By Mike Colias and Sara Germano
Volkswagen AG has agreed to invest around $2.6 billion in Ford Motor Co.'s autonomous-vehicle partner, Argo AI, in a deal that values the startup at $7 billion, as the two global auto-manufacturing giants expand an alliance struck earlier this year.
Together the two auto makers help create a deep-pocketed new player in the race to commercial self-driving-car services, while at the same time expanding commitments to develop fully electric cars. As part of the alliance, Ford said it would use a Volkswagen tool kit to help develop and make at least one electric vehicle for European customers starting in 2023.
"The collaboration brings some of the smartest people in the field of autonomous driving together," said VW Chief Executive Herbert Diess at a news conference Friday.
Jim Hackett, the Ford chief executive, said that in turn, Argo will be able to leverage having two global auto makers as clients which should prove crucial for hiring and retaining the best talent.
Both companies emphasized that while they will jointly invest in Argo and share tools, they will make distinct products for their own respective customers.
"We remain competitors, we've been purposeful in designing this," Mr. Hackett added.
Ford has been the majority shareholder of Pittsburgh-based Argo since early 2017, when it agreed to invest $1 billion. VW's investment will leave the two auto makers jointly owning a majority stake in Argo, the companies said.
Argo will work with VW and Ford to develop autonomous-driving technology and eventually supply each of the respective auto makers with driverless systems once they roll out in a few years.
The $2.6 billion investment in Argo includes $1 billion in capital funding as well as the value of VW's 200-person autonomous-driving division in Munich, which the companies placed at $1.6 billion. That group, called Autonomous Intelligent Driving, is run by VW's Audi luxury-car unit and will form the foundation of Argo's presence in Europe, the companies said.
Major auto makers have been consolidating efforts as they race to develop driverless and electric cars and build business models around them.
General Motors Co.'s San Francisco-based Cruise subsidiary is developing an autonomous-driving system with Honda Motor Co., which has agreed to invest $2.75 billion in Cruise. The startup has attracted more than $6 billion in outside investment and was valued at $19 billion after its latest financing round in May, GM has said.
For Ford, bringing VW into its efforts with Argo will give the No. 2 U.S. auto maker a foothold to develop autonomous vehicles for the European market, said Jim Farley, Ford's president of new businesses, technology and strategy. He said the market for driverless-vehicle services in Europe will develop differently from the U.S., with distinct regulations and business models.
"This is going to cost billions to develop this technology," Mr. Farley said in an interview. "Having two incredibly strong [auto makers] with complementary geographic footprints allows us to not only to be smart about the deployment of capital but to attract resources and talent."
For VW, the expanded alliance comes as the German company aggressively ramps up its investments in electric vehicles. Last fall the Wolfsburg-based auto maker said it would earmark roughly $50 billion over the coming five years for electric cars, autonomous vehicles and digital services.
On Friday, Mr. Diess said that through offering use of VW's modular electric tool kit to Ford, the partnership hopes to increase adoption of electric vehicles world-wide.
VW is grappling with a host of challenges. Earlier this year, VW said it would cut 7,000 jobs in effort to trim costs as it focuses on the electric-vehicle market. VW and some of its executives are also facing new legal challenges from the U.S. Securities and Exchange Commission as well as German authorities for the continuing diesel-emissions scandal.
Ford and VW began talks last year that led to the January deal to work together on vans and trucks for markets around the world. The idea to work together on electric and self-driving technology grew from those earlier talks. Both sides have said they aren't interested in any cross-ownership deals with each other.
The race to develop self-driving cars has spawned numerous partnerships between car companies, auto suppliers and tech companies -- all with the goal of solving what GM Chief Executive Mary Barra has called "one of the biggest technical challenges of our time."
German luxury-car rivals Daimler AG and BMW AG are working together to develop driverless cars and smartphone-based mobility services. Alphabet Inc. 's Waymo unit, considered by many analysts to be furthest along in technical development, is working with several big auto makers, including Fiat Chrysler Automobiles NV, France's Renault SA and its alliance partner, Japan's Nissan Motor Co.
The partnerships are especially crucial for the German auto industry, which is a pillar of the domestic economy and which has been dogged by a steady stream of profit warnings and management shake-ups in recent months.
Also on Friday, Daimler issued its second profit warning in three weeks -- its fourth within a year -- citing its own ongoing challenges from Dieselgate.
"If we still want to play a leading role going forward," said Hubert Barth, chief executive of Ernst & Young Germany, "we have to join forces because the competitors aren't sitting within the country anymore."
Consulting firm AlixPartners LLP forecasts that about $45 billion will be spent on developing autonomous vehicles globally by 2025.
"This is a time, talent and capital-intensive business," Argo Chief Executive said Bryan Salesky said in an interview. "I think you're going to continue to see consolidation as those realizations set in."
Ford and Argo have been testing driverless cars, with safety drivers at the wheel, in five U.S. cities, including Miami and Washington, D.C. The companies plan to offer an autonomous-vehicle service sometime in late 2021, Mr. Farley said. He declined to say whether that would involve robot taxis, commercial delivery or other services.
Pittsburgh-based Argo has grown from about a dozen employees since Ford's early 2017 cash infusion to about 500 people. Formed out of the robotics program at Carnegie Mellon University, the company will benefit from a second customer in VW and from having its artificial-intelligence system learn from Europe's different driving conditions, Mr. Salesky said.
Write to Mike Colias at Mike.Colias@wsj.com and Sara Germano at Sara.Germano@wsj.com