At last, Marchionne finds a high profile friend

In a strange twist of fate two recent GM suitors, Google and FCA, find themselves in a highly publicized marriage of convenience. But why would these two end up as bedfellows in the race for the first series-production self-driving car? “Every car company is trying to get into the tech space right now because they all know their future depends on it,” explains Karl Brauer, an auto-industry analyst for Kelley Blue Book. “At the same time, tech companies are trying to understand how to transition from software, interface, and personal device production into the much more complicated world of automotive manufacturing. A Google/FCA tie-up could simultaneously put both companies in the lead in this critical race.”

Two giants rejected by GM

It’s no secret that Google, having run more than 1.4 million miles of tests on its driverless prototypes, has been hard at work trying to secure a partnership with an automotive manufacturer to take its technology to production.

Unfortunately, until now, Alphabet Inc (Google) has been unable to close any deals: A recent attempt to conclude an agreement with General Motors failed because of disagreements over ownership of the technology and data.

For Marchionne, coming off a high of the fruitful Fiat-Chrysler merger, the cause and effect of escalating development input costs was so evident that he believed Mary Barra would wilt at his approach. Unfortunately for the cash-strapped FCA, GM didn’t see it that way and never responded to the overtures.

This contention that carmakers waste capital in developing new technologies across similar platforms has formed the cornerstone of the recent Google/ FCA agreement.

Benefits of the Joint Venture

Fiat Chrysler Chairman John Elkann has been quoted as saying that the Italian-American carmaker would work with “new industry players” such as Google and Apple Inc. rather than compete with them.

For Fiat-Chrysler, partnering with Google is in keeping with Marchionne’s approach to his proclaimed development philosophy, while providing a shortcut to much sought after expertise in self-driving technologies.

Furthermore, working with Google provides an opportunity for FCA to team up with one of the world’s leading technology companies to leapfrog the opposition in the race to producing a self-driving car. And of course, for a cash-strapped company the savings in development costs will not go unnoticed.

What gives this deal the edge over previous attempts to form JVs in self-driving is that the deal is not exclusive. Other car makers have fought shy of doing a deal with Google, concerned that they may end up as component suppliers instead of being the OEM.

This co-operative attitude allows both parties the flexibility to focus on developing and applying the technology without the pressure of having to commit to future roles, such as who would hold the license, and who would own the technology.

Significantly, the deal is Google’s first to see the Tech company working with an OEM as a partner to develop vehicles, rather than just retrofitting its equipment to existing models.

John Krafcik, CEO of Googles self-driving car project, holds the belief that working closely with FCA engineers will accelerate the development of a fully self-driving car fit for series production.

This may be a great press statement, but in reality, what’s so different in installing a system to a Chrysler Pacifica, to fitting it to a Lexus? Google has already spent years developing and testing autonomous driving systems and has made significant advances in the technology:

In a report to the California DMV, covering the period Sept. 24, 2014, to Nov. 30, 2015, Google claims the distance covered between disengagements improved from the previous 785 miles between interventions to 5,318 miles.

So what Google lacks is the ability to take the technology to series production. In this regard, Fiat Chrysler could well become a contract manufacturer for Google’s autonomous cars, a solution the company has applied to other products.

“It’s what you would call a buyer’s market for them,” said AutoPacific Inc. Manager of Product Analysis, Dave Sullivan. “It could be a real opportunity for Google to come in and take a modern and federalized vehicle and turn it into something of their own, which follows the logic of what Google has done with many of their other products.”

The question is, however: Will an automotive OEM be satisfied with the role of contract manufacturer? I think not!

This implies that Google would basically own the rights to the vehicle, and FCA would build it under license whereas the fact of the matter is that the platform design would be FCA with Google supplying the self-driving know-how. This hardly seems to lend itself to FCA being the contract manufacturer.

On the other hand, Google does not have the resources, or finances to become an OEM. Just the cost of meeting global safety requirements would be crippling to a fledgling manufacturer. Therefore, surely the Holy Grail for any tech company is to partner with, or become a first tier supplier to, an established OEM.

Partnering with Google could also offer Fiat Chrysler additional credibility in the auto tech sector while potentially allowing Google access to hundreds of thousands of slow-selling cars such as the Fiat 500, Chrysler 200 and Dodge Dart to refine the technologies further.

Is this a revolution or evolution

Googles potential decision to choose FCA as a manufacturing partner in its robot cars could signal the start of the long-awaited new technology disruption of the automotive industry.

In a recent report, Morgan Stanley analyst Adam Jonas commented: “This marks a watershed event for the auto industry on two levels: contract manufacturing for high-tech firms and allowing such firms a clear pathway into the brain of the car.”

Taking a contrary position, investment Evercore ISI analyst, Arndt Ellinghorst, believes the deal is more an indication of FCA’s weakness:

“FCA probably has a greater willingness and more flexibility to explore agreements than any other (manufacturer), offering Google better commercial terms. Given FCA is not generating as much cash as its peers it is thus presumably dedicating less to investment in “new technologies.”

Compared to other key motor manufacturers, FCA has invested relatively little in new and possibly disruptive technologies like electric and autonomous cars. It has fallen behind companies like Tesla, GM, Ford, Mercedes and Audi, and its balance sheet reflects high levels of debt.

The automotive landscape is changing

At the North American International Auto Show in January, Marchionne acknowledged that traditional OEMs were regularly engaged in discussion with tech companies in Silicon Valley as they are set to play a significant role in the future of the auto industry.