Volkswagen Buys a Donald Trump Insurance Policy
(Bloomberg Opinion) -- This feels like an odd moment for Ford Motor Co. and Volkswagen AG to announce a global automotive partnership, given the difficulties at some of the industry’s other big tie-ups.
Nissan Motor Co. and Renault SA are at loggerheads over Japan’s imprisonment of Carlos Ghosn, the boss of those two companies’ alliance, and their unbalanced cross-shareholding structure. Meanwhile, Tata Motors’ Jaguar Land Rover unit is spilling red ink and slashing thousands of jobs, taking some of the shine off the Indian group’s 2008 trophy acquisition.
But compared to this deeply enmeshed quartet, the commitments unveiled by Ford and VW in Detroit on Tuesday are relatively modest. The two companies will develop pickup trucks and commercial vans together and will discuss possibilities to cooperate on electric and autonomous vehicles.
While there’s clearly scope for VW and Ford to deepen their partnership in future (and working together could have political benefits for VW), a full-blown merger seems unlikely for now, especially from the German point of view. The alliance doesn’t envisage cross-shareholdings.
Regardless, you can see their motives for the union. Technological upheaval is putting huge strain on automakers’ cash reserves, while Donald Trump-created trade tensions are upending international production strategies and car sales are slowing in China and elsewhere. So cutting costs makes sense, even if the financial benefits of this deal won’t materialize for Ford and VW until 2023.
As Fiat boss Sergio Marchionne was fond of repeating prior to his early death last year, it’s also boneheaded for dozens of international carmakers to spend billions of dollars developing similar technologies that consumers struggle to tell apart.
Unfortunately, the history of automotive mergers hasn’t been a happy one either. While Peugeot SA seems to be getting more out of Opel/Vauxhall than its previous owner, General Motors Co., and Fiat has worked miracles with its Chrysler assets, previous tie-ups between Daimler AG and Chrysler, VW and Suzuki, and BMW AG and Rover were flops.
You’d think that the largest carmakers should prevail because of economies of scale, but the savings from bringing two together are easier to conceive than achieve. In any case, the capital markets are sending a troubling message to the industry’s giants right now, as Bernstein’s Max Warburton has noted. The low valuations accorded to mass-market carmakers suggest their future will be much diminished. In contrast, low-volume luxury brands such as Ferrari NV and Aston Martin Lagonda are valued as if they produce haute couture, not cars.
Similarly, Peugeot’s still relatively buoyant share price reflects in part that it isn’t a globe-spanning carmaker and hence isn’t as vulnerable to trade wars.
With a combined 17.5 million in yearly car sales spread across the globe, VW and Ford can’t do much about investors’ “small-is-beautiful bias” (although VW might want to think about spinning off its collection of luxury brands). But they can make their existing operations run more efficiently, and here both companies have something to gain from an alliance. Ford is stronger than VW in pickup trucks, commercial vehicles and in the U.S., where the German company is still trying to recover from the dieselgate emissions scandal.
That said, Ford is clearly the weaker partner financially. Volkswagen’s market capitalization is more than twice that of Ford’s, partly reflecting the latter’s need to restructure unprofitable overseas units. Analysts say VW will generate about $7 billion of free cash flow in 2019, compared to less than $1 billion at Ford, which gives VW more firepower to spend on technology. Having a deep-pocketed partner might help out Ford’s new boss Jim Hackett, who’s under a lot of pressure. Even a limited cost-sharing tie-up might show investors he’s a man of action, not just words.
For its part, VW has pledged an eye-watering 30 billion euros ($34.3 billion) of investment in electric vehicles, so being able to use that technology to build more cars in an alliance would be welcome. If this arms-length marriage also helps protect the German company from Trump’s fire and brimstone over foreign brands, so much the better. The U.S. president sung VW’s praises on Tuesday for investing in its Tennessee plant.
The German company’s boss Herbert Diess has bet its future on electric vehicles, and on globalization. It won’t hurt to have an American insurance policy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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