The auto industry is marked by fierce competition. Yet with automakers forced to balance investments in new technologies like electric vehicles (EVs), autonomous vehicles (AVs), and fuel cells with updates to their current portfolios, collaboration has become essential, too. Even the largest global automakers don't have enough scale to make all of the necessary investments without putting pressure on their earnings and cash flow.

Some automakers have used mergers and acquisitions to gain scale. In other cases, they have turned to partnerships rather than full-blown mergers. Last week, General Motors (NYSE:GM) and Honda Motor (NYSE:HMC) announced a broad alliance in the North American market to boost their profitability there.

Longtime partners

GM and Honda have worked together on various projects for more than two decades. However, they have deepened their relationship considerably over the past several years.

In June 2018, GM and Honda agreed to collaborate on EV batteries, with GM selling full EV battery packs (using its new Ultium architecture) to Honda, which the latter would use in vehicles it designed itself.

A few months later, Honda paid $750 million for a small stake in Cruise, GM's AV subsidiary. It also committed to invest an additional $2 billion in Cruise over 12 years to fund the development and commercialization of fully self-driving vehicles. While General Motors has now sold several minority stakes in Cruise, Honda is the only other automaker involved in this high-potential endeavor.

A white Chevy Bolt autonomous test vehicle

Honda owns a minority stake in GM's Cruise self-driving car unit. Image source: General Motors.

In April of 2020, GM and Honda expanded their EV collaboration. The companies agreed to jointly develop a pair of new Honda EV models for the North American market that will be ready for the 2024 model year. Honda will be responsible for the interior and exterior design, but the vehicles will use GM's new Ultium EV platform and will be manufactured at GM plants in North America. They will also feature GM's OnStar connected service platform.

Expanding the scope of cooperation

At the time of the April announcement, Honda executive Rick Schostek stated, "We are in discussions with one another regarding the possibility of further extending our partnership." GM and Honda announced the next phase of their collaboration on Thursday.

The two automakers have signed a memorandum of understanding to share common vehicle platforms and propulsion systems in a variety of vehicle segments in North America. They also plan to cooperate with respect to purchasing, R&D, and connected services. GM and Honda will begin planning discussions for co-development projects immediately, and the detailed engineering work will start in early 2021.

The main purpose of this alliance is to reduce costs. By collaborating on R&D, vehicle engineering work, and connected services, GM and Honda will be able to share the burden of investments in those areas. Meanwhile, joint purchasing efforts will give them more negotiating leverage with suppliers. While the automakers won't provide any detailed savings estimates until the terms of the alliance are finalized, each company could realize billions of dollars in cost savings, according to Reuters.

Natural partners

In many ways, GM and Honda are natural partners. GM delivered nearly 2.9 million vehicles in the domestic market last year, while Honda's U.S. deliveries totaled 1.6 million vehicles. Together, they account for more than a quarter of the U.S. market, giving them a meaningful scale advantage over rivals.

On the other hand, they focus on different areas of the market. GM's full-size trucks, SUVs, and vans accounted for more than 40% of its U.S. delivery volume (nearly 1.2 million vehicles) last year. Honda doesn't participate in any of those market segments in the U.S. Conversely, cars and minivans accounted for half of Honda's U.S. volume last year. GM doesn't sell minivans in the U.S., and it has dramatically reduced its car lineup in recent years, with cars set to represent less than 10% of its domestic volume going forward.

GM and Honda are still fierce competitors in the crossover market and also go head to head in midsize pickups. Those are segments where they could potentially generate substantial savings by sharing vehicle platforms and other engineering work. Since the companies don't compete in a meaningful way across large swaths of their vehicle portfolios, they have less to fear from sharing technology in segments where they do overlap.

Close collaboration is critical to the success of any broad auto alliance. The long history of partnership between General Motors and Honda will help in this respect. But it could be several years before investors will be able to evaluate the impact of this new alliance.