GM CEO and Chairman Mary Barra and LG Chem Vice Chairman and CEO Hak-Cheol Shin in the automaker’s battery laboratory in Warren, Mich., in which the firms announced a new $2.6-billion joint venture on Dec. 5, 2019.
DETROIT — General Motors’ $2.3 billion joint venture with LG Chem for creation of battery cells for electric vehicles is “more than a collaboration,” it is a requirement in today’s rapidly changing automotive industry.
The declared joint venture involving America’s largest automaker and the South Korean chemical giant adds to a growing list of tie-ups for the automobile industry as companies try to share in the enormous costs of autonomous and electric vehicles.
Automakers like GM are yearly spending billions on the emerging technologies in an effort to gain an upper hand on the possible multitrillion-dollar companies, which many believe will change transport as we know it and also help out with lowering global carbon emissions. But, for now, remain unprofitable.
Mark Wakefield, international co-leader of the industrial and automotive clinic at AlixPartners and a managing director in the company, said the “tricky balance” of investing in new technologies while maintaining conventional business operations profitable is one of the primary drivers to the uptick in automobile industry partnerships.
“All these things take this tremendous investment and aren’t going to pay off with a top-end profit next year or the year after or the year after that,” he told CNBC on Friday. “But they are somewhat existential if you want to be in the game 10 years from now. That’s where partnerships come into play.”
A report by AlixPartners earlier this year estimated that the industry’s yearly spending autonomous driving and electric vehicles will reach a cumulative $85 billion by 2025 and $225 billion by 2023, respectively.
The funds being spent on electric vehicles is roughly equivalent to the gigantic amount that automakers globally united spend on capital expenditures and research and development in a year, according to the firm.
“To invest in these electric vehicles and CASE (connected, autonomous, shared, electric vehicles) in general, you’re taking one years’ worth of investment out of every five out of the picture,” Wakefield said. “That’s an extraordinary amount to take out and keep the trains running on time of your vehicle programs and traditional business.”
Billions at tie-ups
Some of the most obvious collaborations this year have been involving automakers and technology companies, however many have been automakers choosing to share costs with conventional competitors.
The greatest announcement thus far this season is the planned merger between Fiat Chrysler and French automaker PSA Group. It would create the fourth-largest automaker by earnings in the world with a roughly $50 billion evaluation.
Fiat Chrysler CEO Mike Manley explained it as a “potentially industry-changing combination,” while PSA CEO Carlos Tavares said the “convergence brings significant value to all the stakeholders and opens a bright future for the combined entity,” including autonomous and electrical vehicles.
Important non-merger prices included: Hyundai Motor and automobile provider Aptiv making a $4 billion autonomous car joint enterprise; Volkswagen agreeing to spend $2.6 billion in Ford Motor-endorsed autonomous car startup Argo AI within a worldwide alliance; Amazon, Ford and others investing hundreds of millions in startup EV manufacturer Rivian; and German automakers Daimler and BMW jointly investing more than $1 billion in freedom services.
Jim Hackett (r), CEO of Ford, and Herbert Diess, CEO of VW, at the Detroit auto show last January.
Boris Roessler | picture alliance | Getty Images
“These companies, especially on the autonomous side, they’re finding it’s harder to develop this stuff than they thought it was going to be, so they’re teaming up to spread those costs and share the expertise that they have across a broader range of vehicles to try and get some scale,” stated Sam Abuelsamid, principal research analyst at Navigant and an engineer.
AlixPartners reports the amount of automaker partnerships increased 43percent from 2017 to 2018 to 543, directed by a 122% increase in autonomous vehicles tie-ups to 115.
The partnerships are different from mergers and acquisitions, which AlixPartners said were “down a bit” last year from 2017. However, the company reports the percentage of closed deals annually associated with linked, autonomous, shared, electrical vehicles rose five percentage points to 55 percent, worth $21 billion, in 2018.
Other high-profile deals this season included: Toyota Motor carrying a 4.9% stake, valued at more than $900 million, in Suzuki; Ford making a $275 million joint venture with Mumbai-based Mahindra & Mahindra; and Honda Motor and Hitachi announcing plans to unite car parts companies to produce a $17 billion parts provider . In September, Toyota announced plans to boost its stake in Subaru from 17percent to greater than 20%, expanding their partnership to spend more effectively in new technologies.
Executives from many automakers, including GM and Ford, have stated their next-generation electric vehicles will be rewarding — a challenge the sector has faced for almost a decade.
“For competitive reasons and also for regulatory reasons, everybody has to have EVs in their lineup. The challenge is selling them profitability,” Abuelsamid said. “That’s something everybody has struggled to do so far.”
GM CEO Mary Barra on Thursday affirmed the joint venture with LG Chem will help out with the business’s plans for lucrative electric vehicles, which are expected to start rolling out in 2021.
“The new facility will help us scale production and dramatically enhance EV profitability and affordability,” she told reporters when announcing the joint-venture with LG Chem. “Ours is a long-lead industry and having accelerated our product planning and production processes, we will develop a greater range of EV options that truly alter our product portfolio.”
The Ohio plant, according to GM, is expected to drive price per kilowatt-hours, a key metric for making electric vehicles cheaper, to “industry-leading levels.” The GM-LG Chem collaboration also has a joint development agreement to develop and produce advanced battery technologies.
“The joint venture that we are signing today is more than just a collaboration,” LG Chem Vice Chairman and CEO Hak-Cheol Shin said Thursday at the media event. “It marks the beginning of a great journey that will create an emission-free society and transform the global automotive market into an eco-friendly era.”