[Insights] Can Foxconn replicate the outsourcing model for EV, as Traditional Car Makes Urgently Cut Costs?

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Foxconn Technology Group held its Tech Day on October 18, 2023, focusing on three key areas: AI Smart Factories, CDMS (Contract Design and Manufacturing Services), and Model N.

TrendForce’s insights:

1. Increasing EV Adoption Crucial for Sustained Growth

According to an intention survey by Gallup in April 2023, only 4% of respondents in the United States currently use electric vehicles, with an additional 12% considering a purchase. The majority of potential buyers in this category belong to households with an annual income exceeding $100,000. As per the salary survey by the New York Federal Reserve in July 2023, the average annual income for full-time employees in the United States stands at approximately $69,475.

Apart from concerns about driving range, the primary obstacle to the widespread adoption of electric vehicles is their relatively higher cost compared to traditional gasoline-powered vehicles. This pricing differential limits the consumer base for electric vehicles. The growth rate in electric vehicle adoption, which nearly doubled from 2020 to 2023, now faces a “30% plateau” challenge.

With the deadlines for banning gasoline cars in 2025 in Norway and 2035 in the European Union approaching, reducing manufacturing costs to reach a broader consumer demographic will be a critical factor in the successful transition of traditional automakers.

2. Foxconn’s CDMS Model Offers Cost Savings and Addresses Key EV Challenges

Take Volkswagen, the world’s second-largest automaker, for example. The investment in creating the MEB platform for their EVs amounted to approximately $7 billion. For many small or startup automakers, this figure is astronomical.

Furthermore, in recent years, automakers have made substantial investments to ensure the stability of crucial components like batteries and semiconductor chips. These costs are inevitably spread across the overall vehicle cost, which, in turn, affects the growth rate of electric vehicles.

The CDMS  model leverages Foxconn’s Model series of complete vehicle platform production lines. It combines modular component assembly and supply chain resources to offer car manufacturers a comprehensive development service, reducing their upfront development time and costs. This enables manufacturers to concentrate on brand marketing.

Foxconn’s active push into CDMS may prompt many traditional automakers to reevaluate the core value of in-house manufacturing, reduce costs, and expand their customer base, offering a solution to the current challenges faced by the industry.

3. While Automakers Predominantly Continue to Independently Develop Platforms, Foxconn Must Expedite Its Efforts to Compete for Next-Generation Platform Manufacturing Opportunities

Despite the considerable costs associated with platform development, many automakers have already invested resources in creating their initial NEP (New Electric Platform). In the early stages of new energy vehicle development, it attracted various capital investments, with ample development funding and a relatively high fault tolerance.

Consequently, many automakers boldly invested in building their dedicated platforms. However, as market competition intensifies, automakers are likely to exercise greater caution in various investments.

For some automakers, the timing to reintroduce the CDMS model for the next-generation platform planning could be optimal for Foxconn to make its entry. However, outsourcing the production of new energy vehicles may entail sacrificing their uniqueness, which can influence the types and quantities of vehicles that automakers are willing to outsource.

Moreover, automakers tend to be more conservative compared to the electronics industry, and they might have concerns that outsourcing to Foxconn could inadvertently nurture potential competitors.

Furthermore, if automakers only view outsourcing as a financial adjustment or a temporary strategy, the sustainability of such orders becomes uncertain.

While the Luxgen N7, built on the Model C platform under the CDMS approach, has achieved promising results in its presale, marking a successful initial step, expanding the economies of scale for CDMS will require Foxconn to seize the right timing to secure more outsourcing orders from international automakers.

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