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Honda, Toyota’s investments in autonomous vehicles could prove pricey

How much capital will it take before Japanese fims strike gold?

SoftBank’s Masayoshi Son. Photograph: Bloomberg

Thu Oct 4 2018 - 08:01

Japan is leaping into the future of cars, courtesy of SoftBank Group.

On Wednesday, Honda announced a $2.75 billion investment in General Motors' self-driving subsidiary Cruise, a departure from the Japanese carmaker's tight-fisted approach to technology spending. That follows SoftBank Vision Fund's $2.25 billion outlay just months ago. With these, GM Cruise is now valued at close to $15 billion.

Then, at a briefing Thursday, Toyota and SoftBank unveiled MONET Technologies, a joint venture to develop mobility offerings that include ride-hailing and autonomous driving. Junichi Miyakawa, SoftBank's new chief executive and technology chief, said that Japan needs to catch up in the global race towards autonomy - and what better optics than to bring together powerhouses of capital and cars? Whether they'll be able to address the technology is another issue.

SoftBank's Masayoshi Son and Toyota's Akio Toyoda's also noted the importance of moving quickly. The new venture will start with under $20 million of initial capital.

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Both have already announced billions of dollars of investment in these areas, including putting money into Grab and Uber and autonomous vehicles.

That Japan’s car companies are cutting big checks for such futuristic technologies indicates one thing: They’re looking for a way out of the current pall, and fast. The question is how much capital will go in before they strike gold?

The stakes are high. Honda initially will put $750 million of equity, equivalent to a 5 per cent to 6 per cent stake, into GM Cruise. Over the next 12 years, it will add $2 billion, a signal of the long road ahead.

Whatever car ends up being developed, Honda won’t even get to produce it - only GM will, according to the current plan.

Going by Cruise’s spending needs so far, that looks like a conservative estimate. It posted a $154 million loss in the quarter to June and its costs were $200 million. GM estimates it will spend $1 billion (up from initial plans) on Cruise this year and another $1.3 billion in 2019.

And realistic timelines remain up in the air. As GM's president Daniel Ammann said on an investor call Wednesday, while the company is moving fast to develop these technologies, "the timing of driverless deployment will be gated by" safety and regulations that are still in nascent stages.

Meanwhile, the structure of SoftBank’s investment in Cruise shows how uncertain timing is and how much capital is actually being put to work.

The Vision Fund’s investment was made in two tranches: The first $900 million was equity; the remaining $1.35 billion will only come when “Cruise AVs are ready for commercial deployment” and subject to regulatory approval. The companies expected commercialisation at scale by early 2019. In short, Cruise has taken in about $5 billion just this year, of which only $1.65 billion materializes immediately as equity. The rest comes with caveats.

Jumping on the SoftBank bandwagon in the hope that it takes you to the future isn’t necessarily a reliable strategy. The company has spread its bets far and wide, throwing hundreds of millions of dollars at a host of autonomous-vehicle technologies.

Then there is the question of whether Honda backed the right horse.

The company seems to have ended up with Cruise over Alphabet's Waymo, which it was in talks to work with on autonomous deliveries. Waymo has a significant lead over Cruise not only in terms of physical miles tested but also its superior data-processing. Alphabet's self-driving car company also has a partnership with Jaguar Land Rover Automotive - the two are planning to produce an autonomous Jaguar I-Pace - and a fleet of Chryslers on hand.

For Honda, the reality is it needs Waymo more than the other way around, and an equity partnership would likely be far more expensive.

Throwing capital at the problem may be one way, but it isn’t a sure shot. – Bloomberg

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