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Cisco Systems, Inc. (CSCO), Google Inc (GOOG), International Business Machines Corp. (IBM): A Big Alliance?

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I can’t help but wonder what Google Inc (NASDAQ:GOOG) will name its car if reports prove accurate that it’s teaming with International Business Machines Corp. (NYSE:IBM) and German auto components maker Continental AG  in what could be an initial step in developing self-driving vehicles.

The Big G, Big Blue & Continental AG alliance

Continental is close to teaming with Google Inc (NASDAQ:GOOG) and International Business Machines Corp. (NYSE:IBM) to develop and produce autonomous driving systems, according to an August 21 Reuters’ article, which cited German newspaper Frankfurter Allgemeine Zeitun. Reportedly, Continental will announce the pact(s) at the Frankfurt Car Show, which runs from September 12 through September 22.

Google Inc (NASDAQ:GOOG)

There’s some buzz that Google Inc (NASDAQ:GOOG) is contracting with Continental to produce the systems because it hasn’t been successful in convincing any automakers to integrate its self-driving technology into their vehicles. That’s a likely possibility  — $75,000 or more has been a commonly thrown around cost for Google Inc (NASDAQ:GOOG)’s system. So, it would be cost-prohibitive to integrate into all but very high-end vehicles.

However, the desire to produce the systems as soon as possible is also surely being spurred by Google Ventures’ just announced $258 million stake in Uber, an on-demand car service. This is Google’s investment arm’s largest investment ever and represents 86% of its $300 million a year fund. There’s no doubt that Google plans to incorporate the autonomous driving systems as soon as technologically and legally possible into vehicles for use by Uber. The Google-Uber teaming could not only be disruptive to taxi and limo services (especially once the cost of paying drivers is eliminated), but also give Google Inc (NASDAQ:GOOG)’s nascent same-day delivery service a competitive advantage over Amazon’s, eBay’s, and others’.

Where does IBM fit in?

Continental’s a natural partner, as it’s a leading developer and manufacturer of auto systems. Further, like Google, it’s been heavily investing in R&D related to autonomous driving systems.

But International Business Machines Corp. (NYSE:IBM)? The initial spate of articles out on this story say zip about IBM’s involvement. However, Google did purchase thousands of patents from IBM in 2011 and 2012, some of which were related to auto safety and self-driving vehicle technology. So, obviously International Business Machines Corp. (NYSE:IBM) has been involved in related research going back some time. While well-respected in computing-related fields, International Business Machines Corp. (NYSE:IBM)’s been innovative in a more broad range of tech areas than it seems many realize.

And future steps?

Surely, Google plans to incorporate autonomous driving systems into Uber’s vehicles. Given the commercial potential of these vehicles, system cost is not nearly as significant a factor here.

In addition, Google Inc (NASDAQ:GOOG) could also license the technology to automakers and/or build its own vehicle. However, cost is a significant factor in both these scenarios. While Google seems to have the lead in developing self-driving vehicle technology, there are others — including Volkswagen and Volvo — working on this technology. So, future licensing can’t be viewed as a sure thing anyway. Whether or not Google decides to produce its own vehicle — by contracting out production — remains to be seen. That seems a very remote possibility, but never say never.

Investment implications?

Google and IBM are huge, and whatever comes of a jointly developed autonomous driving system is likely to be a drop in their respective revenue buckets and not contribute anything to earnings for awhile. So, we’ll hold off on speculation until there’s more info.

Continental seems a potentially interesting investment angle for those who are OK with highly cyclical stocks. And given it’s a German company which trades over-the-counter in the U.S., some might not be familiar with it. So, let’s briefly look under its hood.

Continental has a $32 billion market cap and is Europe’s second largest car parts manufacturer. Its automotive division — which accounted for 60% of revenue in Q2 — develops and produces brake systems, driver assistance systems, powertrains, IT systems, etc., for passenger vehicles and light trucks. Its rubber division — which accounted for 40% of revenue in Q2 — makes tires for passenger and commercial vehicles, and serves other industrial markets.

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