VW and Ford: The New Wave of Transformations has Begun

Ford Motor Company and Volkswagen AG’s decision to broaden their global alliance, beyond just commercial vehicles and vans, is certainly one of the most significant announcements in the auto industry in recent times. The announcement validates that a new wave of truly transformative strategies through alliances, with automakers putting aside their rivalries to manage the cost of new technologies, is here to stay.

The scope of the proposed alliance is broad and helps the two companies access each other’s capabilities in the areas of electric vehicles (EVs) and autonomous driving technologies. The alliance complements two companies’ strengths while addressing their weaknesses.

On the EV front, Ford can access Volkswagen’s proprietary electric vehicle platform — the Modular Electric Toolkit (MEB) – enabling the US carmaker to produce 600,000 EVs in Europe over the next six years. Volkswagen has already adopted the MEB platform and is aims to manufacture 15 million battery EVs (BEVs) on a global basis over the next 10 years.

Meanwhile, on the autonomous vehicle front, Volkswagen will purchase a stake in Argo AI. The start-up is developing sensors, software, and other advanced technologies for autonomous vehicles. The key arrangement is for Ford and Volkswagen to have an equal stake in Argo AI. Volkswagen will need to invest over US$1 billion for the same also make its Munich-based subsidiary Autonomous Intelligent Driving (AID) a part of Argo AI. As a result, AID, including its 200 employees, will become Argo AI’s European operations. The agreement values Argo at approximately US$7 billion.

Further, the announcement also establishes that these two global automotive manufacturers – with a combined global sales of 16.7 million vehicles in 2018 – will now be the pioneers in laying the foundations of a consistent global standard for EV architecture.

Driving Down Development Costs

Through this alliance, the two companies are looking to drive down production costs through common components which will provide significant economies of scale. This will allow both OEMs the capability to offer their respective models to consumers at a competitive price point. The anticipated growth in demand will, in turn, provide the necessary critical volume to trim costs even more. For vehicle manufacturers, who are currently either independently investing or holding back or losing money on their EV strategies, such alliances can demonstrate that a collaborative approach may be the preferred strategic option to achieve accelerated, sustained, and profitable growth.

Evidently, Volkswagen and Ford are betting on developing a production-capable autonomous driving vehicular platform, that can be scaled rapidly. In fact, one of the key reasons Ford initially invested in Argo AI was because of the start-up’s focus on working with an automobile manufacturer to make its products ready for real-world use. Undoubtedly, this strategic approach towards developing an autonomous vehicle platform is similar to the MEB in terms of the ability to reduce costs through volume. There is also the added benefit of eventually developing Argo AI systems for integration onto other vehicle models, and not limited to just the Volkswagen Group and Ford vehicles.

It helps that Ford and Volkswagen are pooling in their respective expertise and leveraging on each other’s strength in the proposed alliance. While Ford may be leading Volkswagen in autonomous driving, Volkswagen is far ahead of Ford in its development of EVs.

By 2021, Ford is aiming to install Argo AI’s autonomous systems in driverless RoboTaxis and delivery vehicles in the US.  At the same time, Volkswagen is planning to use self-driving technology in its Moia ride-sharing service – a fleet of 6-seater, battery-powered e-vans, already operating with human drivers in Hamburg, and expected to be simultaneously introduced soon in other European cities. Clearly, Volkswagen contributes significant weight to the alliance with its higher global sales volume and larger global footprint. The potential market for supplying and delivering Argo AI’s technology will multiply significantly as a result of the agreement.

In another agreement, Ford has already committed to building EVs based on motors, batteries and other standardized components that Volkswagen has developed and currently utilized in a model called the ID.3, scheduled for launch next year. Volkswagen is aiming for the car to be priced less than €30,000 in Europe (approx. US$34,000), allowing for battery-powered electric transportation being more accessible to middle-income buyers.

Biting the Bullet

As auto sales slump around the world, hard-pressed carmakers have little choice but to join forces to fend off the Silicon Valley technology disrupters and avoid obsolescence. Volkswagen and Ford, which already cooperate on commercial vehicles and pickups, must now show that they can avoid the power struggles among their managers and engineers,  that have negatively impacted and broken up many other previous alliances. Volkswagen, known for its inward-looking, hierarchical culture, has little experience in collaborating with competitors.  An alliance with Japan’s Suzuki Motor Corporation, in 2015,  was short-lived with hostile feelings lingering on both sides.

Undoubtedly autonomous driving is an expensive, capital intensive and highly skilled technology, requiring large upfront investments. It, therefore, makes sense for Ford and Volkswagen to align together. The need for companies to share costs and mitigate the risk of developing EVs and autonomous vehicles has become even more urgent now than ever before, with car sales slowing down in all major markets, including China, the US, and Europe. Also, OEMs must quickly introduce electric vehicles to comply with increasingly stringent emission regulations and tight timelines in Europe and China as they are still far away from achieving 2021 targets. The financial investments are immense even though there is uncertainty on when they will be able to introduce their models, the market acceptance of these models, or how and when OEMs finally make money from these models.

If the future is indeed electric and autonomous, the recent transformative and definitive agreements between Ford, Volkswagen, and Argo AI can be the catalyst to demonstrate what it takes to get there sooner.