Volkswagen tries to play catch-up on driverless tech

VOLKSWAGEN AG's next step into autonomous driving looks like it could be disappointing. But it's also probably the best option the German giant has if it's going to become a serious player in driverless technology.

The world's largest automaker is in talks to invest in Argo AI at a US$4 billion valuation, the automated car company backed by Ford Motor Co, Bloomberg News reported. The deal could be finalised in the next few months.

Argo isn't exactly the top dog with this kind of tech. Automotive consultant Navigant has said that its offering isn't market-leading, and it has a point. General Motors Co's Cruise and Alphabet Inc's Waymo have been at it a lot longer, and Aurora Innovation Inc has a more accomplished leadership team.

The company seems to have a valuation to match. Evercore ISI analysts described the US$4 billion as "a disappointment", with some justification. Cruise was most recently valued at US$15 billion, and startup Zoox at more than US$3 billion. Ford investors hoping to highlight the underlying value of the business as a way to boost the parent firm's share price will understandably feel let down.

VW is something of a late arrival to the driverless party, and it needs to secure key technology. It looks like it has had to take what it can get. Although it has a partnership with Aurora, the prospects for developing that significantly aren't clear-cut - co-founder Chris Urmson seems wary of tying his firm too firmly to any single carmaker, and has at any rate just secured new funding from Sequoia Capital and Amazon.com Inc.

As for the others, Cruise would probably have been too expensive, and Waymo too risky: Honda Motor Co walked away from a tie-up because of concerns it would get little access to the valuable underlying autonomous technology.

VW could go it alone. Indeed, it already has several internal programmes of its own. But talent is scarce, and development is expensive, with mid-level engineers often commanding salaries above US$300,000. Teaming up helps spread the cost, while concentrating the effort and manpower.

The good news for both VW and Ford is that, despite early fears that Silicon Valley was going to dominate autonomous cars, the race to master the technology is more a marathon than a sprint. It wasn't that long ago that there was talk that these vehicles would be hitting the roads in 2020. We're nowhere near that point, and those expectations have been soundly tempered. Being late to the starting line isn't the end of the world.

And as much as Argo doesn't have the same aura as a Cruise or Waymo, it has advantages over much of the rest of the industry. Chief executive officer Bryan Salesky was an early employee of what was then known as the Google self-driving car project, and has now evolved into Waymo; and Argo's Pittsburgh headquarters means it's well-placed to hoover up top artificial intelligence and robotics experts from Carnegie Mellon University. Its access to talent is enviable.

The structure of the deal strengthens the case for looking at it as a prudent move. The two firms are reportedly considering a joint venture. That might mean that each owns 45 per cent of the startup and the founders and employees the remaining 10 per cent. Therefore neither would have to consolidate the losses into their income statement, so investors can potentially avoid the pain suffered by their counterparts at GM, where Cruise's US$728 million loss last year dragged company-wide operating profit 6.2 per cent lower.

VW is playing catchup, but given how long the race has to go, it may not really matter. And if it does follow through with an investment in Argo, it will have taken the best opportunity available. BLOOMBERG