Ford and Volkswagen appear headed for some kind of combination. They’d better.
The industry is facing the challenges and costs at least as great as those posed by the financial crisis of a decade ago. Going it alone no longer appears to be an option.
Automakers are spending billions of dollars in development costs as they try to develop the electric and self-driving vehicles they believe are the future. They’re also facing more competition from tech companies, including Uber and Google parent Alphabet (GOOG). Upstarts like Tesla (TSLA) and new combinations, such as the joint effort by General Motors (GM), Softbank and Honda, also could shake up who wins the future of cars.
It’s a race in which neither VW nor Ford are in lead.
“We don’t see either Ford or VW as currently in a leadership position on autonomous mobility and see them as lagging peers in some areas,” said Morgan Stanley auto analyst Adam Jonas. “On electric vehicles, we see Ford and VW as in the middle of the pack – not the leader, but not the laggard.”
Ford has already said it plans to spend $11 billion on new technologies and reshaping the focus of the company in the next three to five years. Finding someone to share those kinds of costs with will be crucial to its success. But it has yet to give details of its plans.
Volkswagen officials are similarly tight-lipped, refusing to confirm a report by Reuters that VW CEO Herbert Diess is set to outline a 10-year plan to the company’s supervisory board as soon as next week.
So far the only alliance firmly in place between Ford and VW involves an agreement to work together on commercial vehicles. But more is in the works as the companies are in negotiations for additional forms of cooperation.
In a recent interview with Bloomberg, Ford Chief Financial Officer Bob Shanks said the companies’ discussions are “broad” but not limited to any particular technology, product or geography. But some kind of combination or alliance appears inevitable.
The companies are clearly a good fit.
Ford’s sales and profitability are strong in the United States, but the company is trailing competitors badly in China and continuing to struggle in Europe and Latin America. Volkswagen does well in Europe, China and Latin America but and has never been a major player in the United States.
Ford’s lineup strength is with trucks and SUVs, but it’s struggling in luxury cars and is walking way from sedans. Volkswagen is a power-player in sedans and luxury cars – it owns the Audi brand – but struggles in light trucks such as pickups and delivery vans.
As much as a combination of the two established automakers makes sense, a formal merger will be unlikely, if not impossible, because of the unique nature of each company’s ownership structures.
Two classes of stock at Ford give the descendants of founder Henry Ford effective control of the automaker. His great-grandson, Bill Ford Jr., is the current chairman of the company and it’s clear the Ford family is unwilling to give up that control.
Volkswagen has about 20% of its shares owned by the German state of Lower Saxony, where it is based. That’s a likely roadblock to a full merger as well said Rebecca Lindland, senior analyst for Cox Automotive.
“The ownership structures of the two companies are the one thing keeping them from a full-on merger,” she said.
Even without a full merger the two companies can get close enough to operate as a single automaker. Nissan, Renault and Mitsubishi have been operating under such an alliance for nearly 20 years, sharing top executives, factories and other assets and holding stakes in one another.
VW and Ford could buy joint ownership of a separate company that is working on new technologies such as electric and self-driving cars. GM has set up such a stand-alone company, dubbed Cruise, and has sold stakes in it to Softbank and Honda.
In August Ford quietly set up its own Autonomous Vehicles stand alone business.
“As expected and intended, we’re receiving significant interest from potential partners and financial investors,” Ford CEO Jim Hackett told investors last month.
These kinds of alliances and joint ventures are the future of the rapidly changing auto industry, said Lindland.
“We’re going to see a web of alliances that overlays the industry because we’re facing such enormously capital-laden decisions that need to be made,” she said.