The Foxconn Technology Group doesn't design, market, or sell a single product. Yet, ironically, it is one of the largest consumer electronics manufacturers on the planet. Chances are you have at least one of the products it builds within reach right now. Could the same type of arrangement work in the auto industry?

It would make sense if traditional carmakers like FCA, Ford, and General Motors could be hired to build or assemble cars conceived by vendors like Apple, Uber, and Waymo/Google, says Bryan Reimer, a research scientist in MIT's AgeLab and associate director of The New England University Transportation Center at MIT, vehemently. In fact, he insists it's already happening.

You design it, we build it

Foxconn is the king of contract manufacturers. It assembles a multitude of items: everything from flat-screen televisions to smartphones for cash-rich tech giants like Apple, Nokia, Samsung, Sony, and others. A client hands Foxconn a set of schematics. The Taiwan-based manufacturer then manages the supply chain and quickly builds the product so that the client can market and sell it to the masses.

By all accounts, especially from those pesky Wall Street investors, this type of outsourcing arrangement benefits both parties involved. When successful, outsourcing the build enables the client to increase its production capacity and improve time to market, acquire new products it cannot manufacture itself, and, most importantly, increase cash flow by reducing production costs—especially when a contract manufacturer can offer cheap labor because its factories are in developing economies. This is the case for Foxconn, which builds most of its products in China at pennies per product per day. The manufacturer gets paid for its services upfront.

That works for phones, but can it work for cars?

As transportation evolves, so must the traditional automaker business model. "Electrification and digitization are on the rise," says Reimer. "Consequently, the profit motivation in the automotive sector is shifting from hardware (sheet metal, tires, brakes, etc.) and performance to electronics and software, software that will shape drivers' future experience behind the wheel."

Though today's cars are already heavily computerized, software architecture and electronic platforms designed to support them are not places where traditional automakers have a core competency. "So," Reimer says, "they are sourcing that highly valuable content—whether it is display technology that helps motorists more easily interact with their cars, artificial intelligence that helps drive the cars down the road, or the batteries used to propel them—from tech companies that are better suited to develop those technologies. For instance, Ford isn't writing its self-driving software. It acquired Argo to do it. Also, GM acquired Cruise to do it."

Willy Shih, professor of management practice at Harvard Business School's technology and operations management unit, says you don't even have to look that far down the road, which will be trafficked by autonomous vehicles, to see the changes in the value chain. "Take the recent deal BMW made with the Chinese battery maker Contemporary Amperex Technology," says Shih. BMW is paying CATL $4.6 billion to supply all batteries for the Bavarian automaker's electric vehicles. A little more than a third of the battery packs will come from a new CATL factory in Erfurt, Germany, with the rest coming from China. CATL will also source all the materials needed to build the batteries.

"What percentage of the value of BMW's EVs are going to be the battery?" asks Shih. "The answer is a lot! Yet, they don't manufacture it. They don't own it. Who then has the best value proposition? CATL."

The most compelling evidence, however, that OEMs will eventually offer contract manufacturing services is that they are already doing so on a limited basis. "FCA is supplying the platform for Waymo's fleet of autonomous vehicles," explains MIT's Reimer, referring to the 62,000 Chrysler Pacifica minivans that Waymo has ordered to use for its autonomous ride-hailing service. "The tech giant will add the autonomous driving systems, the important stuff, the high-value stuff. In this arrangement, the traditional automaker becomes just another cog in the supply chain."

FCA is not alone. Jaguar Land Rover is also supplying platforms to Waymo. Volvo provides them to Uber. And Volkswagen to Apple. Right now, the OEMs control the software platforms," says Reimer. "But that's unlikely to continue as the need for more software content increases."

No one is saying that automakers can't write the software needed to manage operations within their automobiles, but why would they want to? "There is a reason just a select few operating systems exist: competing with the likes of Android, iOS, Linux, and Microsoft in the software arena," notes Reimer. "It is incredibly difficult and costly."

The software superstars have the upper hand. (Indeed, most infotainment systems are now moving to either Automotive Grade Linux or Android Automotive.)

Who else is going to build cars?

Even though proponents of contract manufacturing think it would be suicide for the OEMs to compete with the software giants on their turf, they think it would be more unlikely that the software folks could even hope to compete with traditional automakers when it comes to manufacturing. OEMs are better at building and validating cars.

"It's not simple to assemble and manufacture at scale. Look at the turmoil Tesla has encountered jumping into the mass market," says HBS' Shih. "The OEMs understand volume manufacturing. They understand organizing a supply chain. They understand testing and certification. Moreover, they understand deadlines. Don't discount the importance of those things."

Also, the tech giants have proven they want no part of it. "Right now, Ford and GM control the entire supply chain," says MIT's Reimer. "Waymo doesn't want such controlling interest. They don't want to own or manage a car company. That is the low-value piece of the equation. Waymo wants the high-value pieces. Those are the design and marketing/sales of the product. It's a matter of minimizing risk."

Nothing new

Skeptics say this is not out of the ordinary, however. For years, automakers have been building less and less of each car they sell, sourcing components from Tier 1 suppliers like Bosch, Continental, Denso, Delphi, and Magna-Steyr. Today, the depth of manufacturing (i.e., the amount of work done at a car as opposed to the parts bought from somewhere else) is below 50 percent. Though it varies by brand, model, and geography, most carmakers run factories for their engines (they do not buy them from other sources), but many of them do not build their gearboxes or suspension components.

"In former times, it was common to assemble a dashboard from parts delivered by a third source," says Sam Abuelsamid, a senior research analyst at Navigant Research. "And they were put together by the OEM. Today, car manufacturers like Volkswagen get a complete dashboard with all the gauges, display, car entertainment and navigation system delivered right to the assembly line. They merely secure it in place."

In fact, a handful of independent European manufacturers has successfully applied the contract assembly concept to low-volume niche vehicles. Most people who purchase a BMW X3 have no idea that the Bavarian automaker does not build it. "The sport utility is assembled by Magna-Steyr, a Canadian contract manufacturer that builds cars for several other automakers, including Ford, General Motors, Mercedes, and others," says Abuelsamid.

Google has even made prototype driverless cars using components from several suppliers, with contract manufacturing performed by Roush.

None of the OEMs we reached out to would comment on a future where they would be a contract manufacturer.

In the end

The Foxconn concept is viewed with skepticism in the conservative auto industry. OEMs have traditionally done all final assembly, even though they outsource many components and subassemblies—such as cockpits, seating, and front-end modules. There are many analogies in the Foxconn arrangement, but there are a lot of fundamental differences as well.

If anyone can tell what business model will unfold in the auto industry, they are delusional, says Joe Vitale, global automotive sector leader for Deloitte. Changes to the value chain will most likely come from many directions. OEMs and others are still trying to figure it out.

"To say there is a definitive answer to what the future will uphold—how the value proposition will change, who will be the winner, who will be the loser within that new paradigm—is ludicrous," warns Vitale. "Though it's not at all clear that the contract manufacturing business model will be economically viable, it is an attractive option—also, one that has a proven return on investment."