GM and Honda join forces as the post-coronavirus consolidation of the auto industry begins

• GM and Honda have announced that they are exploring a strategic alliance in North America.
• The automakers have been working together for decades, but amid numerous challenges to the auto industry — most recently the coronavirus pandemic — their collaboration has intensified.
• Consolidation in the auto industry is overdue, but big carmakers have stalled, hesitatin to risk capital on electric vehicles and autonomous mobility.
• COVID-19 has shown the industry that it can survive a major disruption, however, so we should expect more alliances and possibly more outright mergers to take place in the next decade.
• The bottom line is that great compression of the global auto industry has begun.

Prior to the coronavirus pandemic, the global auto industry faced a period of unprecedented change. Many automakers weren't dealing with it very well, practicing the well-honed art of kicking the can down the road on everything from electrification to self-driving vehicles.

Ironically, the near-total shutdown of worldwide production has shown Big Auto that can actually endure a significant, unforeseen crisis — and motivated the industry to grapple with the dreaded "disruption" it had been avoiding.

This week, General Motors and Honda announced that they would develop an alliance, extending several decades of cooperation that has intensified in recent years as the automakers jointly invested in Cruise, the GM-affiliated autonomous ride-hailing startup now valued at around $20 billion, and pledged to create two new electric vehicles using GM's new Ultium battery technology.

What's interesting about the alliance, then, isn't the fact of its existence. It's that the newly signed "memorandum of understanding" outlines a North American alliance.

Honda has been selling and manufacturing vehicles in the US for decades; GM, the number one US automaker by sales volume, has been around for more than a century. The North American market, comprising the US and Canada, is the world's most competitive.

But it has also calcified in terms of market share. GM leads with just under 20% of new vehicle sales. Honda has a little more than 15%. The percentages never change much, and long-term, going back to the 1950s, GM has seen its once-dominant 50% share steadily eroded.

The new GM is really, really new

Taking share and defending share in this market is staggeringly expensive. And for most of its history, leading up to its 2009 bankruptcy, GM fought for share like no other automaker. Chapter 11 radically revised that attitude, and the efforts of CEO Mary Barra and her leadership team to turn GM into a more agile and effective 21st-century competitor have meant that while market share continues to matter — GM won't needlessly surrender profitable pickup-truck sales — capturing market opportunities matters more.

Enter the alliance with Honda. Effectively, GM is going to help out a competitor in its own backyard.

"An alliance in North America between Honda and GM would leverage the best technologies and generate substantial cost efficiencies from shared vehicle platforms and propulsion systems, joint purchasing, potential manufacturing efficiencies and other collaboration efforts," GM said in a statement. "This would enable both GM and Honda to make greater investments in advanced and next-generation technologies."

Alliances in the car business have a bumpy track record. Daimler's merger with Chrysler was a disaster, leading to ruinous ownership by private-equity firm Cerberus before Chrysler's 2009 bankruptcy and takeover by Fiat. The Renault-Nissan-Mitsubishi alliance, established in 1999 and often pointed to as an example of successful global cooperation, has been in shambles since its architect, chairman Carlos Ghosn, was arrested in Japan in 2018 on allegations of financial malfeasance. (He later staged a dramatic escape.)

However, the industry suffers from excess manufacturing capacity, redundant R&D, and wasted capital, a situation that the late Fiat Chrysler Automobiles CEO Sergio Marchionne excoriated in a now-infamous presentation before his unexpected death in 2018.

The pre-COVID bottom line was that with the electric and autonomous businesses in gestation — EVs constitute just about 1% of worldwide sales, while no autonomous effort has yet generated any significant revenue — carmakers were staring down the unappetizing prospect of both grappling with Marchionne's indictment and finding the resources to keep pace with rapid-growth new entrants like Tesla.

For a gigantic company like GM, the first priority to prepare for an overdue market downturn. Following the Great Recession, US sales gradually recovered and then surged, setting record or near-record annual tallies from 2015 on. Easy credit, pent-up demand, low gas prices, and a comeback for big SUVs meant that GM was banking over $10 billion a year in profits and building up a fortress-like balance sheet, relatively flush with cash.

But those reserves were largely committed to riding out a market decline and avoiding another Chapter 11 while preserving GM's investment-grade borrowing capability. The secondary management challenge was figuring out how to invest in the future — a future that Barra had unequivocally declared was electric.

With the coronavirus crisis receding, carmakers can shift back to worrying about future

In numerous conversations with Barra and her team since she got the job in 2014, I heard over and over again that the company wouldn't know how good it was, post-bankruptcy, until it was tested by fire. Then came COVID-19.

Sales have declined, but the damage hasn't been as bad as many thought, and the sense in Detroit is that the market is coming back faster than expected. GM basically lost 100% of production for more than a month, but the preparations it had begun in 2010 proved effective.

That has emboldened GM to tackle the secondary problem, and to take the bold step of giving up on snatching US market share from Honda. If you can't beat 'em, join 'em. The upshot is that a GM-Honda alliance would represent roughly 25% of the total US market, although the proposed tie-up is concentrated more on new vehicles than on existing segments.

And while GM and Honda do go head-to-head with many products, Honda is strong in segments that GM would like to get out of, chiefly sedans, while the Japanese automaker lacks the big SUVs and full-size pickups that are GM's US stalwarts.

In other words, neither company loses that much in working together to create new vehicles, and Honda stands to gain if GM uses the alliance to back away from sedans and commit those resources to its goal of launching 22 electrified vehicles by 2023. The Accord and the Civic aren't going anywhere, while the Chevy Malibu is living on borrowed time and the Chevy Cruze has already been put to rest.

Apart from the nuts and bolts of the internal-combustion business, what's actually being shared here is less the opportunity of capturing new markets for EVs than the risk of developing vehicle platforms for that market — platforms that have to endure for potentially decades.

In this sense, GM is in the driver's seat, because Honda should be plugging into GM's Ultium efforts. Think of Ultium like an EV's operating system: the more Ultium GM can sell, badged with one of its brands or one of Honda's, the more profitable the investment should be. Honda can stop worrying about catching up on EVs (where it lagged) and ride along with GM, acting as a sort of copilot and providing GM access to some of that aforementioned US market share.

GM and Honda aren't alone on commencing a post-corona consolidation. Ford and VW have been intensifying their collaboration, although VW's share of the US market is far lower than Honda's (VW is a leader in Europe and China, however). FCA and Peugeot are expected to complete a 50-50 merger early next year, under the name Stellantis.

Marchionne was correct in his grim diagnosis of the legacy auto industry's addiction to capital. COVID-19 made his jeremiad impossible to ignore. As 2020 closes out, with the pandemic having decimated global vehicle sales but, crucially, not killed off any big automakers, the industry has collectively realized that now is the time to address its addiction to waste, overproduction, and redundancy and get serious about building transportation for the 21st century.

Nobody wants to go out of business — so almost everybody is going to work together. We'll see if the ugly history of automaker alliances recurs. But for now, the great compression has begun.