Ford and Volkswagen, two of the biggest automakers on the globe, are seeing off the grim days of the pandemic era to join forces in a new alliance to make their sales more profitable in the future. Ford, Volkswagen, and Nissan have all posted great quarterly earnings over the past two days.
Reports from GM and Stellantis all indicate unusually high margins due to the increase in new and used vehicle prices. Nowadays, even a used Ford Edge for sale has created an unusual profit margin for the automaker, a phenomenon which they relish but not the consumer. The chip shortage has driven the price of new cars to new heights, forcing automakers to prioritize only the more profitable models in their lineup.
Following this, investors only have one question on their minds- whether this era of unusually high-profit margins will last? The answer is most probably no, but automakers like Ford and Volkswagen are looking to keep these good times rolling with their strategic plans for the future. These plans involve rethinking their relationship with consumers and collaborating together to create more futuristic cars. Here is what lies ahead in the future for both the American and German automotive giants.
How Ford and Volkswagen plan to entice customers to their side
Ford and Volkswagen both gave a statement of reassurance to customers about retaining their pricing discipline even after the scarcity of microchips. This will ease the pricing of new cars. However, historically the automotive industry has always suffered from spare factory capacity. As the automakers keep their factories running, this results in excessive inventories which can be seen on the various dealer lots for the U.S. manufacturers and the company balance sheets for German manufacturers.
The problem of spare capacity will only get worse as automakers start prioritizing the production of EVs over their gas-engine assets. Many manufacturers like Volkswagen have talked about cutting down the production of their gas-powered cars. However, it is hard to predict when customers will fully accept EVs as their daily mode of transport. Flexibility is needed in such a situation. However, maintaining pricing discipline in this environment seems like a distant reality.
How investors should take their next steps
Good news may be incoming for investors in the upcoming days, as automakers have started focusing on the software side of things instead of just the hardware side. Ford and Volkswagen are planning to use over-the-air updates to sell software services to their customers.
Ford claimed that it has developed an ‘order bank’ that aims to replace an element of the traditional dealer-based sales model. Volkswagen also said that it had acquired Europcar, a Paris-listed car-rental company, that would help it engage with different kinds of consumers. With this deal, the target gained an enterprise value of 2.9 billion euros, which equates to $3.4 billion.
Investors have bid up their traditional car stocks in recent times. This is owing to the inflation in car prices and the rise in popularity of EVs like Ford’s Mustang Mach-E and Volkswagen’s ID.4. However, compared to Tesla’s dominant presence in the sales figures, both these EVs still have a long way to go. Ford and Volkswagen need to reduce the EV sales gap between Tesla and simultaneously develop smart software solutions to give them a new kind of pricing power in the market.
Is there a collaboration in the making between Ford and Volkswagen?
The news is true, Ford and Volkswagen have formed an alliance to develop commercial vans and medium-sized pickups starting from 2022. With this collaboration, both these companies also envision to co-develop cars for the next generation, which includes the likes of electric and self-driving cars.
All the automakers are currently in a race to develop the latest new technologies and vehicles. It's no surprise that automakers are looking for ways to splurge in enough money to aid their research and development process. Ford is expecting to spend $11 billion to restructure its business model in the upcoming days. Volkswagen on the other hand, made a major announcement saying that it will invest 44 billion euros, about $50 billion to fund their electric revolution, which will help them develop electric cars, self-driving vehicles, and other new technology.
"You can't do this alone," said Ford CEO Jim Hackett. "All these efforts will be enhanced by sharing brainpower." Volkswagen CEO Herbert Deiss also resonated with the same words as the Ford CEO, “It is no secret that our industry is undergoing fundamental change, resulting from widespread electrification, ever-stricter emission regulation, digitization, the shift towards autonomous driving, and not least changing customer preferences. In such an environment, it just makes sense to share investment, pool innovation capabilities, and create scale effects in clearly defined areas.”
How both parties could benefit from this alliance
Just last year, Volkswagen posted record sales of 10.8 million vehicles, however, only 1% of them were EVs. The VW Group has a strong presence in the minivan market, but not so much in the commercial van or pickup markets. This is where Ford comes in, with its strong lineup of pickups and SUVs. Volkswagen’s presence in the world’s 2nd biggest automotive market behind China, the U.S. isn’t that influential either.
Meanwhile, Ford has a major stronghold in the U.S. market, second only to its contemporary rival GM in the sales charts. However, Ford struggles in the overseas market, especially in Europe. Volkswagen, on the other hand, is an extremely popular brand in the European automotive scene. Its subsidiary luxury brands Audi, Porsche, and Skoda are also a huge hit in the European and Asian markets.
Ford’s best-selling vehicle in the United States is the Ford F-150, which has been at the podium of Ford’s lineup for more than 40 years. Recently, Ford has been dropping traditional sedans from its lineup in favor of SUVs and trucks. On the other hand, sedans are an integral part of the VW Group’s sales figures. There are many ways in which both automakers could benefit from their strategic partnership. However, a formal merger is unlikely, given the unique marketing philosophy and ownership structures of both brands.
At Ford, the descendants of founder Ford Henry have effective control over the company, thanks to two classes of stock. Its current chairman, Bill Ford Jr. is the great-grandson of the legendary Henry Ford. Hence, the Ford family may be unwilling to give up their control to another party. On the other hand, 20% of Volkswagen’s shares are owned by the German state of Lower Saxony, where the automaker is based.
Analysts also expressed their discontent on the reluctance of both sides to give a definitive statement on their future plans regarding electric and self-driving cars. Both the company CEOs assured the analysts that their companies are moving ahead in that direction. But they also admitted it was equally hard to work out the proper details. Still, we have heard the news from Reuters that VW will be sharing its upcoming MEB platform with Ford as well. If the news is indeed true, we may well be seeing a fruitful Ford-VW alliance in the field of autonomous driving technology.