(Bloomberg Gadfly) -- Automakers are increasingly coming together to tackle the onslaught of technology. Over the past year, several car companies have announced strategic partnerships to deal with the disruption. But there isn't always strength in numbers.
The latest such alliance is Hino Motors Ltd. The Japanese diesel bus and truck maker, which is majority owned by Toyota Motor Corp., agreed last Thursday to a tie-up with Volkswagen AG's truck unit. Together, the two hope to tackle the industry buzzwords of autonomous driving and electric cars. No capital changed hands, and shareholders cheered, sending stock in Hino up as much as 6.7 percent on the day.
Investor optimism is understandable.
The threat from technology to automakers is real. Connected cars, or those equipped with internet access, are expected to grow 30 percent every year though 2020, McKinsey & Co. data show. Almost one-quarter of all new cars sold will have installed wireless communications within the next two years, according to the management consultancy firm.
The industry is being pushed to take risks that both companies and consumers don't quite have the appetite for. Internet-connected vehicles could cost as much as 20 percent more than regular cars, PricewaterhouseCoopers LLP estimates.
In theory, alliances should work to limit costs and speed the development of new technologies. General Motors Co. and Honda Motor Co. have a fuel-cell partnership to mass produce a new hydrogen system that will be used in vehicles from 2020, for example. They're splitting the bill for an otherwise risky venture. That makes sense. According to Goldman Sachs Group Inc., adding assisted-driving systems and other forms of automation can cost upwards of $3,000 per unit.
But these tie-ups don't help carmakers differentiate themselves, and cost pressures remain. The narrowing gap between the price of a car and what it takes to make one means companies are constantly looking for ways to trim expenses at a time fuel-efficiency regulations are pushing in the other direction. Automakers, on average, spend around 3 percent to 10 percent on R&D as a proportion of sales. Yet returns on invested capital are low, ranging from 3 percent to 5 percent, and could get worse if costs continue to rise.
Some firms prefer to keep everything in-house, or stick with the one supplier. Toyota has components manufacturer Denso Corp. and a stake in Aisin Seiki Co., which makes parts like clutches, disc brakes and power windows, while Honda has a long-standing relationship with Hitachi Automotive Systems Ltd. That gives companies control over processes, quality and technology, but again, doesn't necessarily provide an edge over competitors.
Investing in car-sharing technology or ride-hailing apps is unlikely to move the needle much, either. Both are crowded spaces where billions of dollars have already been spent. Taking minority interests in niche tech firms won't give automakers a huge leg up either because the companies aren't theirs to own.
Others are trying to do away with humans entirely. The one player taking automation to the extreme is Tesla Inc. Yet even Elon Musk is finding that isn't always easy. As Bernstein analyst Max Warburton says, not only is automation expensive, it's "inversely correlated to quality."
History shows that for carmakers, coming together doesn't always have ground-breaking results. Hino's almost decade-long alliance with Scania AB, now part of Volkswagen, didn't result in a radical shift in trucks.
Investors should be wary of having their expectations raised too high by these strategic partnerships. Automakers' seemingly swift riposte to the technological change sweeping through the industry may not pay many dividends.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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