Rumors are swirling that Toyota (NYSE:TM) and Ford (NYSE:F) are in discussions to establish deeper ties or form some kind of alliance. I can't speculate on the odds of that happening, but what I am quite sure of is that sometime later this year, Toyota will surpass General Motors (NYSE:GM) as the world's largest automobile maker.
And if GM isn't careful, and Ford doesn't enter into some kind of alliance with Toyota, I fear that the gap between Toyota and the American manufacturers will only grow larger. It certainly won't help Ford and GM that the company's latest focus will be on "low-cost technology."
Toyota President Katsuaki Watanabe suggested as much in an interview with Britain's Financial Times on Monday. The reason behind the new focus is to undercut Renault's low-cost car, the Logan, which that company is targeting for emerging markets in Asia and Eastern Europe.
According to Watanabe, "Everything from design to production methods will be radically changed, and we are thinking of a really ultra-low-cost way of designing using ultra-low-cost materials, even developing new materials if necessary."
The design will have to be radical to undercut Renault's Logan, which costs about $6,200. But the strategy makes perfect sense for one reason: the so-called fortune at the bottom of the pyramid -- the idea that a huge business opportunity exists in targeting products at the rapidly growing number of middle- and lower-class people around the world.
Even at $5,000, Toyota wouldn't be able to sell cars to the very bottom of that pyramid -- i.e., the 4 billion people who earn less than $1,500 a year -- but it will certainly attract the attention of some of the 1.5 billion people in the middle of that pyramid who already are, or soon will be, making between $5,000 and $20,000 a year.
Some readers might think that the high R&D expenses, coupled with the lower margins and smaller profits that such a car will entail, don't justify this kind of attention. I disagree. For one thing, a small sliver of profit from a large and growing pie can still mean something to the bottom line of a company like Toyota.
Secondly, as many members of the world's new middle class work their way up the economic ladder and grow wealthier over time, they will likely look to upgrade to a more expensive automobile. When they do, Toyota should stand a better chance of supplying them with their next automobile, since they'll have already become familiar with Toyota through the cheaper car.
The bottom, or in this case the middle, of the pyramid offers a massive opportunity. If Toyota capitalizes on the world's expanding middle class, America's automobile manufacturers will now have to add making ultra-inexpensive cars to their growing list of things to do if they want to keep pace -- a list that already includes cutting labor costs, improving quality, and getting serious about hybrid cars. If they don't, they are likely to find themselves on the bottom of the automobile pyramid.
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Fool contributor Jack Uldrich does not own stock in any of the companies mentioned in this article. The Fool has a strict disclosure policy.
