GM-Honda North American Alliance May Free Up Capital

General Motors GM and Honda HMC announced a nonbinding North American alliance on Sept. 3. We are not changing our fair value estimate for either firm until we see more details on what profits the alliance may yield, but we like the potential scale benefits around combined purchasing, research, and vehicle development, including sharing common vehicle platforms. No equity stake in each company will be made by the other. Planning discussions begin immediately with engineering work starting early next year. GM and Honda have a history of cooperation, having worked together on hydrogen fuel cells and electric vehicle cell module assembly. Honda invested in GM’s Cruise in 2018 and contributed work to the Cruise Origin autonomous vehicle unveiled this year, while also committing to a $2.75 billion Cruise investment over 12 years. In April, GM announced it will provide batteries to two North American Honda electric vehicles that will be made in GM factories for the 2024 model year.

One way we think the alliance can make sense is by focusing on what each firm is good at, and there is a complement between the two there. GM excels at light-truck models such as full-size pickups and full-size SUVs; Honda does not have a vehicle in those segments. Honda could use GM to develop something, though those segments are dominated by the Detroit Three and GM has over half the SUV segment in the U.S., so it will be interesting to see if GM lets Honda into this area. Battery electric vehicles and connectivity make more sense as Honda needs GM’s Ultium battery expertise and GM’s OnStar. In exchange, perhaps GM will use Honda’s small-car expertise to replace the subcompact Chevrolet Sonic, which is ending Michigan production soon, or eventually move the Chevrolet Malibu midsize sedan to a Honda platform. We see the agreement as a low-risk and potentially high-reward move for both firms, and their prior history lowers the risk of tension and poor cooperation.

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