What's the difference between making mobile phones and making cars?

Author: Winslow

Many Phone Makers are Preparing to Make Cars

It makes sense to think that making cars is not much more complicated than putting four wheels together, adding one or more “iPads.” In comparison to traditional car manufacturing, new car makers seem to be better at designing products with these high-level interactive experiences from these “iPads.” In terms of interactive experience, which company can do better than smartphone makers? Almost none. This is mainly because the daily use time of smartphones exceeds 8 hours, occupying 1/3 of the daytime, which is almost equivalent to the time spent sleeping every day. User-addictive use has brought a lot of opportunities for iteration. As a result, interactions are more naturally performed by companies that make smartphones than those that make televisions, computers, and so on.

From the perspective of interactive experience, it’s a low-strike for phone makers to make cars. It’s like fast companies fighting slow companies, first-class companies entering industries that are full of third and fourth-class companies. So it makes sense for phone makers to make cars.

But is there any difference between making phones and making cars? You don’t have to think too much; of course, there’s a difference.

However, today we don’t intend to take apart every component from a traditional perspective, such as parts, self-built/outsourced factories, after-sales maintenance, and energy supplement systems. Instead, let’s analyze it from a different perspective.

In fact, the materials and components that make up smartphones and smart cars are very similar: there are N kinds of metals (steel, aluminum, copper, nickel, lithium, etc.), N kinds of chips (CPU, GPU, NPU, filters, etc.), N kinds of sensors (IMU, GPS, cameras, etc.), N kinds of communication modules (Bluetooth, 4G, Wi-Fi, etc.), as well as glass, lights, speakers, microphones, and so on.

Looking at materials alone, almost every material/component on a phone can be found on a car. From this perspective, saying that a car is like an oversized smartphone is not an exaggeration.

But there’s a huge difference between the two. The average weight of a phone is 200-400 grams (0.2-0.4kg), while the net weight of a car is 1,600-2,000kg. The price of a phone is mainly between 3,000-8,000 yuan (0.3-0.8 million yuan), while the price of a car is between 150,000-350,000 yuan.

From the perspective of price/material weight, the difference is obvious. To make it easy to understand, assume that the weight of a phone is 0.3kg on average, the net weight of a car is 1,800kg. The price of a phone is 5,000 yuan, and the price of a car is 250,000 yuan.

Phone = 16,000 yuan/kg

Car = 138 yuan/kgThe materials used in the two industries are almost the same, but the prices for materials of the same weight are different by a factor of 115. Although the manufacturing methods and supply chains of the two industries are very different, it cannot be simply concluded that making cars profitable means making phones profitable or vice versa. However, it can be seen that making cars is much more difficult than making phones because the prices for the same materials in the two industries are vastly different.

Assuming that the gross profit margin for phones is 30% and for cars it’s 20%, from the perspective of cost/material weight, the cost of a phone is CNY 11,666/kg and the cost of a car is CNY 111/kg.

Peeling off another layer: cost = raw material cost + process cost. In other words, the cost of a part is the sum of processing raw materials into components, including mineral extraction (raw materials), processing (process), and logistics (process). And the total cost of a product is the sum of the costs of each part.

The materials used in phones and cars are almost the same, and the raw material costs per unit weight should be almost the same (both are similarly affected by the pricing in commodity markets), so the reason for the huge difference in final costs lies in the process costs.

From this, one should be able to draw a vague but correct conclusion: the proportion of raw material costs for a phone is much smaller than that of process costs, while the proportion of raw material costs for a car is much larger than that of process costs.

Phones can be sold at a price that leaves little value for raw materials, but a lot of value for the processing chain. Cars cannot be sold at a price that leaves little value for raw materials, but a lot of value for the processing chain.

Therefore, phones do not need to build their own factories or develop their own components. They can achieve good profits through outsourcing. Cars need to be produced on a large scale, built in their own factories, develop their own components, and minimize outsourcing in order to reduce the processing chain’s grab on already meager profits.

“Breaking and recombining continuously is the road to innovation.”

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.