Here's What Investors Need to Know About Ford's Partnership With GlobalFoundries

Ford Motor Company (F 0.66%) and semiconductor manufacturer GlobalFoundries (GFS -0.35%) recently reached an agreement that could have wide-ranging effects on the chip shortage the auto industry is dealing with right now. In this segment of Backstage Pass, recorded on Nov. 19, Fool contributor John Rosevear explains. 

John Rosevear: Well, speaking of iconic American companies splitting up, Ford is not one of them. [laughs] It's not what's happening. The background here, before we get into the deal, is that, I think probably a lot of our viewers know this, there's a shortage of chips. Specifically, semiconductors. Specifically, a shortage of the older and simpler microcontrollers that cars are full of. This is because chip manufacturing pivoted during the pandemic to making more chips for all of the consumer devices and computers that people stuck at home were buying. They've also been some one-off events. There have been COVID closures. There was a fire at a big Japanese chip factory that hit Ford in particular earlier this year, and so on.

Now, though, many things that are being rethought through the pandemic, as the auto companies -- at least the more leading-edge auto companies -- are moving to electric vehicles, much more sophisticated software and onboard electronics. They're starting to think about more-sophisticated chips.

I think that's where companies like GlobalFoundries have seen an opportunity. What has happened is Ford and GlobalFoundries -- GlobalFoundries is a chip manufacturer that was spun out of AMD about a dozen years ago. I think 2009, I think. They make chips -- they have announced a strategic collaboration. What this seems to mean is that they've agreed to a framework to talk about more specific ways in which they could collaborate.

Before you say, "Oh, my god, smoke and mirrors," it's worth noting that Ford has done this in the past. A couple of years ago, they came out with Volkswagen and said, well, we've signed a strategic collaboration deal. We're going to look at a bunch of ways to collaborate. Then they came out later and said, we have a deal. Ford is going to build pickups for Volkswagen. We have a deal, VW is going to supply electric vehicle parts to Ford for a new product in Europe, et cetera, and it's built. This could very well follow the same pattern. For now, however, the deal is, and they said this in the press release, nonbinding.

But it could include things like custom chips for advanced driver-assist systems, custom chips for battery management in electric vehicles, networking for connected cars. And it could also include, and this is a quote, "Expanded semiconductor manufacturing opportunities to support the automotive industry. "

Ford is not taking a stake in GlobalFoundries, GlobalFoundries is not taking a stake in Ford. I suspect that could change in time, though. Notable quote from Ford CEO Jim Farley, who is a forward-thinker: "This agreement is just the beginning and a key part of our plan to vertically integrate key technologies and capabilities that will differentiate Ford far into the future."

We talked about another deal a while back that Ford announced with SK Innovation, a Korean battery maker. They're jointly building battery factories, several of them, for electric vehicles. Ford has a slew of electric vehicles coming and will need massive battery capacity. But the deal with SK Innovation, they structured it as a joint venture, which gives Ford some control over these key high-tech parts of its supply chain.

It does not want to be buying batteries as commodities on the global market, it wants to have control over the manufacturing. I think given the events of the last year or two, they are now thinking the same way about chips. We can have custom chips, they can be tailored to our products. We can develop chip design expertise in-house at Ford, and make better products that allow us to differentiate ourselves.

Another issue in the auto industry is as we all move to electric vehicles, differentiation. Why buy a Ford over a Chevy, or Honda, or a BMW? That question will be different from what we've seen in the past. "We make great engines or whatever." If it's all batteries and motors, you got to sell the car somehow and this technological embedding sophisticated capabilities into the vehicles is a way that a company like Ford can differentiate itself from rivals. The Wall Street Journal, as usual, Mike Colias, who is their very good auto reporter, got some quotes on this.

One of the things, he talked to Chuck Gray, who is vice president of vehicle embedded software and controls at Ford, and what he said is, "We feel like we can really boost our product performance and our tech independence at the same time."

That's really the nut of it here: We can control this technology, we can control the manufacturing of the technology, and we can get more performance, more features into our vehicles that will be differentiators. In the near term, Chuck Gray said, "This is going to enhance chip supplies for Ford, possibly for other automakers as well, if these two companies work together to build new chip factories tailored to automotive chips in the United States."

Longer term, they're going to be producing higher-end chips for vehicles, as we talked about, integrated chips for advanced driver-assist services, maybe even self-driving in time. The last question I had is: Is it possible that Ford could acquire GlobalFoundries? I don't think so, because it has a $34 billion market cap, [laughs] which is more money than Ford has in its pocket, really than any automaker has in it's pocket. Although I suppose Tesla is somebody who could trade stock for it. Perhaps Rivian could trade stock for it, who knows?

GlobalFoundries is a decent-size company, $6 billion in revenue in 2020. This deal, on the one hand, it sounds like it's a deal to talk about deals. On the other hand, Ford's history suggests that when they do something like this, there is real intent here. It's hard to see exactly what could come up from this beyond what they've said, but I would take some at their word that this is what they want to do.