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Speculation about the iCar was spurred by a recent meeting between Apple CEO Steve Jobs and Martin Winterkorn, chief executive of the German car manufacturer.
It is not yet known if they discussed an iCar project, or if it was simply a conversation regarding cross-functional leverage opportunities for each company.
A move into cars presents Apple with a chance to extend the iPod ecosystem, while Volkswagen would benefit from strong sales of such a vehicle, iSuppli explains.
The total automotive infotainment market is set to be worth US$50 billion by 2012, the analysts say, pointing out that vehicle production is rising at a steady 3 percent rate. However, the automotive infotainment market will expand faster, at a Compound Annual Growth Rate (CAGR) of 8 percent between 2006 to 2013.
According to the analysts, a difference in the two firm's corporate culture would present the greatest challenge: "Although the old clichi 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."
Warranties would also be a problem -- Apple would be required to support the mooted vehicle throughout its usable life.
"While Volkswagen would expect a car manufactured in 2007 to be perfectly serviceable 10 years later, does anyone seriously think the current iPod and iPhone ranges will be anything more than museum relics a decade from now?" the analyst asked.
"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.