Volkswagen (OTCMKTS:VLKAY) has decided to turn away from Silicon Valley and back toward the car business for its future.
Volkswagen’s Modular Electric Drive Kit (MEB) will eventually be married to Argo AI, a start-up for autonomous vehicles Ford invested in back in 2017.
The loser is Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Waymo unit, which seems to have the best autonomous tech but whose proposed agreements were believed to be one-sided by the industry. Amazon and Aurora are still working with Korean nameplates Hyundai and Kia. Waymo is expected to wind up with Nissan, Renault and Mitsubishi.
The Ford/VLKAY Deal
Under their deal, Ford and Volkswagen will place their strengths into one another’s hands starting in 2022. Ford will make pick-ups for Europe under the VW nameplate, while VW will produce a city van Ford can sell.
Volkswagen is going full speed ahead with the MEB platform in China, where a joint venture called SAIC Volkswagen will begin making up to 300,000 vehicles per year in 2020. Another joint venture, FAW-Volkswagen in Foshan, recently doubled its capacity to 600,000 vehicles, although some are gas-powered.
For Volkswagen, its electric car alliances in China are a way to get past its Dieselgate scandal. The scandal led to the firing of Audi’s CEO, over 7.000 layoffs, and tens of billions of dollars in fines and court costs.
For Ford, the VW alliance gives it a stable electric vehicle platform and control over its path in self-driving cars. It could also bring Ford back into markets like Europe, South America, and Africa, from which it had been retreating.
It’s also a step back for CEO Jim Hackett, who was brought in two years ago in part because he had connections to Silicon Valley as head of Steelcase, a furniture company.
What Comes Next
Volkswagen is roughly twice the size of Ford. It has a market cap of about $86 billion, against $40 billion for Ford. Its sales last year came to about $264 billion, against $160 billion for Ford. Despite Dieselgate, VW sells for one-third its sales while Ford sells for one-fourth.
The market poverty of the car business, compared with technology, where companies frequently sell for 8-10 times sales, has created an unequal balance. It may have led Waymo to push terms the auto industry could not abide.
The car makers are now teaming up and sharing costs because, if they wanted, Waymo, Amazon, or Apple (NASDAQ:AAPL) could build their own factories. The combined market cap of Ford and Volkswagen, about $120 billion, still pales in comparison to Amazon’s $943 billion.
The car makers insist no one has learned how to make money in electrics or autonomous cars. They insist even Tesla (NASDAQ:TSLA) hasn’t cracked the puzzle, although its success in the luxury segment recently cost BMW (OTCMKTS:BMWYY) CEO Harold Kruger his job. This came just months after BMW signed a manufacturing alliance with Microsoft (NASDAQ:MSFT).
The Bottom Line
The Ford-VW tie-up is a defensive alliance that boosts China and begins what may be the auto industry’s last stand against Silicon Valley.
Making electric cars takes fewer employees than making gas-powered cars. But autonomy remains a tough nut to crack. Tech companies believe they have the hole cards, but automakers want a better deal before they accept a back seat.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT, AAPL and AMZN.
More From InvestorPlace
- 2 Toxic Pot Stocks You Should Avoid
- 10 Stocks to Buy on College Students’ Radars
- 7 Retail Stocks to Buy for the Second Half of 2019
- The S&P 500’s 5 Best Highest-Yielding Dividend Stocks
The post Ford and Volkswagen: Throwing Rocks at Silicon Valley appeared first on InvestorPlace.