The alliance between Volkswagen and Ford announced Tuesday marks a trend as automakers connect in the face of development costs that are too high even for the biggest players to handle alone.
VW and Ford said they will jointly develop commercial vans and pickups from 2022 and will explore cooperation on electric and self-driving technology as well as mobility services.
To be sure, Ford needs the alliance more than VW — the Motor Company’s operating margin stands at just 4 percent compared with VW’s 7 percent. That’s not enough to finance the billions of dollars in investment needed to electrify its model range.
But the German behemoth too stands to profit because it lacks a large pickup of the type widely used in the rural south and west of the US. Ford is the market leader in this segment with its F-150 and could make production capacity available to the Germans.
“The old competitive mindset in the auto industry no longer works,” said Axel Schmidt, auto analyst at consultancy Accenture. Car sales are stagnating while manufacturers face burgeoning research and development costs.
The pressure is compounded by competition as new rivals spring up, from Chinese automakers like Geely, Internet giants like Google and Apple and mobility service players like Uber.
For now, the established Western players are reluctant to cooperate with any of the newcomers. “The manufacturers prefer complementary partnerships ‘among equals,’ as far as possible,” said Schmidt. “They’re shunning alliances with the new players — for now.”
It’s not just the new competition and the surging R&D budgets. The industry also faces sharp cost increases from tougher CO2 limits and will have to reduce fuel consumption in new car fleets by 20 percent by 2021 to reach the EU’s CO2 limit of 95 grams per kilometer. The ceiling will be lowered by a further 37.5 percent by 2030.
The ever-tougher regulatory environment poses a huge challenge, forcing the automakers to keep on developing ever-cleaner combustion engines while at the same time investing in hybrid and electric drive models without knowing whether customers want them. And then there’s the cost of developing self-driving technology where Uber and Google subsidiary Waymo are forging ahead.
“There are hardly any manufacturers who can afford the high development costs on their own,” said one senior executive from a German premium automaker.
The Germans on the sidelines
VW and Ford have cooperated before, launching a joint venture called AutoLatina in South America in the late 1980s. They abandoned it in 1995 when the region’s economy improved. They also made Sharan and Galaxy limousines together in Palmela, Portugal, until the late 1990s when Ford pulled out and VW took over the whole plant.
But more recently, Germany’s auto industry has been on the sidelines of moves towards greater cooperation in the sector, letting international rivals push ahead. Renault and Nissan have had cross-shareholdings since 2002 and Mitsubishi joined them in 2016. They’re doing well despite the upset caused by the arrest of the alliance’s CEO, Carlos Ghosn, in November. Both companies share the cost of engines and vehicle architecture and are highly profitable as a result. The jointly developed Nissan Leaf and Renault Zoe models have put the French-Japanese alliance well ahead of the Germans on electric cars.
The tie-up of Fiat and Chrysler, merged in 2014, is also proving more stable than thought. The group posted a record profit of $3.5 billion in 2017. Thanks to Chrysler, Fiat no longer depends on its sluggish home market and is assembling Jeeps in its Italian plants.
And China’s Geely has been carrying out a brisk exchange of technology with Volvo since its takeover of the Swedish brand. Some 2,000 European and Chinese staff are working on tomorrow’s cars in the “Chinese European Vehicle Technology Center.”
Trump’s long shadow
Meanwhile, here in Germany, some companies are still tied up competing internally. Until recently, Porsche and Audi — both VW luxury units — were each shelling out millions of euros on racing teams to outdo each other in France’s legendary 24 Hours of Le Mans endurance race. And their first electric cars like Audi’s E-Tron and Porsche’s Taycan were developed separately at great cost.
The new CEO of parent VW, Herbert Diess, has put a stop to that and ordered Audi and Porsche to start cooperating more. A joint electric mobility project center is to save the two brands hundreds of millions of euros. Audi also plans to work with VW on smaller electric models after VW presented its platform for electric vehicles, MEB, last year, a platform that’s designed to support all kinds of electric VWs and could be expanded to its Skoda and Seat units as well.
In turn, the Ford cooperation has heightened the pressure on BMW and Mercedes. Both premium carmakers issued profit warnings in recent months, shocking investors who had grown accustomed to record years. With annual sales of 2.5 million cars each, they're minnows compared with VW and Toyota that sell 10 million each, and their R&D budgets are already at record levels.
Daimler said at last week’s Consumer Electronics Show in Las Vegas that it was open to talks. The two automakers had previously agreed to combine their carsharing units Car2go and DriveNow and could expand their current purchasing cooperation beyond its modest current level involving seatbelt tensioners and similar components.
President Donald Trump’s “America First” policy is already nudging the carmakers to cooperate more closely. Both will need to increase production in the US to meet the new requirements of the overhauled North American Free Trade Agreement. One possible solution would be to jointly assemble engines or drive systems.
Stefan Menzel writes about the auto industry focusing on Volkswagen. Markus Fasse specializes in auto and aviation industry news and works from Handelsblatt’s Munich office. To contact the authors: [email protected] and [email protected]