On April 7th, Daimler, Nissan (NSANY), and Renault announced a wide-ranging partnership that will allow them to jointly develop cars that could boost their competitiveness by sharing technology investment costs, gaining scale, and expanding access to new markets. The cooperation will focus on electric cars, passenger cars, and light commercial vehicles. They will also share diesel and gasoline engine technology. The carmakers will take small investments in each other, with Daimler taking a 3.1% stake in Renault and Nissan, while the latter two will each hold 1.55% of the German carmaker. Combined savings from the deal could reach $5.3 billion over five years. 

Daimler hopes the deal will strengthen its competitiveness in the small and compact car segment. Its Smart brand has been struggling lately, so the use of Renault’s small-car expertise should help this brand. The company wants to profit from recent trends toward smaller, more fuel-efficient cars, and also wants to reduce its CO2 footprint. Daimler wants to make it clear that the new partnership would not resemble its merger with Chrysler, which ended in 2007 after nine years. That deal did not meet expectations, as Daimler ultimately took a $30 billion loss on the transaction. This new deal is on a much more limited scale.

Renault and Nissan, which have been partners for a decade, realized last year that they needed a collaborator to help with cost synergies. After searching for a few months, they finally agreed to the deal with Daimler. Besides sharing technology and development costs, the agreement will give Renault and Nissan access to Daimler’s top notch engine know-how. This could be particularly beneficial for Nissan’s luxury Infiniti brand.
These types of partnerships will likely be the norm for the auto industry in the coming years. There is an urgent need for economies of scale, particularly given the recent collapse in demand for vehicles. Costs are also up for the industry as a whole, as it continues to pay for huge investments in green-car and hybrid technologies. Unless a firm is a top auto sales producer, like Toyota (TM), it is becoming more and more difficult to pay for investments in new technologies, and thus the need for alliances. Recent partnerships include Japan’s Suzuki Motor with Volkswagen and Italy’s Fiat with Chrysler. As a result, we anticipate significant mergers, acquisitions, restructurings, and spinoffs in the months and years to come.

However, partnerships may not necessarily be the panacea to automakers’ woes. There have been numerous alliances in recent years that have been disastrous, including Daimler’s deal with Chrysler. There is the presumption that one will save money and be more efficient, but often this is not the case.  And even if an alliance does, work, it could be years before the benefits are realized. The Renault Nissan union has been one of the better deals in recent times, and even it had a difficult start.

As a result, some of the larger auto companies will likely go it alone for the time being. Toyota has said that instead of seeking an alliance, it would trim its operations and focus on a more efficient lineup. Mitsubishi Motors and Honda Motors (HMC) have also shunned deals. Ford (F) has stated that although it is open to partnerships in green-car technology, it would be cautious about making any commitments. These companies believe it is more important to efficiently develop, produce, and market cars, while holding onto key technologies. Independence is something that many of these companies value strongly. Others are worried about dilution of their brand.

All told, we view the Daimler, Nissan, Renault deal favorably. It is big enough that there could ostensibly be significant cost-savings for each company, along with the benefit of technology sharing. On the other hand, the partners could fairly easily unravel the new links if they wanted to, so there is minimal downside risk. From an industry perspective, we do see the trend toward collaboration continuing globally.