As it ratchets up self-driving and electric car development, the automotive industry finds alliances offer the fastest, most cost-effective route.
At this year’s Detroit Auto Show, Ford and Volkswagen announced a multi-phased alliance to speed up development of electric and self-driving cars, as well as cut costs. More automotive industry alliances are anticipated, as global automakers are under pressure to manage the costs of developing electric and autonomous vehicles, as well as technology to meet tougher emissions standards. “You can’t do this alone”, said Ford’s Chief Executive, Jim Hackett.
“It is no secret that our industry is undergoing fundamental change, resulting from widespread electrification, ever stricter emission regulation, digitization, the shift towards autonomous driving, and not least the changing customer preferences”, said Herbert Diess, Chief Executive of Volkswagen. “Carmakers around the globe therefore are investing heavily to align their portfolios to future needs and accelerate their innovation cycles”, he added. “In such an environment, it just makes sense to share investment.”
Volkswagen also recently announced a new initiative, co-led by China, to increase spending on electric vehicle development to $300 billion over the next five to 10 years. About $91 billion of the investment will come from VW, and focus primarily on the Chinese market. The company is developing various electric cars. As part of its “dieselgate” settlement, VW pledged to introduce EVs in the U.S. It is also funding a company that is installing charging stations around the country.
For its part, Ford is spending $11 billion to introduce over three dozen hybrid and electric car models over the next five years. It has also invested over $1 billion to produce a driverless vehicle.
The Ford-VW alliance will be governed by a joint committee including both CEOs, and gradually expand. Initially, Ford and VW plan to cooperate on pickup trucks and vans. As the New York Times reports, Ford said it will develop and manufacture a compact pickup truck which the two companies may sell under their own names in South America, Africa and Europe.
In addition Ford will produce a large delivery van and Volkswagen will produce a compact van, both primarily for the European market. Ford expects to realize about $500 million in cost savings a year once the vehicles are rolled out. “We are forecasting the benefits at the end of our five-year period, so it is the 2023-2024 time frame mostly that the synergies start to accrue”, Hackett said.
Competition from outside the automotive industry is another driver of new alliances. “Automakers aren’t just competing with each other anymore, they’re under intense pressure from well-funded tech companies,” said Jessica Caldwell, executive director of industry analysis at Edmunds. “Cutting costs by sharing vehicle architectures and manufacturing facilities is just table stakes in this new world,” she added.
Both companies have more immediate issues, however, related to a slowdown in China’s automotive market as well as slow growth in Europe. On January 16, Ford forecast a weaker-than-expected fourth quarter profit and a murky outlook for 2019. Chief Financial Officer Bob Shanks cited the impacts of U.S. trade policy and uncertainty around Brexit.