most people end up coming to talk to us at some point.”

The rise of ride hailing, self-driving cars and electric vehicles has placed the automotive industry on the cusp of a dramatic change. Yet for all their expertise in software and consumer electronics, the tech behemoths don’t know how to piece together 30,000 components to make a car.

It’s an expensive process. A completely new vehicle can cost several billion dollars, so leaning on the expertise of an industry veteran is a way of minimizing those costs. Apple has been quick to understand that: about a dozen Magna engineers have been working with the iPhone-maker’s team in Sunnyvale to develop a vehicle, according to a person familiar with the arrangement.

The experience of Tesla Motors Inc. is a cautionary tale. Even as consumer enthusiasm for its vehicles remained high, Tesla, which doesn’t outsource production, has been bedevilled by production delays and glitches. Of course, it will also be a new challenge for Magna to ramp up production and work with companies who are unfamiliar with car making.

The model for Magna is Foxconn Technology Group. The Taiwan-based company builds iPhones for Apple, computers for Dell Inc., Kindle e-readers for Amazon.com Inc. and Xbox gaming consoles for Microsoft Inc., making it the world’s biggest contract manufacturer of electronics. In cars which rely heavily on software for autonomous driving, navigation and entertainment, Magna senses an opportunity in manufacturing.

Chief Executive Officer Don Walker sits in the Magna boardroom in Aurora.
Photographer: Mark Sommerfeld/Bloomberg

“Our business model is to be a one-stop shop—development, design, supply chain all the way through to production,” said Guenther Apfalter, who heads up both Magna’s contract assembly and European operations.

Today Magna will announce a contract to build the new BMW 5-Series luxury sedan next year, adding to a deal from Jaguar Land Rover to build two models.

Magna’s engineers started collaborating with BMW on the model in 2012, helping it develop, source and integrate components. The companies haven’t disclosed the value of the deal, but Magna expects the orders to max out its 200,000 vehicle annual capacity by 2018, boosting the revenue from contract manufacturing to at least $5.3 billion annually from $2.4 billion last year.

Building cars is complex—BMW has 206 suppliers—and so it makes sense that a company new to the industry would want a partner that knows how to source parts and make a vehicle that can pass the hundreds of required crash tests.

“It’s a skillset they could maybe build up internally,” Walker said of new entrants. “Maybe long-term they would. But short term, I don’t know why they’d want to.”

In the late 1950s, Frank Stronach, an Austrian immigrant, set up a tool-making shop in Toronto. He merged the business in 1969 with Magna Electronics, then an aerospace and defense company, becoming chairman two years later, and over the next three decades transformed Magna into a global automotive supplier. The company now has 139,000 employees across some 400 sites and sales approaching $35 billion. While Stronach, now 84, no longer controls the company, his mansion, stables and golf course abut the castle-like headquarters in Aurora, Ontario, about 30 miles from Toronto. The company plans to move to a new headquarters by the end of next year.

In 1998, Magna bought the car making vestiges of Austrian conglomerate Steyr-Daimler-Puch AG, and the acquisition formed the core of Magna’s contract assembly unit, which is key to its plans for the tech industry. The fulcrum of the division, called Magna Steyr, is a factory in Graz, Austria, a medieval town whose most famous son is Arnold Schwarzenegger.

The contract assembly business had been in decline until tech companies started getting interested in cars. Companies in Italy, France and Germany had gone out of business or been acquired, leaving just a handful of competitors, such as Nedcar in the Netherlands and Finland’s Valmet Oyj, alongside Magna. China’s JAC has also recently entered the market.

Crash test dummies at Magna’s ACTS safety facility.
Photographer: Kiên Hong Lê/Bloomberg

Magna’s Steyr factory has been assembling vehicles for more than a century, largely for carmakers who want to avoid building new manufacturing facilities for lower volume models. Aston Martin’s Rapide sports sedan, BMW’s X3 sports-utility vehicle, and versions of Volkswagen AG’s Golf compact car were all made there.

On adjacent assembly lines, Magna makes the Mercedes-Benz G-Class sport utility vehicle and is preparing to produce the BMW 5-Series. The factory has been building the boxy G-Class for 37 years, and the manufacturing process bears traces of old habits: the chassis is still mounted by hand by burly men in full protective body suits and welding helmets.

It’s a stark contrast to the BMW line built in recent months, which is heavily automated with robots. The team is testing one so-called “collaborative robot” which helps glue the fin on top of the car in place—hard for a human to do with consistent reliability since the adhesive needs to be applied evenly.

