November 9, 2018 1:15 PM, EST

VW May Invest in Ford-Backed Argo as Alliance Talks Advance

Argo Self-driving CarGene J. Puskar/Associated Press

Volkswagen AG and Ford Motor Co. are nearing a framework agreement to join forces on electric and self-driving vehicles, capital-intensive areas that are reshaping the auto industry and straining carmakers’ finances across the globe.

As part of the pact, VW may invest in Ford’s self-driving partner, Argo AI, according to people familiar with the discussions. VW also is poised to share electric-vehicle technology, with Ford piggybacking onto the tens of billions of dollars that the German giant has committed to battery-powered autos, said the sources, who asked not to be identified discussing confidential matters.

Ford Presenatation

Andy Wong/Associated Press

The possible investment in Argo is significant as it could accelerate VW and Ford’s self-driving efforts — a costly but crucially important element of the auto industry’s future. Both carmakers have been dogged by the perception they are lagging in developing the technology, and cooperation would allow them to share costs and potentially catch up faster.

Talks between VW and Ford have been constructive since the companies publicized them five months ago and might firm up by the end of this year or early 2019, the sources said. The two have said they don’t plan a cross-shareholding arrangement like global partners Nissan Motor Co. and Renault SA.

VW declined to comment. Ford spokeswoman Jennifer Flake is talking with VW about potential collaboration across multiple areas and that it is premature to share additional details now.

Argo Test Car

Argo test car. (Gene J. Puskar/Associated Press)

Broad Discussions

VW and Ford said in June that they were considering a strategic alliance focused on a range of commercial vehicles. Bloomberg News reported last month that the discussions had broadened to include potential collaborations on autonomous driving and to develop and build vehicles for one another.

“We’re having a very broad set of discussions about how we can help each other around the world,” Ford Chief Financial Officer Bob Shanks said in an interview last month. “Collaboration isn’t being limited in any way whatsoever.”

Self-driving cars are expected to upend the transportation industry and become a business worth $7 trillion by midcentury, according to a report last year by Intel Corp. and Strategy Analytics. Automakers who get it right will be on track to more than double the industry’s meager profit margins and build a more prosperous future. But those who fail may not have a future at all.

Open to Investment

Together with self-driving partner Argo AI, Ford has said it is open to outside investment in its autonomous efforts by a second automaker. The talks to bring on VW are progressing well and have the potential to create a global competitor in the self-driving race, one person familiar with the discussions said.

Having two major automaker customers would put Argo on similar footing with Cruise Automation, General Motor Co.’s autonomous unit that last month took on a $2.75 billion investment from Honda Motor Co.

Herbert Deiss

Volkswagen CEO Herbery Deiss. (Michael Sohn/Associated Press)

Ford has been struggling to reverse losses in markets including Europe and South America. It also is in talks with Mahindra & Mahindra Ltd. to broaden an alliance that began to develop models for India and other emerging markets, including SUVs and electric cars.

Herbert Diess, CEO of VW, confirmed in a recent interview that talks with Ford could involve licensing the company’s new electric-car technology, dubbed MEB. VW plans to roll out the first fully electric vehicles underpinned by this technology in 2020, starting with the I.D. Neo hatchback in Europe.

Deliberations also include VW building a compact panel van about the size of its Caddy model for Ford, while the U.S. manufacturer could produce a successor to VW’s T6 van at its low-cost factory in Turkey to improve returns, according to the sources. In South America, the companies could bundle production of VW’s Amarok and Ford’s Ranger pickups at the German company’s site in Pacheco, Argentina, in a move to share cost.

Urban Deliveries

Joining forces would allow VW and Ford to gain critical scale in a commercial vehicle market that has been boosted by growth in deliveries to online shoppers. At the same time, the segment faces tightening emission rules across the globe: Some major cities are considering allowing only electric vehicles into downtown areas.

Volkswagen event

Michael Sohn/Associated Press

Combined annual sales of about 1.1 million light commercial vehicles would put Ford and VW on par with other alliances such as the collaboration between Daimler AG, Renault and Nissan. For VW’s light commercial-vehicle unit based in Hanover, the Ford cooperation could be key to its future strategy.

The division has been struggling to expand outside Europe and South America, partly due to high manufacturing costs for some vehicles in Germany. With the Traton AG heavy-truck unit being separated to prepare for a possible share sale, the light commercial-vehicle operations risk being folded into the much-larger VW cars division if the Ford cooperation doesn’t generate the anticipated benefits in coming years, according to the sources.