Ford's New Partner: Toyota

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Wait, what?

At a hastily called press conference in Dearborn, Mich., on Monday, executives from Ford (NYSE: F  ) and Toyota (NYSE: TM  ) presented a surprise: The companies have agreed to jointly develop a new gas-electric hybrid engine system for light trucks and SUVs.

While major automakers occasionally collaborate on joint ventures, this kind of joint development project, where bleeding-edge technology is shared and not just sold or licensed, is pretty rare. For these archrivals -- the two leading producers of hybrids -- to collaborate on the development of something as fundamental to a vehicle's character, to an automaker's identity, as an engine doesn't seem to make sense.

Or does it?

The problem: Pickups
Here's the problem: Recent changes to the U.S. government's fuel-economy rules mean that all of the automakers who do business here are going to have to make big improvements in the fuel economy of all of their vehicles, top to bottom. While that won't be easy anywhere, there are degrees of difficulty: It's one thing to add a few mpg to a compact commuter car by using a smaller engine or decreasing its weight, it's another thing entirely to do it to a product where size, power, and durability are its key reasons for being.

A product like, say, a pickup truck.

Does this mean big pickups will have to change radically, or go away entirely? That's a nonstarter: While Toyota's Tundra pickup has been a modest success, Ford's F-series pickup isn't just the company's best-selling product, it's the best-selling vehicle in America. And pickups and their full-sized SUV cousins are similarly important to General Motors (NYSE: GM  ) and Chrysler.

Pickups aren't going anywhere, and they're not likely to change a whole lot, but they will have to get better mileage. Automakers are already taking steps in that direction with a variety of technologies -- lighter-weight steels, more diesel engines, turbocharged V6s instead of V8s -- but there's a special reason to rush development of a hybrid system: It's favored by the new rules.

What Ford needs: Hybrids in a hurry
As I pointed out when the new fuel-economy guidelines were presented, pickups get a couple of breaks under the new rules. One of those breaks is particularly relevant: Hybrid pickups earn extra credits even if they don't get significantly better mileage. In other words, even if hybrid pickups don't represent a huge step forward in terms of fuel economy, there's still a big reason to build them.

Credits earned under the rule can be used to lower an automaker's overall scores, something that will be extremely useful as the manufacturers rush to meet the guidelines. GM and Chrysler already have access to a "mild" hybrid system, developed a few years back in a joint venture with BMW and Daimler. It's not great, but it would get them some credits under the rules -- and it's a place to work from.

Ford has no such thing, but I bet the company wants one bad. And while the company has a system under development, that urgent need explains why they got with Toyota -- anything to help speed up development of a viable system is a good thing from Ford's perspective.

But why did Toyota sign on?

What's in it for Toyota
The upside for Toyota is less immediately obvious, but it's still visible. Toyota's pickup sales volumes don't compare to Ford's, but the company would obviously benefit from having a hybrid option available -- for all of Toyota's vaunted green technology, its V8-powered Tundra is just as thirsty as its Detroit counterparts. Speeding up development and using Ford's very large truck sales volume to reduce the per-vehicle costs of such a system, which will be expensive to develop, makes a lot of sense.

Toyota's not completely averse to sharing some technology around hybrids and electric vehicles, as past deals with Nissan (OTC: NSANY) and Tesla Motors (Nasdaq: TSLA  ) have shown. But unlike those deals, this one isn't likely to be visible in showrooms or on balance sheets for several years yet, which is why neither company's stock moved significantly on the news.

But this is a big deal, especially for Ford. Investors taking a long-term view have been right to worry about how the Blue Oval would preserve its extremely profitable pickup franchise as the new rules come into effect. With this deal, one part of the solution to that dilemma is starting to come into focus.

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Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On August 25, 2011, at 10:06 PM, baldheadeddork wrote:

    I think it's a stretch to call the Tundra a success by any definition. The sales numbers for this truck are just horrible, John.

    Toyota spend billions developing the current model and by any subjective measure they built a hell of a truck. But sales started weak and then took a dive. In 2007, with the most expensive roll out in Toyota's history, the Tundra sold less than 200,000 units in a year when Ford moved nearly 700,000 F-series. That was the high water mark. Last year just 93,000 Tundra's sold. The margin against Ford has moved from 3.5:1 to almost 6:1.

    The new Tundra is a flop even compared to the first generation truck. The worst year of sales for the mediocre first generation Tundra was better than what the new Tundra has done in either of the last two years. It's not turning around, either. Sales for 2011 are 13% below the 2010 numbers. They're on pace for 80,000 units this year.

    Okay, yeah, I'm Rain Man. But that's what jumped at me with this deal. Toyota took their best shot with the Tundra, and they were failing even before the recall nightmare. They (and everyone not named GMC) have also seen a collapse of large body-on-frame SUV sales.

    I totally get why Ford did this deal. They are going to split development costs and tap Toyota's expertise with hybrids. If/when $5 gas becomes the norm, it's not hard at all to imagine a market for 100,000 F-series hybrids a year if they have any fuel economy improvement. (See Boost, Eco)

    But Toyota will be overachieving to get back to 120,000 total sales for every vehicle that might use this powertrain. What do you imagine the hybrid take rate might be? Ten percent? Maybe 15%? Toyota won't need the hybrid credits and they'll never recover the R&D cost.

    Why did Toyota make this deal? (And step on their Camry launch to announce it?) The answer that makes the most sense to me is that the company is still flailing.

  • Report this Comment On October 11, 2011, at 11:09 PM, MHedgeFundTrader wrote:

    Today Toyota, the world’s largest car maker, has been slammed by the perfect storm that has taken its shares down a gut churning 60% from its 2008 peak. They took eight years to find a defect in an American made accelerator component that caused thousands of accidents, and dozens of deaths, forcing a worldwide recall of 10 million vehicles.

    To me, this all adds up to a great screaming “BUY.” You can start with the recall, the largest in history, covering eight models, which promises to be speedy, lavish and generous. It prompted a production shut down, an unprecedented measure in auto history. The company is going all out to reinforce customer loyalty. Toyota still makes great cars. And let’s face it, many people would rather die than drive an American car.

    There are a few additional angles here. Since the company is Japan’s largest exporter, it would benefit greatly from any weakness in the yen, which I consider as the world’s most overpriced currency. Think of the stock as a long dated yen put. Look at the charts for Ford, US cars sales, and the palladium used for catalytic converters, and it is obvious that the world is seeing a surge in global car sales.

    I know the philosophy, and the strengths of this company intimately, and they will come roaring back. Let the ruckus over the recall burn out, and add Toyota to your “buy on dips” list. Keep in mind that this is not a day trade, but something to bury in your portfolio and then lose behind the radiator. It will also not be immune from the calamities that strike the stock market.

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