- Volkswagen and Ford could be set to further extend their alliance from January through a new form of strategic partnership, sources tell Business Insider.
- M&A bankers say the deal “makes sense” and could boost the automaker’s push into automated driving and provide additional cost efficiencies.
- The auto industry has been squeezed by declining margins from car sales and increased regulatory pressure making partnerships increasingly necessary.
- Click here for more BI Prime stories.
Less than six months since Volkswagen and Ford announced an auto alliance that could save them billions of dollars, the two auto giants could be set to further merge strategically, sources tell Business Insider.
It’s another sign that the global auto industry is squeezed with companies looking to take on strategic deals in the face of declining sales for many brands, and an increasing need to automate and electrify their output.
The January deal between the two carmakers sought to share efficiencies across production, but importantly across electric vehicles and autonomous driving. A further strategic tie-up between Volkswagen and Ford would “make sense,” according to one London-based M&A banker. Automation and cost efficiency synergies were two noted areas of promise, they said.
Ford acknowledged the value of its existing partnership with VW but declined to give details of further plans. “Both companies have said we are open to considering additional vehicle programs in the future. The teams will continue working through details,” a spokesperson said.
Fiat Chrysler sought to merge with Nissan and Renault earlier this year, but the deal fell through. Similarly, news emerged Thursday of a deal between German manufacturers BMW and Daimler to pool developers in a bid to develop autonomous driving technology.
At the time of January’s announcement, Ford’s CEO Jim Hackett said: “I think you’re going to see a lot more of what we did with VW,” in interview comments to CarBuzz. “There will be winners and losers in our business like you’ve never seen before. I think you will see companies looking for scale, because some technologies need to scale to be effective.”
The automakers have been transparent about the nature of their talks, with one source familiar with the matter indicating that discussions were on a good path to expand the current global alliance. Volkswagen declined to comment.
This appears to be the general direction of travel for automakers.
In May, Bank of America noted: “As cycle/macro pressures potentially escalate in the future, we believe deals and partnerships could emerge, especially as scale in new technology will be critical for OEMs (original equipment manufacturers) to earn returns above the cost of capital over the cycle.” The report’s authors, John Murphy, Aileen Smith, Yarden Amsalem, and Gwen Yucong Shi, said, “In the interim, the industry could see more unofficial alliances focused on spreading investment cost including, but not limited to: joint ventures, alliances, contract manufacturing agreements, among others.”
Despite that, there is still some doubt over the viability of a complete merger between the two automakers given the companies’ varying geographies, and trust difficulties between the families which run the car manufacturers respectively.
Ford is a dominant player in the US market while VW has a greater foothold in China. A further strategic alliance could have major differences in focus and direction.
January’s tie-up required high levels of trust between the Porche-Piech family which controls VW and the Ford Family, according to Financial Times reporting. Many major automakers are run by families with Fiat Chrysler ultimately controlled by the Agnelli family with these relationships making merger opportunities tricky to navigate.
Both companies also have large exposures to Europe which has seen a major decline in car sales in recent years. The combination of regulation, compliance, a shrinking market, and even Brexit, could see margins trimmed further still if companies fail to diversify, according to a March note from Nomura.
The current alliance sees the companies share production of medium-sized pickup trucks and city vans along with a broader agreement to cooperate on autonomous driving and electric vehicles. The alliance could see cost efficiencies save over $1 billion by 2023.