VW and Ford join forces to develop electric cars

Car giants VW and Ford are pooling their resources to focus on electric vehicles and driverless cars. What are the odds of success? Matthew Partridge reports.

With "storms battering the global [car] industry", Ford(NYSE: F) and Volkswagen (Germany: VOW) "have significantly expanded" their global alliance, says Peter Campbell in the Financial Times. They have agreed to collaborate on electric vehicles and self-driving technology. The new venture will involve Volkswagen investing $2.6bn in Argo AI, the Ford-backed driverless technology start-up, in a deal that values the group at more than $7bn. Ford will also build a mass-produced electric vehicle in Europe using the German group's in-house development and manufacturing system for battery cars. The idea is to save money by avoiding duplicating investments.

A culture clash?

Ford and Volkswagen's "ambitious plans" to expand their alliance are already being "lauded", says Neil Winton for Forbes. However, there are also worries "that company culture might be a source of friction over the long term". Previous big car deals suggest that this factor is crucial. For example, Daimler's 1998 takeover of Chrysler "was described as a marriage made in heaven, but ended in 2007 after what were called cultural difficulties". Similarly, Opel and its Vauxhall sibling made "massive" losses with General Motors.

It's impossible to guarantee that any alliance will be successful, especially "in an era of rapid change", says Stephen Wilmot in The Wall Street Journal. However, the two companies have maximised their chances of success by agreeing not to exchange equity in each other, something that typically ends up becoming "a seemingly irresolvable source of tension" in many partnerships. They have also "carefully calibrated" the agreement, so that it "covers only specific areas of operation in which one side or the other needs a leg-up".

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The tie-up may be "one of the biggest events in the [car] industry in modern times", says Gary Vasilash on Autoblog. By using Volkswagen's electric-vehicle platform the two companies are trying to create "a standard for an electric-vehicle architecture". Similarly, having Volkswagen use Ford's artificial intelligence (AI) system in their cars will generate more data, enabling the AI to become "smarter and better".

Let's not get carried away, say Antony Currie and Liam Proud for Breakingviews. It's true that autonomous vehicles "can potentially reduce congestion and traffic-related fatalities, improve carmakers' margins and more". But working out how to value these outfits "is a quest in itself", especially since "no one knows when autonomous driving will take off and how much revenue it will earn". Even Argo AI's boss, Bryan Salesky, admits that "it will probably take several years for carefully circumscribed operations to get under way in more than a few cities", while broad adoption "is for long in the future". This makes it "hard to justify" the implicit valuation of $7bn that this deal gives Argo AI.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri