Will FCA, Google Deal Trigger Industry Disruption? Maybe.
“One possible outcome is a future devoted to large-scale contract manufacturing of the autonomously driven mobile computing electric transport capsules formerly known as automobiles”
Google’s decision to choose Fiat Chrysler Automobiles (FCA) as a manufacturing partner in its robot cars project is a watershed event signalling the start of the long-awaited new technology disruption of the automotive industry.
That’s the view of investment bank Morgan Stanley, which said the deal has two important aspects.
“This marks a watershed event for the auto industry on 2 major levels: contract manufacturing for high tech firms and allowing such firms a clear pathway into the brain of the car,” Morgan Stanley analyst Adam Jonas said in a report.
Not everybody thinks it signals much of a breakthrough though and investment researcher Evercore ISI said the deal reflects more FCA’s weakness.
Among major auto manufacturers, FCA has invested little in new and possibly disruptive technologies like electric and robot cars. It has fallen behind companies like Tesla, GM, Ford, Mercedes and Volkswagen’s Audi. Its balance sheet contains much debt too.
“FCA probably has a greater willingness and more flexibility to do this than any other (manufacturer), offering Google better commercial terms, given FCA is not generating as much cash as peers, and is thus presumably dedicating less to investment in “new technologies”,” said Evercore ISI analyst Arndt Ellinghorst.
Alphabet’s Google subsidiary said Tuesday it agreed to buy 100 plug-in hybrid Chrysler Pacifica minivans from FCA to expand its robot car-testing program. The deal is not exclusive. Other car makers have apparently fought shy of doing a deal with Google, worrying that they may end up more like component suppliers. The deal is Google’s first to include working with a partner to develop vehicles, rather than just adding its equipment to existing ones.
Morgan Stanley’s Jonas acknowledged that the Google FCA deal wasn’t really earth-shattering, yet. It also shows a certain amount of bravery from FCA.
“While volumes are not significant, this venture marks the first time that Google has worked in partnership with an auto company to integrate its self-driving technology,” Jonas said.
“The auto industry has to date expressed a collective wariness to allow players like Alphabet too close to data generated by today’s car platform. FCA’s willingness to let Alphabet ‘in’ represents a divergence in strategy from its broader competition,” he said.
Morgan Stanley says FCA is its top auto stock pick, not least because it sees subsidiaries like Jeep, Ram and Maserati as capable of unleashing hidden value. If FCA decided to sell these subsidiaries, what would happen to the remaining brands like Chrysler, Fiat and Dodge?
“One possible outcome is a future devoted to large-scale contract manufacturing of the autonomously driven mobile computing electric transport capsules formerly known as automobiles,” Jonas said.
Reaction to the FCA Google news was generally positive.
Kelley Blue Book analyst Jack Nerad said it benefitted both companies.
“Google gets the opportunity to continue its development of autonomous driving technology in a modern plug-in hybrid platform that seems a logical candidate for the system. FCA gets the high-tech rub-off of being associated with the very visible Google efforts on the self-driving car with one of its newest and most important products, the Chrysler Pacifica minivan,” he said.
“It’s hard to look at this as anything but a win-win,” Nerad said.
Colin Bird from IHS Automotive was impressed to.
“Teaming up with Google helps put FCA in a stronger position to compete when it comes to autonomous car research and development, though significant effort remains to introduce this technology into FCA production vehicles. Conversely, Google’s more intimate relationship with a large scale (manufacturer) will provide significant integration and manufacturing experience and may portend an ongoing, developing relationship which may lead to deploying Google’s driverless software in production FCA vehicles,” Bird said.
Evercore ISI’s Ellinghorst was a bit more restrained, and said Google’s potential to upset the traditional players, at least in the short-term, might have been exaggerated.
“The size of the collaboration, however, may curb some of the grander/disruptive ideas some market participants have had for Google’s near term capabilities to disrupt the mass auto industry,” he said.