That kind of hardware expertise is something car giants are increasingly happy to outsource as they focus on using software features to lure customers, Magna Chief Technology Officer Swamy Kotagiri said.

“Some are very clear about it, saying five years from now the core of the engineering in the manufacturer is going to be software,” he said. “Five years ago they would have said the core of the engineering is engine transmission.”

“It’s extremely important for tech companies to go the route of partnering with a contract manufacturer, especially a company like Magna,” said Arun Kumar, a consultant at AlixPartners who advises Fortune 500 companies on strategy. But, he said, the greatest risk for Magna and its competitors is if consumers don’t want to buy self-driving and electric cars. “The only reason why the tech companies are interested in the auto business is because of electric and autonomous vehicles, so if those vehicles don’t see increased adoption in the next five to 10 years, they might start stepping back.”

Last October, Walker gathered a group of five executives at his Toronto apartment for a brainstorming session. What, he asked them, was Magna’s role in a world where ridesharing, autonomous vehicles and electric motors will dominate?

“We had a couple of beers, I think we had a couple of shots of tequila,” said Walker. “It was all about product strategy, geographic strategy and what’s going to happen in the future of electrification.”

After 12 hours of discussion that bled into the early hours of the morning, the group concluded that Magna needed a concept car which could serve as a calling card. Walker asked Kotagiri to set up a think tank of 25 experts drawn from across Magna’s divisions: from seating, through chassis, drivetrain, electronics and vision systems.

A Magna representative leads a demonstration of a semi-autonomous vehicle in Holly, Michigan.
Photographer: Graham Walzer/Bloomberg

Kotagiri came to the U.S. from India in the early 1990s with just $40 in his pocket and worked his way up through Magna’s research and development arm. His team has two years to come up with a vehicle that can transport four to five people, boast advanced autonomous driving features and be emissions-free.

“Rather than be reactive to somebody coming and giving us a spec and then seeing what can Magna do, we want to be able to project a vision to say ‘Look, this is where we think the transportation market is going, here’s what Magna can bring to you as a platform,’” said Kotagiri.

A car’s value will increasingly lie in the data it collects. Knowing a passenger’s location and tastes might let a company like Google suggest a nearby coffee shop or music to download. And understanding how often each feature of the vehicle is used can feed back into future design, allowing carmakers to cut costs and generate profit margins approaching those of their tech competitors. If passengers rarely use seat heaters, carmakers might decide to make them an add-on in future models.

Chief Technology Officer Swamy Kotagiri at Magna’s offices in Troy, Michigan.
Photographer: Graham Walzer/Bloomberg

IHS Global estimates that global car sales will reach almost 90 million vehicles this year, yet that number could fall in the coming decades if people decide to skip car ownership and instead use ridesharing services like Uber or Lyft. That would mean that the miles driven by each vehicle will likely rise, increasing components’ wear and tear, which is why Magna is looking to expand its replacement parts business.

“I’m used to driving 15,000 miles a year with an owned model but if I’m sharing it, it could be driving 60,000 miles, so that vehicle has to be built differently because it still needs to last five years,” Kotagiri said. “The seats and the interiors and so on and so forth will be cycled out.”

Walker, though, is quick to temper expectations about how fast everything’s going to change. “For the most part, vehicles are going to look pretty similar in 10 years to how they do today,” Walker said. “To be assuming that new entrants are going to come in and dominate this industry in five years is craziness.”

And yet, that may be Apple’s ambition—or Uber’s, or Google’s. Apple’s secretive car program, dubbed ‘Project Titan,’ includes hundreds of engineers, but the company has not yet publicly acknowledged its existence. The project underwent a shift earlier this year and now is focused on developing an autonomous driving platform. Walker declined to comment on a collaboration with Apple; an Apple spokesman also declined to comment. Uber is working with Volvo Car on autonomous vehicles, though the deal isn’t exclusive. Fiat Chrysler Automobiles NV is working with Google to develop 100 self-driving prototype Chrysler Pacifica hybrid-powered minivans.

Anticipating more demand from these carmakers and others, Magna is currently scoping locations that would allow it to build more cars for new customers. North America, China and Europe are all possible locations for a new plant.

“If you look at the number who’ve tried to do it and miserably fail, this is not an easy industry,” said Walker. “There’s a lot of good people out there, but it’s tough to do everything on your own.”