Coopetition to stay ahead on the road to autonomous driving: The Case of Mercedes-Benz and BMW

Founded in 1926, Mercedes-Benz is one of the oldest and most renown luxury car manufacturers in the world. As part of the Daimler AG, the Germany-based company currently employs 170,000 people worldwide and reported revenues of €98.6 billion in 2020. The company is split into Mercedes-Benz Cars and Mercedes-Benz Vans. Mercedes Benz is working towards electrifying its entire portfolio by 2022. In doing so, it is driving the electrification of the luxury car industry.

On July 4, 2019, Mercedes-Benz and BMW announced a long-term development partnership for autonomous driving involving 1,200 specialists from both companies. The focus of the alliance was the joint-development of cutting-edge technologies for automated freeway driving as well as automated parking, with the ultimate goal of commercializing level 4 self-driving cars (i.e., fully autonomous vehicles) by 2024. With reported revenues of 99 billion euros in 2020 BMW is Mercedes-Benz’s key competitor in the luxury car market, thereby making the alliance a prime example of coopetition. The competitive rivalry between the two companies is one of the longest-running ones in automotive history, spanning over a 100 years.

Source: AutoBuzz.my

How could the alliance benefit Mercedes-Benz?

Such an alliance between two bitter rivals would probably not have happened 5-10 years prior to the alliance. However, new technologies and new entrants (e.g., Tesla) had been disrupting the automotive industry, forcing incumbent carmakers to bundle their resources. Apart from the obvious commercial objective, i.e., developing technologies that would enable Mercedes-Benz to start selling level 4 autonomous cars by 2024, there were several ways in which this alliance benefited the company. First, bundling its R&D efforts with BMW allowed Mercedes-Benz to share the huge R&D burden that came with developing automated driving technology. Second, together these two influential car makers could set standards to shape the way autonomous vehicles would be produced. Mercedes-Benz could thus fortify its market-leading position in the luxury car segment.

Third, the alliance provided Mercedes-Benz with valuable learning opportunities. BMW had been working on autonomous driving since 2006 and was trialing the latest technology in more than seventy test vehicles around the world. The alliance provided Mercedes-Benz with the opportunity to access and to assimilate this knowledge. Finally, the alliance (if successful) could have significantly strengthened Mercedes-Benz’s existing product offering. Mercedes-Benz was the only OEM in the world that was so well-positioned to apply a scalable automated driving solution “in every relevant context”. The company could not only apply the new technology in its cars and vans but also across the portfolio in Daimler Trucks & Busses.

Was BMW the appropriate alliance partner?

Despite being Mercedes-Benz’s key competitor, there were several reasons why BMW seemed like a good partner to jointly develop the cutting-edge technologies necessary for the commercialization of autonomous cars. To begin with, BMW had been working on autonomous cars for over a decade and with an R&D budget of almost 6 billion euros in 2019, this was likely to be continued in the alliance with Mercedes-Benz. Next to that, the two carmakers were already collaborating before the alliance. Back in 2015, they joint forces together with Audi to develop mapping and navigation technology under the “Here” banner. The partnership had enabled the car manufacturers to successfully compete with larger mapping companies such as Google Maps and TomTom. This previous collaboration with BMW is likely to have increased Mercedes-Benz’s partner-specific absorptive capacity, as it led to a high frequency of interactions between the two companies which enabled Mercedes-Benz and BMW employees to know each other well enough to know who knows what and where critical expertise resides within each firm.

"A pair of brothers with different mothers"

Also, the two companies were very similar in terms of both national and corporate culture. Both companies stood for high quality German craftsmanship as well constant innovative pursuits. Some had even called the two companies “a pair of brothers with different mothers”. Such cultural similarities are found to be positively associated with alliance success. Finally, there was a significant overlap in the companies’ R&D pipelines. Both Mercedes-Benz and BMW had been working independently on autonomous cars for years and combining these R&D efforts was expected to increase the chances of commercializing the revolutionary technology. Yet, despite the above mentioned arguments that clearly depict BMW as the ideal alliance partner, challenges soon started to emerge after the formation of the alliance.

