Why The Fiat Chrysler Partnership With Alphabet Inc Makes Sense

  • Fiat Chrysler and Alphabet plan to develop about 100 self-driving prototypes based on the car maker's Pacifica minivan.
  • The collaboration is the first phase of a joint project to create autonomous vehicles, and makes good business sense for both companies.
  • Fiat Chrysler could enter similar partnerships with Apple.

Fiat Chrysler (NYSE:FCAU) and Alphabet Inc-A (NSDQ:GOOGL) plan to develop about 100 self-driving prototypes based on the car maker's Pacifica minivan, Bloomberg Technology reported earlier this week.

According to "people familiar with the matter," the collaboration is the first phase of a joint project to create autonomous vehicles. The prototypes will be used by Alphabet to test its self-driving technology, and the companies would remain free to cooperate in driverless technology with other partners.

"This collaboration with Fiat Chrysler Automobiles (FCA) is the first time we’ve worked directly with an automaker to create our vehicles," confirmed Alphabet with a Google+ post. "FCA will design the minivans so it’s easy for us to install our self-driving systems, including the computers that hold our self-driving software, and the sensors that enable our software to see what’s on the road around the vehicle. The minivan design also gives us an opportunity to test a larger vehicle that could be easier for passengers to enter and exit, particularly with features like hands-free sliding doors."

Alphabet is more than doubling its self-driving car fleet with the initial addition of about 100 new 2017 Chrysler Pacifica Hybrid minivans, and hopes that the first few prototypes will be on the road by the end of this year. Alphabet's self-driving cars unit is expected to a become a stand-alone business under Alphabet and offer self-driving car rides for hire, with a business model similar to that of Uber.

Fiat Chrysler Chairman John Elkann said last month that the Italian-American car maker should work with "new industry participants" like Alphabet and Apple (NSDQ:AAPL) rather than compete with them. Similarly, Alphabet seems to prefer working with old industry participants rather than re-inventing the wheel.

Alphabet is the undisputed leader in advanced software for self-driving cars, including sophisticated Artificial Intelligence (AI) subsystems for autonomous driving, computer vision, and navigation. At the same time, since the company is not a car maker, it makes business sense for Alphabet to work with established industry players with the required expertise and infrastructure in place. For Alphabet, the best business strategy is to concentrate on the technology, the more advanced and out of reach of competitors the better, and license it to car makers with non-exclusive agreements.

"In the coming months, our team will collaborate closely with FCA engineers," added Alphabet. "This experience will help both teams better understand how to create a fully self-driving car that can take you from A to B with the touch of a button. Collaborations like these are an important part of realizing the potential of self-driving technology to improve road safety and make transportation more accessible for millions of people."

John Krafcik, chief executive of the Alphabet self-driving car unit, said Fiat Chrysler had a nimble and experienced engineering team, and the hybrid version of the Pacifica was well-suited to Alphabet’s self-driving technology, as reported by The Financial Times. "The opportunity to work closely with [Fiat Chrysler] engineers will accelerate our efforts to develop a fully self-driving car that will make our roads safer and bring everyday destinations within reach for those who cannot drive,” added Krafcik.

The mention of Apple by Fiat Chrysler's CEO Elkann is not casual - in fact, Fiat Chrysler could enter similar partnerships with Apple. "My approach is to be completely open to technology," said Fiat Chrysler CEO Sergio Marchionne in an interview, as reported by the unofficial Apple news site 9to5Mac. "I think the next paradigm of this business is a paradigm that involves the cooperation for technology with the disruptors. Google is one. Apple is another, even Uber."

In fact, Uber is rumored to be planning a fleet of self-driving autonomous cars. The rumors are supported by the strategic partnership with Carnegie Mellon University (CMU) to jointly develop technologies for self-driving cars at the Uber Advanced Technologies Center in Pittsburgh.

Marchionne added that companies like Alphabet and Apple, which are willing to spend a lot of money to break into the automotive sector, are too big to ignore and force traditional car makers to reconsider their role and strategy.

It appears that the Apple Car project is ready for road testing and on track to ship to consumers as early as 2019. The project, codenamed "Project Titan," has been designated internally as a "committed project," with the number of staff working on the project tripled. While the Apple car - or "iCar" - is also being tested and developed in California, according to recent rumors it will be made in Austria by Magna Steyr, a brand-independent automotive engineering and manufacturing contractor, with an initial focus on high-tech, all-electric design cars, in direct competition with Tesla (NSDQ:TSLA) models.

The Wall Street Journal notes that the Alphabet deal is also a small but critical win for Fiat Chrysler, which has been viewed as lagging in rapidly advancing driverless technology. Other major car makers are investing in their own driverless-car technology, but Fiat Chrisler's choice to work with Alphabet instead of re-inventing the wheel seems to make good business sense.

It seems likely that the collaboration will prove to be a win-win deal for both Alphabet and Fiat Chrysler. However, the mid-term impact on the more narrowly focused business of Fiat Chrysler should be comparatively bigger, which is interesting news for investors.

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