Abu Dhabi, UAEFriday 6 December 2019

VW deal with Ford illustrates new reality for car makers

Electrification and looming autonomous reveloution are forcing manufacturers to balance rivalry with survival

Ford President and CEO Jim Hackett, Argo AI co-founder Bryan Salesky and VW CEO Herbert Diess appear with a prototype vehicle after announcing a joint investment in Argo, a self-driving autonomous vehicle company in New York City, New York, U.S. July 12, 2019. Sam VarnHagen/Handout via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. NO RESALES. NO ARCHIVE.
Ford President and CEO Jim Hackett, Argo AI co-founder Bryan Salesky and VW CEO Herbert Diess appear with a prototype vehicle after announcing a joint investment in Argo, a self-driving autonomous vehicle company in New York City, New York, U.S. July 12, 2019. Sam VarnHagen/Handout via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. NO RESALES. NO ARCHIVE.

To understand how much strain the world’s leading car manufacturers face as they make the daunting leap to the electric and autonomous vehicle age, just listen to their leaders.

“The business part of you wouldn’t do these things,” Ford chief executive Jim Hackett said on Friday. That startling admission came after he had just inked a huge deal with German arch-rival Volkswagen to join forces to develop electric and self-driving cars.

“This game will change, so economies of scale will be important,” VW chief executive Herbert Diess said on Friday to announce the expanded tie-up with Ford. “Sharing tech and using standards will be important to succeed in the future.”

The collaboration commits Ford to build battery cars on a VW platform, while the German car maker invests $2.6 billion in the American company’s autonomous-affiliate Argo AI. That gives the startup an eye-popping valuation of $7.25bn - and the commercial launch of its robot rides is still two years off.

The auto industry is being disrupted by increasingly stringent environment regulations mandating electric cars, while breakthroughs in driverless technology have the potential to upend the way humanity moves. That’s forcing car makers to balance rivalry with survival.

“The leadership part of you requires that you do it,” Mr Hackett said of partnering with the competition. “You have to invest in things that are uncertain, before they are ready, because when they are ready you can’t catch up.”

Ford’s one-upmanship with VW goes back decades - from the German manufacturer’s founding in the run-up to the Second World War, to America’s hippie-era love affair with the Beetle and fuel-sipping Rabbit model during the oil-shock era and now trade wars that threaten to further politicise commercial battles.

But the shift to battery-powered cars and autonomous driving will require different tools than the ones car makers have spent the better part of a century honing. It’s no longer just about building ever-more powerful engines and sculpting exterior sheet steel.

The Ford-VW deal is a bet on a coming age of electric-powered robo-cars that will take fresh approaches to competition, marketing and planning. And it will take money - enormous amounts of it.

While the deal will result in a new electric passenger vehicle from Ford in 2023 and Argo joining with VW brand Audi’s autonomous operation to deploy self-driving test vehicles in Europe next year, it’s really about ensuring each company’s survival well into the future.

“They’re looking at the longer term,” said Stephanie Brinley, auto analyst with IHS Markit. “These moves aren’t about 2025, these moves are about these companies trying to make sure they’re fully ready and capable for 2030 and 2040 and taking the steps you need to get that far down the road.”

Electrification will cost car makers $225bn through 2023, about equal to the industry’s annual total for capital expenses, research and development spending, according to consultant AlixPartners. Self-driving cars will soak up an additional $85bn through 2025.

The partnership between Ford and VW shows how some companies are tackling the task with more urgency than others.

So far buyers aren’t exactly swarming showrooms to pick up electric cars. High prices, patchy charging infrastructure and, with the exception of Tesla’s sleek models, unorthodox styling have made them a tough sell.

Likewise, the payoff in self-driving technology is years away and drivers remain resistant to turning over the wheel to a robot. But consumer habits are changing, as people rely less on ownership and turn to sharing apps, e-bikes and scooters for more of their transportation needs.

Cash-rich giants like Alphabet, Amazon and Apple have turned industries from phones to cameras to television upside down, and car executives fear they could be next as vehicles become increasingly high-tech and software-dependent.

“The OEMs [original equipment manufacturers] have to invest through this valley to get to the other side,” Mark Wakefield, a managing director with AlixPartners, said last month. “But investing - or partnering to invest - to get through that is a way to span the generational path.”

Jim Farley, Ford’s president of new businesses, technology and strategy, said the partnership with VW isn’t only about cutting costs. This collaboration could help accelerate each maker’s trip through the profit desert Mr Wakefield warns of.

“This is not only a capital efficiency play,” Mr Farley said. “It’s absolutely leverage on our margins, especially in a place like Europe.”

Other car makers are also reinventing themselves. General Motors’ acquisition of the self-driving start-up Cruise in 2016 for $581 million has turned out to be prescient. GM has since attracted three major outside investments totalling $6.15bn. As of May, GM Cruise was valued at $19bn when T Rowe Price Associates joined earlier backers, Honda and SoftBank Vision Fund. VW’s backing of Argo AI - $1bn in cash and another $1.6bn for the value of its Autonomous Intelligent Driving unit that it’s contributing - should put that self-driving start-up on a similar path to attracting outside investment.

“Now that a valuation’s been set and with the potential of this relationship, it does set us up well for that,” said Bryan Salesky, Argo’s co-founder and CEO, a veteran of Google’s self-driving car programme. “I’m sure that’s on the cards at some point in the future.”Meanwhile, Fiat Chrysler Automobiles tried - though it failed - to build scale and gain access to electric-car technology through a merger with Renault, to make up for its dearth of battery-powered cars. Chairman John Elkann this week told Italian newspaper La Stampa that the attempt was “an act of courage” and would have allowed it to make better use of capital and more cars.On the other side of the spectrum sits the Renault-Nissan-Mitsubishi Alliance, where tensions threaten to rip apart two decades of cooperation just at the moment it’s needed most.

Lack of a decisive strategy on electric cars this month also cost BMW CEO Harald Krueger a second term as leader, after he couldn’t unite a bickering board behind him. And Daimler’s new CEO Ola Kaellenius will have to dig deep on leadership skills to steer the Mercedes-Benz maker that’s endured four profit warnings in just over a year. Those two German car makers have partnered on a self-driving project they vowed earlier this month would see robot-piloted cars on motorways by 2024.

Building a software stack for autonomous vehicles may cost a few billions of dollars, while maintaining it will cost billions more each year, Mr Diess said.

“The times we are facing, we will get into resource problems” without the help of partnerships, he said. “Because it gets really, really expensive.”

Updated: July 14, 2019 10:45 AM