Toyota's Surprising Gamble

"By partnering with Tesla, my hope is that all Toyota employees will recall that 'venture business spirit,' and take on the challenges of the future."
-- Toyota CEO Akio Toyoda

Toyota (NYSE: TM  ) surprised the industry last week by announcing a $50 million investment in niche electric vehicle producer Tesla Motors, best known for its hot-performing Roadster sports car. The companies also announced an agreement to "cooperate on the development of electric vehicles, parts, and production system and engineering support," as well as Tesla's purchase of Toyota's recently idled New United Motor Manufacturing Inc. ("NUMMI") plant in northern California.

It's a no-brainer to see what Palo Alto, Calif.-based Tesla gets out of this deal: a huge credibility boost from the association with Toyota and a world-class factory right in its Silicon Valley backyard just as it's putting the finishing touches on its upcoming IPO.

But why would Toyota do this? It's not like it needs Tesla's technology. The Japanese giant is already one of the world's leaders in hybrid and electric vehicle technology -- maybe the leader, arguably ahead of key rivals Honda (NYSE: HMC  ) and Ford (NYSE: F  ) . Toyota has been mass producing hybrids for over a decade and has plowed tremendous research and development resources into building a sustainable position of leadership.

So what happened?

Akio Toyoda, car geek?
The story making the rounds is that Toyota CEO Akio Toyoda, a sports car enthusiast, let it be known that he wanted to test-drive a Tesla Roadster. Tesla CEO Elon Musk, smelling an opportunity, jumped to make it happen, with himself in the passenger seat. Toyoda was impressed with the car and with the company's attitude, and offered Tesla a small (by Toyota standards) investment and a deal on the NUMMI plant.

It might have been that simple; Toyota making a modest venture investment in a company that avidly follows monozukuri, Toyota's much-lauded approach to manufacturing. And while the quote from Toyoda at the top of this article sounds like typical Japanese executive boilerplate, there is merit to the idea that a large organization can be energized by association with a small, entrepreneurial company.

But there were some more concrete motivations for Toyota here:

  • Solving the NUMMI problem. Toyota's decision to close NUMMI earlier this year -- the company's first-ever factory closing -- was wildly unpopular in economically hard-hit California, and was a frequent bone of contention during congressional hearings. Having it reopened should restore some of that lost goodwill, even if only a fraction of the plant's 4,500 former workers are employed at first.

  • Green goodwill. Toyota has gone to great lengths in recent years to paint itself as the greenest of the big car companies. Investing in Tesla will only burnish those credentials, at a moment when Toyota's credentials can use all the burnishing they can get.

  • Solving the NUMMI problem, part 2. It's not news that auto sales in the U.S. are running sharply below precrash levels. Right now, Toyota has more North American manufacturing capacity than it can use; that's why NUMMI was closed. Since NUMMI is a big factory, much bigger than Tesla really needs, it's possible that Toyota is using this deal as a way to hold it in reserve. Should sales pick up, Toyota might be able to build vehicles alongside Tesla's operations.

Long story short, the investment makes sense for Toyota from a number of different perspectives. But what does it mean for Tesla? And more to the point, what does it mean for investors pondering Tesla's upcoming public sale of shares?

Open questions for Tesla
Details of the deal haven't yet been revealed, probably because they're still being worked out; Toyoda's test-drive reportedly happened just a few weeks ago. One thing we do know is that it may be awhile before Tesla actually sees Toyota's cash. Toyota's investment will be made in a private placement that is set to close immediately after Tesla's IPO closes. The IPO is expected later this year, but no date has been announced.

Clearly, the Toyota link and the NUMMI factory make Tesla's IPO seem like a better bet today than it did a few months ago. But there are still unresolved questions. For instance, where does Daimler (NYSE: DAI  ) fit into this? Mercedes-Benz's corporate parent bought a 10% stake in Tesla last year. One condition of that investment gave Daimler first right of refusal if any other automaker were to try to buy Tesla. How does this square with Toyota's involvement?

One last thought. Tesla has portrayed itself as a different kind of car company -- a smart and flexible Silicon Valley start-up, not a hidebound Detroit colossus. But NUMMI's labor force -- skilled, local, and presently unemployed -- was represented by (speaking of Detroit colossi) the United Auto Workers. Rehiring some of those folks seems like a smart move, but it probably means a UAW contract, with all of the baggage that that entails.

Is Tesla ready to go there? We'll find out soon enough.

Fool contributor John Rosevear owns shares of Ford, which is a Motley Fool Stock Advisor choice. You can try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2010, at 5:06 PM, baldheadeddork wrote:

    I agree with you John that Toyota didn't need anything from Tesla to build electric or hybrid cars, and I think its at least as unlikely that Tesla will get components like dashboards or suspensions from Toyota for its Model S sedan.

    I've got a cynical feeling about this one. Tesla gets a marquee partnership and some much-needed cash. Toyota gets a little bit of leverage over the California Congressional delegation that has been beating it mercilessly over SUA and closing NUMMI, a way to get out of the ongoing conflict with Fremont officials about paying millions to clean up and repurpose the plant, and one of the least-expensive rounds of PR they've bought in the last six months.

    If I'm right, if Toyota ever makes a vehicle with Tesla or if a Tesla ever rolls out of Fremont is irrelevant.

    One last thing: The Fremont plant was world class while Toyota and GM were making cars there. Now it's an empty building at best, and an assembly facility configured in ways they can't use (like making 400K cars a year) at worst.

    Giving Tesla this plant would be like giving a student pilot a 747.

  • Report this Comment On May 27, 2010, at 9:36 AM, TMFMarlowe wrote:

    baldheadeddork... yeah, for Toyota it cleans up that PR trouble and keeps the plant's capacity in their back pocket in case it's needed. $50m well spent on their part.

    For Tesla, here's what I keep coming back to: They just bought themselves a UAW contract (or they're going to hire unskilled folks to run the plant for them, which would be entertaining but dumb). They might figure out how to manage the plant, but can they figure out Detroit-style labor relations?

    John

  • Report this Comment On May 27, 2010, at 4:42 PM, baldheadeddork wrote:

    I think the UAW question falls into the 747-for-a-student-pilot part of this deal. Tesla will have to worry about Nissan forcing them out of existence long before the UAW becomes a problem.

    But the real reason I stopped by, did you see the news about Tesla's IPO filing today? Toyota didn't give them NUMMI as part of the deal, Tesla paid Toyota $42 million for the facility.

    If I'm understanding this correctly, Toyota scratched out a check for $50 million, had a press conference, then took back $42 million secretly.

    And for bonus points, the joint venture project that both sides were hedging about "because of the upcoming IPO" doesn't exist. The amended IPO issued today says there is no deal to build cars with Toyota.

    http://jalopnik.com/5549330/tesla-paid-42m-for-nummi-lacks-e...

  • Report this Comment On June 07, 2010, at 4:45 PM, Milligram46 wrote:

    Well late to this party but there really isn't any partnership. As baldheadeddork linked to, it was a funny money exchange, and Tesla only agrees to work with Toyota on a vehicle after a THIRD generation vehicle sees the light of day. There is no real news here when you dive into the "deal."

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