Ford and Volkswagen partnership: a Star is Born syndrome?

Wednesday, 19 December 2018

Henry Ford II passed up the opportunity to get Volkswagen for nothing.

After World War II, the victors divided Germany into pieces, and the British found themselves with the region that housed the auto factory. They offered it to the eldest son of Edsel Ford in 1948.

'I don't think what we're being offered here is worth a dime,' said Ernest Breech, chairman of the board at Ford, who joined the auto executive on a trip to Cologne, Germany, to discuss the idea. Hank the Deuce declined the offer.

While both parties say it isn't a merger, the deal would leave Ford particularly reliant on Volkswagen in the future.

These days, Ford and Volkswagen are talking about a broad partnership in research, production and shared office functions that could mean billions for the companies. An announcement is expected as soon as next month as Ford also looks to trim its white-collar workforce, which grew significantly in the past five years even as market share was flat.

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While it was once a big player in Europe, Ford is struggling badly there now and would benefit from VW's help.

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Volkswagen would love to break into the US truck market, somewhere that Ford is particularly strong.

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Analysts say Ford has little choice if it is going to snare a chunk of profit in the high-tech transportation future - but they see a risk of the American icon ultimately being dependent on a bigger partner.

An earlier deal between Ford and VW was centred around commercial vehicles, an area where the German company is strong.

'Ford has little choice but to form some kind of partnership with one of the top-three truly global automakers of Volkswagen, Toyota or Hyundai-Kia in order to survive long term in any form,' said market analyst Jon Gabrielsen, who uses data from corporate filings to advise automakers and suppliers.

Back to that post-WWII decision, documented by Walter Henry Nelson in 'Small Wonder,' a history of the German carmaker published in 1970 by Little, Brown & Co.

The VW Beetle overtook the Ford Model T to become the most produced car in the world in 1972.

The Volkswagen Beetle ended up breaking a production record set by the Ford Model T, and in a bit over 60 years, VW had eclipsed Ford in overall sales.

Ford and VW executives say neither company will take an ownership stake in the other. People close to the companies' talks about cooperating on some projects say an announcement could be made as soon as early 2019, likely after the Detroit auto show in mid-January.

Ford earlier this year signed an official agreement with Volkswagen to explore talks that initially focused on commercial trucking. Those discussions expanded to include shared investment in electric and autonomous vehicles, costly work that carmakers need to remain relevant as transportation changes over the next couple of decades. Then, the CEO of Volkswagen said this month the company may expand its U.S. production presence by building products in underutilised Ford factories.

'Look, we're in discussions,' said Ford spokesman Mark Truby. 'It's not a merger. These are discussions to have an alliance in specific areas of business where we'd have mutual benefit. Our companies have complementary strengths. There are some interesting discussions going on about how we could work together to strengthen the business.'

CNBC reported that one area of discussion is the idea of the companies merging their marketing and distribution operations, leveraging company strengths and allowing Ford to adjust its role in Europe, where the company is bleeding financially.

For the third quarter, Ford reported a loss of US$245 million in Europe, US$208 million in Asia Pacific and US$378 million in China. The loss of US$152 million in South America demanded a 'fundamentally different business model,' said Bob Shanks, Ford's chief financial officer, said Oct. 24, 2018.

Meanwhile, Volkswagen reported record sales globally in 2017, with the bulk in China.

VW is the top selling car company in China, the largest market in the world, 'averaging one sale about every 10 seconds,' according to a June 2018 story in Autocar UK magazine, and leading CEO Herbert Diess to say, 'China will have a decisive effect on the success of our future strategy.'

Industry observers say, all things considered, an alliance is obvious.

Yet it is probably better for Ford to enter into a significant partnership while it is still optional, rather than wait in hopes that things will be all right, and find itself in the position that Chrysler was in during the Great Recession bankruptcy, analysts said.

'It desperately needed to be rescued and thus had no better suitor than Fiat, nor any bargaining power with them,' Gabrielsen said.

'In 1980, by multiple metrics, Ford Motor Company was twice the size of The Volkswagen Group. But by about the year 2000 VW had had nearly caught up with Ford as it went into its widely proclaimed quest to become the largest automaker in the world,' Gabrielsen said. 'And by 2017 The Volkswagen Group had become about twice as large as Ford.'

If you consider the time since Ford passed on that VW deal back in 1948 as a tortoise and hare race, it would now seem that the tortoises are winning.