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Morningstar | GM Adds Honda to Its Cruise Partnership With SoftBank, Potentially Opening Japan to GM for AVs

We are not changing our fair value estimate for GM or Honda after GM announced Honda is investing in GM's autonomous vehicle subsidiary, Cruise. Honda will invest $750 million for a 5.7% Class E common equity stake in Cruise and Honda will spend another $2 billion over at least the next 12 years to help fund development of a new AV. This AV will be based off an existing GM architecture not yet displayed publicly, will be jointly developed by GM, Cruise, and Honda, and manufactured by GM. This vehicle will not have pedals or a steering wheel and we think will be used to move both people and things. This vehicle will be far different in function because the design will not be based on a driver. Cruise founder Kyle Vogt in a Medium post on the Honda deal said the car of the future could have minibars, giant TVs, and lay-flat seats. As long as the agreement with Honda is not terminated, Honda cannot transfer its Cruise stake for seven years without the consent of the Cruise board. GM and Honda already are working together on fuel cell vehicles and Honda is buying EV batteries from GM.

We like the deal because it gives Cruise even more cash to scale up AVs quickly without further using GM's funds. We think it's also possible Honda's presence, as well as Cruise's partnership with Japan's SoftBank, announced May 31, means GM can more easily access the Japanese market for AV services next decade. The deal also supports our view that GM Cruise is a leading AV player. Honda Executive Vice President Seiji Kuraishi said in the media release "Honda chose to collaborate with Cruise and General Motors based on their leadership in autonomous and electric vehicle technology and our shared vision of a zero-emission and zero-collision world." We don't expect funding to get in the way of Cruise meeting its goal of launching AV ride-hailing at scale next year, likely in San Francisco, and perhaps New York and Phoenix, to start.

With SoftBank and Honda as Cruise investors, it seems that GM will eventually spin-off Cruise. We think it should wait to build Cruise up first since it currently has no revenue. If Cruise is separated, any upside option value to AVs goes to Cruise rather than GM and GM's stock may just become a dividend play paying out profits mostly from GM China, pickups, and SUVs.