Traditional carmakers are not ready for what’s coming. Unfamiliar technologies have breached the walls that held off challengers for more than a century. Electrification and autonomous vehicle software are forcing incumbents to master two new skills at once, while devaluing their most important expertise: building big vehicles with internal combustion engines. It’s no coincidence that Tesla, the only successful major new US automaker to arrive on the scene in decades, looks nothing like its competitors.
These unsettling developments are what drove Ford’s announcement on Jan. 14 that it will join forces with Germany’s Volkswagen, at least in some arenas. For now, the automakers will jointly develop commercial vans and midsize pickups (something they have done in the past with the VW Sharan and Ford Galaxy), and then explore how to jointly develop electric and self-driving technology. Ford CEO Jim Hackett also hinted that expanded commitments were coming soon.
More cooperation makes sense. Each company has what the other needs. Ford gets better access to the European market—where it has struggled and VW has excess production capacity—as well as part of the $84 billion in electric vehicle investment (mostly batteries) VW has planned. Meanwhile the German carmaker, with just 2% of US market share, wants a share of Ford’s lucrative truck and SUV franchise in America.
The public now expects from automakers what it gets from tech giants: digital spectacle, seamless design, and the latest advances. Ford’s announcement didn’t say much, but it spoke volumes about where the market is heading: No company can do it alone. Even the multibillion-dollar balance sheets of the world’s largest automakers won’t be enough to pay for coming changes.
Ford’s tie-up is just the latest in a battle of “alliances” taking shape. For years, car companies have been cutting deals to share resources, from purchasing and design to R&D and manufacturing. The path that Renault and Nissan blazed by joining forces in 1999 (later joined by Mitsubishi) is now being followed by most other carmakers. Last autumn, Honda bought a 5.7% stake in General Motors’ self-driving unit, Cruise Automation. In February 2018, China’s Geely paid just over $9 billion for nearly 10% stake in Mercedes-Benz’s parent Daimler. A month earlier, Toyota bought 5% of Mazda after agreeing on a $1.6 billion joint car factory slated to open in Huntsville, Alabama by 2021. Expect more.
It’s all moving much faster than expected, thanks in large part to Tesla. The electric-car maker has proven that customers want their cars to work like their iPhones (one Detroit auto critic called Tesla’s Model 3 “Apple on wheels” and named it car of the year). Tesla is now regularly outpacing its premium competitors, with its Model S and Model X taking market share from Audi, BMW, and Mercedes. The Model 3 was the best-selling electric car in the US during the third quarter of 2018, and the fifth best-selling sedan overall.
“It’s hard to believe we’d be where we are had Tesla not existed,” says David Keith, a professor at MIT’s Sloan School of Management. Yet nobody can afford the costs of electrification and automated vehicles alone, he adds, as both have proven harder, and more expensive, than anyone anticipated: “Electrification and automation will take limitless amounts of money in the coming decades.”
With a century of refinement of the internal combustion engine headed toward obsolescence, legacy carmakers are now competing on batteries, software, and electronics—skills each of them only partly possesses. Much of the expertise lives outside their traditional sector. See, for instance, Panasonic’s joint battery gigafactory with Tesla, or Volkswagen’s $48 billion order for EV batteries and infrastructure last year.
This is particularly true when it comes to the software at the heart of tomorrow’s vehicles. McKinsey estimates that only 8.5% of global automakers’ 659,000 employees are software engineers (compared to about 62% of those working in the tech industry, which includes auto players such as Uber and Alphabet’s Waymo). Carmakers are even more understaffed when it comes to self-driving cars: Only 118 engineers were working on artificial intelligence in the industry in 2016, compared to thousands in the technology firms of the US and China alone.
This puts the spotlight on the Ford-VW experiment. The two automakers will not exchange ownership stakes, but it is the first step in a much tighter integration. Ford is not sitting in a pretty place. Fully “100%” of its value is reliant on the F-series pickup, analysts at Morgan Stanley estimate. Ford admitted as much last year when it ditched all but one its passenger vehicles, which were delivering few profits for the company. Wall Street has been hammering the company for dawdling as the ground shifted beneath it. That led Ford’s board to push out former CEO Mark Fields in 2017, and encourage current CEO Hackett to make bold moves. “People are getting impatient with Ford for getting a credible vision for where it’s going,” says Keith.
VW, for its part, has aggressively if belatedly pursued its own electrification effort in the shadow of Dieselgate after installing emissions-cheating software in almost 11 million diesel cars. This week, Volkswagen said it plans to invest $800 million in an electric vehicle factory in Chattanooga, Tennessee, adding to the $48 billion it committed last year. Ford, too, has said it will invest $11 billion in electric vehicles by 2022, with 40 hybrid or all-electric models on the way, though it has few cars ready to hit the market. While the alliance may be mutually beneficial, Morgan Stanley told investors on Jan. 15 that it’s “unlikely that VW would collaborate on anything significant with any [automaker] that it could not substantially control.”
Until now, many analysts have assumed Tesla can’t make it as a standalone company. But it’s not clear who really can now. Niche players must cover a multibillion-dollar overhead to profitably sell vehicles in almost any volume. Whether legacy automakers can make the transition from (primarily) bending metal to self-driving entertainment EVs is an open question, says Sven Beiker, a former BMW engineer who now runs the consulting firm Silicon Valley Mobility.
The direction of the auto market is now clear: cooperation displacing competition in the race to accumulate the necessary skills and partners to build tomorrow’s electric, self-driving cars packed full of sensors and services without going bankrupt. But timing is everything. “We all agree on the direction,” said Beiker, “but no one really knows the speed we are traveling at or which speed might be appropriate for the road ahead.”