The big bet announced Friday comes just a few months after the Pittsburgh startup, Argo AI, was created by two alumni of Carnegie Mellon University's robotics program, Bryan Salesky and Peter Rander.
Salesky formerly worked on self-driving cars at a high-profile project within Google -- now known as Waymo -- and Rander did the same kind of engineering at ride-hailing service Uber before the two men teamed up to launch Argo late last year. Argo had been considering whether to raise money from venture capitalists, the conventional fundraising channel for startups, before opting to become an independent subsidiary of Ford instead.
Ford is spreading its $1 billion investment over a five-year period.
The alliance between Argo and Ford aims to combine the spunk and dexterity of a technologically savvy startup with the financial muscle and manufacturing know-how of a major automaker.
The unusual deal marks the next step in Ford's journey toward building a vehicle without a steering wheel or brake pad by 2021 -- a vision that CEO Mark Fields laid out last summer.
The decision to turn to Argo for help is a tacit acknowledgement that Ford wouldn't be able to pull it off on its own.
"This is likely a realization that Ford is behind relative to companies like GM, Audi, Volvo, Waymo and Uber, and is trying to catch up," said Raj Rajkumar, a Carnegie Mellon computer engineering professor who leads the school's autonomous vehicle research.
Ford is counting on Salesky and Rander to hire about 200 employees during the next year while working on the core technology of its autonomous vehicle -- the "virtual driver" system.
That will serve as car's "brains, eyes, ears and senses," said Raj Nair, Ford's chief technical officer who also leads the company's product development.
Competitors such as NVIDIA have developed artificial intelligence that learns about different situations as it's tested on roads, something that is almost essential for an autonomous car to function in heavy traffic on city streets.
In return for its funding, Argo will design its driverless system exclusively for Ford and then have a chance to license the technology to other automakers in the future.
If Argo's system turns out to be far ahead of anything else on the market, the subsidiary could eventually be worth substantially more than it is now. Argo employees, who will work from offices in Pittsburgh, Michigan and the Silicon Valley, will be given stock in the subsidiary as part of their compensation packages so they will be enriched if their Argo's technology becomes a hot commodity.
Ford isn't the first company to spend huge sums to obtain more experience and skills in robotics. Uber bought autonomous trucking startup Otto for an estimated $680 million last summer primarily to get Otto's engineers on its team working on driverless vehicles. Otto co-founder Anthony Levandowski, another former Google engineer, is now overseeing Uber's testing of driverless cars in Pittsburgh and Arizona.
AP Auto Writer Tom Krisher in Detroit contributed to this story.