Breakingviews

The Apple Inc logo is seen hanging at the entrance to the Apple store on 5th Avenue in Manhattan, New York, U.S., October 16, 2019.

HONG KONG/LONDON (Reuters Breakingviews) - Carpooling is back in vogue, at least for companies. Shares of South Korea’s Hyundai Motor Co surged on news of a mooted tie-up with Apple. Details are scarce, but selling high-margin software looks irresistible to low-margin car manufacturers.

The South Korean automaker on Friday confirmed it was in early talks with the iPhone-maker led by Tim Cook. Local media reported the pair were planning to launch self-driving electric vehicles by 2027. Hyundai says it’s “getting requests for cooperation” from various firms. Even so, investors added some $14 billion in value to the company led by Euisun Chung, which as of Monday boasted a market capitalisation of $59 billion.

Selling Apple software, for example, would be lucrative for Hyundai and affiliate Kia. Germany’s Daimler recently announced a 56-inch touchscreen – dubbed the “hyperscreen” - to replace the dashboard on some up-market rides. As well as giving drivers a sleek new look, it provides the Mercedes-Benz maker with a portal to peddle downloads and subscription services. Software for things like assisted driving could eventually generate operating margins as high as 80%, some analysts say, compared to Hyundai’s 3.4% group margin in 2019 from its core business of flogging vehicles.

Automakers can also use a high-tech boost. The transition from churning out gas guzzlers to battery-powered cars has been anything but smooth. A global chip shortage, for example, has forced the likes of Ford and Toyota to slash vehicle production this month. Beyond supply chain snags, traditional car companies need to keep up with a staggering amount of technological expertise: Volkswagen reckons the average lines of code per vehicle will triple to 300 million over the medium-term – with fully autonomous driving potentially requiring up to 1 billion lines.

Other tie-ups are in the works. Chinese search engine operator Baidu unveiled a partnership with local car brand Geely on Monday. The risk for automakers is that they end up as low-value manufacturers at the mercy of Apple and other Silicon Valley giants, similar to Taiwanese iPhone-assembler Foxconn. To avoid that fate, Volkswagen is spending 27 billion euros over the next five years to build its own technology systems. Joining forces may be an attractive shortcut for Chung and peers but could prove hazardous down the road.

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