GM and Honda deepen EV partnership to cut costs

Oover the past decade, General Engines (NYSE:GM) and Honda engine (NYSE: HMC) have found many opportunities to work together to develop new technologies and reduce costs. The two automakers have focused much of their cooperation on new energy vehicles and self-driving technology.

Last week, GM and Honda expanded their relationship in a bid to make electric vehicles (EVs) more affordable than ever. This partnership could potentially position GM and Honda as the world’s largest electric vehicle makers within a decade.

Costs were already the focus

The early stages of the cooperation between GM and Honda mainly focused on the development of new technologies like fuel cells and autonomous vehicles. More recently, however, automakers have primarily focused on exploiting the benefits of their combined scale to reduce costs. (Together they sold over 13 million vehicles in 2019.)

In April 2020, the companies announced they would be co-developing a pair of electric vehicles for Honda for the North American market. GM will supply its Ultium battery system and EV platform, while Honda will design the interior and exterior of the Honda Prologue (coming in the 2024 model year) and an unnamed Acura EV SUV that will follow. Both models will be built at GM plants, which will increase capacity utilization.

Later in 2020, GM and Honda unveiled plans for a full-fledged automotive alliance in North America. As the companies put it at the time: “A North American alliance between Honda and GM would leverage the best technologies and generate substantial cost savings through shared vehicle platforms and propulsion systems, joint purchasing, potential manufacturing efficiencies and other collaborative efforts. … GM and Honda also plan to share R&D and engineering costs for certain future co-developed vehicle and propulsion platforms.”

In short, GM and Honda are finding ways to develop unique vehicles without unnecessary duplication. This will allow them to unlock cost savings behind the scenes while maintaining distinct identities in the minds of consumers.

Expand EV collaboration

Last Tuesday, GM and Honda announced deeper cooperation in the electric vehicle market, with the explicit aim of cutting costs.

First, automakers will develop a series of vehicles using a “new global architecture” that incorporates the next generation of GM’s Ultium battery technology. They will also collaborate on production strategies. This will allow them to produce affordable electric vehicles at scale from 2027, with a particular focus on the popular compact crossover segment. The companies expect vehicles created through this partnership to have starting prices below $30,000.

GM and Honda plan to develop electric vehicles even cheaper than the upcoming Chevy Equinox EV (pictured). Image source: General Motors.

Second, GM and Honda intend to work together on future battery technologies for electric vehicles, including solid-state batteries. Again, the primary objective is to reduce costs.

Affordability is key to mass market success

Today, You’re here (NASDAQ: TSLA) is by far the largest manufacturer of electric vehicles in the world. However, Tesla’s long-term plan to produce increasingly affordable electric vehicles has backed off lately. The cheapest version of the Model 3 – its “$35,000 car” – now costs around $50,000 including destination charges. Additionally, Tesla has dropped plans to produce an even cheaper car with a starting price of around $25,000 for the foreseeable future.

Given supply constraints and strong demand for high-priced electric vehicles from early adopters, Tesla has good reason to focus on ramping up production of its existing models and the Cybertruck. However, price will be a key factor in purchasing decisions in the mass market. By continuing to focus on building electric vehicles that cost $50,000 or more, Tesla is leaving an opening for rivals to win with consumers who can’t afford to spend that much on a vehicle, i.e. most of the market.

General Motors and Honda are looking to capitalize on this opportunity. GM had already planned to start selling an affordable EV version of the Chevy Equinox compact crossover in late 2023. It’s targeting a base price of $30,000. Vehicles coming in 2027 under the expanded GM-Honda partnership will cost even less, and future battery cost improvements could pave the way for even cheaper electric vehicles.

If GM and Honda use their combined scale to develop the cheapest EV platform, they will be able to price their EVs at levels that rivals cannot match. This would give them the inside track to overtake Tesla to become the volume leaders in the electric vehicle industry by the early 2030s.

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Adam Levine-Weinberg is the owner of General Motors. The Motley Fool owns and recommends Tesla. The Motley Fool has a disclosure policy.

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