What were the main challenges of Mercedes-Benz to realize the alliance goals?

The first challenge that Mercedes-Benz faced in realizing the goal of the alliance was managing the trade-off between cooperating to develop the new technology and competing to capture value from it. In the alliance contract, the two firms agreed that, once successfully developed, they would each independently implement the new technology in their cars. Thus their plan was to cooperate to set the new standard for autonomous driving and then later compete within those standards. However, the fact that the companies were fierce competitors made it very hard to find the right balance. By sharing its proprietary knowledge, Mercedes-Benz facilitated joint value creation but at the same time ran the risk of losing its competitive edge and ultimately its market-leading position to BMW. This paradox of openness limited the amount of knowledge that was exchanged as well as the cross-fertilization of ideas.

The second challenge that Mercedes-Benz faced was related to the high degree of technological overlap with BMW. Both companies essentially operated in the same technological areas which was largely due to the fact that they built remarkably similar cars. Experts have found that such high degrees of technological overlap can considerably reduce learning in the alliance. Overlapping knowledge bases between engineers from Mercedes-Benz and BMW greatly reduced the novelty of the knowledge that could be shared in the alliance.

A third challenge that limited learning in the alliance was the not-invented-here-syndrome (NIHS). Since inventing the first modern car back in 1886, engineers from Mercedes-Benz have had an impressive track-record of industry-changing innovations. This may have led to overconfidence in internal R&D capabilities and suspicion towards external sources of knowledge. Engineers from Mercedes-Benz engineers carried this attitude into the alliance with BMW, leading them to degrade valuable inputs from the BMW engineers, who had already been working on autonomous cars for years. Taken together, these three challenges question Mercedes-Benz’s choice for BMW as an alliance partner.

What was the outcome of the alliance?

On June 19, 2020, just 12 months after the start of the alliance, the companies announced the end of their partnership. The high costs associated with creating a shared technology platform as well as the economic downturn caused by the COVID-19 pandemic were given as reasons for the decision. In my opinion, the goal of the alliance was clearly not realized: neither of the companies were even close to commercializing autonomous vehicles. Also, neither of the companies were able to strengthen their product portfolios or set new standards regarding autonomous driving. As an outsider it is hard to judge to what extent Mercedes-Benz was able to exploit learning opportunities. Given the fact, however, that the alliance was ended so quickly, it can be assumed that learning was limited.

"Mercedes-Benz and BMW could not create the novel recombinations of knowledge required to arrive at a breakthrough"

So what went wrong? Why did two companies, that previously worked together successfully, fail to innovate together? I believe that Mercedes-Benz’s prior collaboration history with BMW only partially mitigated the three challenges mentioned above. It is likely that the prior collaboration had led to a certain level of trust between the companies which reduced the need for formal safeguard mechanisms to minimize opportunistic behavior. Also, prior interaction with BMW engineers may have taken away some of the suspicion of Mercedes-Benz engineers. Nevertheless, prior collaboration had led to even more technological overlap and further decreased the novelty of knowledge that could be exchanged. As a result, Mercedes-Benz and BMW could not create the novel recombinations of knowledge required to arrive at a breakthrough technology for autonomous driving. This raises questions regarding the suitability of BMW as an alliance partner in the first place.

In conclusion, BMW was not the appropriate alliance partner for Mercedes-Benz. Rather, Mercedes-Benz would have probably benefited from partnering up with a company with medium technological overlap as this would have provided a balance between familiarity and novelty of external knowledge. Since then, Mercedes-Benz has changed its strategy. In 2020 it entered into a partnership with chip-maker Nvidia to leverage the company’s AI and software expertise in a pursuit to develop breakthrough autonomous driving technologies.