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Electronics Production | September 13, 2007

Apple/Volkswagen "iCar" faces<br>a slew of challenges

Pods are virtually everywhere these days—except in your car. However, Apple Inc. and Volkswagen AG have been talking recently, possibly discussing an alliance toproduce an automobile that integrates iPod capability: the much talked-about “iCar."
While there appears to be strong consumer desire for an iCar, the potential Apple/Volkswagen collaboration faces a set of daunting challenges, and is not likely to yield an actual automobile for three or four years, iSuppli Corp. believes.

Speculation about the iCar was spurred by a recent meeting between Apple head Steve Jobs
and Martin Winterkorn, chief executive of German automaker Volkswagen. However, it's unknown whether they actually discussed an iCar, or if it was merely a conversation regarding cross-functional leverage opportunities for each company.

If the conversation did concern an iCar, then each company potentially could benefit enormously. For Apple, it represents a chance to extend the iPod ecosystem into the automotive realm. On the Volkswagen side, the iCar promises to be a hot seller. A Google search of the phrase “VW + iCar" yielded more than 2 million entries. Even the rumors of the iCar have generated significant caché for Volkswagen—so imagine the amount of interest that will be spurred by an actual product introduction.

With the total automotive infotainment segment set to break through the $50 billion mark in 2012, the car remains a very large—and largely untapped—captive market. Car production is rising at a steady 3 percent rate, but the automotive infotainment market will expand much more quickly, rising at a Compound Annual Growth Rate (CAGR) of 8 percent from 2006 to 2013. Consumer demand is strong for automotive electronics that entertain and inform.

The attached figure presents iSuppli's forecast of global automotive infotainment electronics revenue for the period from 2006 to 2013.

A major challenge to the success of a potential Apple/Volkswagen iCar collaboration would be the vastly different cultures of the two corporations.

“Although the old cliché says 'opposites attract,' the cultural divide between Apple and Volkswagen may be too wide to bridge," said Richard Robinson, principal analyst, automotive electronics, for iSuppli.

“Apple is a highly innovative and dynamic consumer electronics company that generates significant profits from living off its wits and supplying niche markets with the next big thing in music players, mobile phones and personal computers. VW, on the other hand, is from an entirely different tradition: the more conservative world of automotive, with its solid four-to five-year development cycles, tight margins and production-standard compliance requirements that would bring even the most enthusiastic designer from Cupertino to his knees."

Volkswagen is not unusual in its conservatism; automakers have a generally cautious approach
to design and development—a philosophy forged in the fire of a thousand product recalls. With rising electronics, silicon and software content in vehicles, all of which can fail at any time, the automakers probably are justified in maintaining their cautious stance regarding new technology offerings.

“Thus, vehicle manufacturers are not interested in the next big thing and instead are focused on producing solid, tried and tested products that will be reliable for years," Robinson said. “While consumer-electronics warranty returns might eat into a company's profits, automotive recalls are the stuff of nightmares in a car industry that operates at the very margins of profitability."

This wide variation in business philosophies and dynamics could have major negative
repercussions for the iCar.

“If your iPod fails, it's your problem, and you must shell out a meager $120 to buy a new one—which is okay because you probably wanted to get the latest model anyway," Robinson observed. “However, if your two-year-old car's built-in infotainment system fails while driving in 20-below temperatures on an Alaskan highway, it's not your problem—it's a problem for the company that sold you the car and it must bankroll the repairs. Automakers must bear this responsibility throughout a car's entire warranty period, which typically lasts three to five
years."

While it's in the consumers' interest that popular devices such as the iPod and iPhone get
integrated into their cars' automotive infotainment systems, the cultural shock of a consumer-electronics company being forced to support products for up to 10 years after start of manufacturing will probably be the undoing of the idea, Robinson opined.

“While Volkswagen would expect a car manufactured in 2007 to be perfectly serviceable 10 year
later, does anyone seriously think the current iPod and iPhone ranges will be anything more than museum relics a decade from now?"

If indeed Apple and Volkswagen do team on an iCar, either a VW or another company brand like
Audi, Bentley and Bugatti, don't expect to see it this year—or even next year.

“Based on standard automotive industry practice, even if Apple and VW press the 'Go' button today, it is highly unlikely that we would see the first iCars until at least 2010 or 2011," Robinson predicted.

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