EUR 850.00 For Business Accounts Only

Morningstar | Ford's Second Tie Up With VW Makes More Sense to Us Than the First One

We like Ford's second collaboration announcement with Volkswagen made July 12, but we see no reason to change our fair value estimate. The first announcement made in January was mostly, in our opinion, for VW's benefit because its focus on midsize pickups and commercial vans are segments where Ford already excels. The July 12 deal gives Ford access to VW's MEB electric vehicle platform and parts which Ford will use to design and build at least one fully electric vehicle for Europe starting in 2023. Ford expects to sell over 600,000 European BEVs over six years using the MEB architecture. In exchange, Ford will give up some equity ownership (to VW) in Ford's majority owned autonomous vehicle subsidiary Argo AI, in which Ford announced a $1 billion investment to be made over five years in February 2017.

Subject to regulatory approval, VW will invest $1 billion in Argo, plus another $500 million over three years. The $500 million will be part of Ford's equity in Argo sold to VW. Ford still has $600 million of funding for Argo per the 2017 agreement. VW will also place its over 200 employees from its Autonomous Intelligent Driving unit, which VW and Ford value at $1.6 billion, into Argo to establish an Argo European headquarters in Munich. Argo's global base is Pittsburgh. The deal values Argo at over $7 billion, and for comparison, GM's Cruise AV subsidiary's recent capital raise placed its value at $19 billion. Ford and VW will each have minority stakes in Argo but combined will be majority owners with the rest of Argo's equity available to Argo employees as incentive compensation.

This deal makes more sense to us than the January collaboration because each firm is giving up something (sharing of MEB for VW and part of Argo for Ford) to improve itself in another area (BEVs for Ford and AVs for VW). Furthermore, we see financial risk from the collaboration as reasonable for both firms. Ford is the first firm outside of VW to use MEB, and VW will be the first automaker other than Ford to invest in Argo.

We've long felt Ford's emphasis under prior leadership on hybrids over BEVs risked it falling behind the likes of GM and Tesla. We like its moves under CEO Jim Hackett to invest in BEVs on its own in North America as well as 2019 moves to invest in startup BEV light truck maker Rivian (and now VW) for help in Europe and perhaps future VW collaboration in other regions such as China or South America. Compliance with new emission rules and AV development is expensive, and Ford and VW can seek more scale in these new vehicle programs and likely accelerate time to market while remaining friendly competitors.