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Toyota Buys Daihatsu: What It Means

By John Rosevear - Jan 31, 2016 at 10:40AM

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Toyota is moving to take full ownership of tiny-car maker Daihatsu in a $3 billion deal. Here's why this makes good business sense for the Japanese giant.

Toyota CEO Akio Toyoda and Daihatsu President Masanori Mitsui announced the deal at a press conference in Tokyo on Friday. Image source: Toyota.

Toyota (TM -2.09%) said on Friday that it will buy out Japanese small-vehicle maker Daihatsu Motor (NASDAQOTH: DHTMY) in a friendly, all-stock deal worth about $3 billion. 

Toyota has effectively controlled Daihatsu since 1999, when it took a 51.2% stake. But now it's moving to take full ownership. What does this mean?

A strategic global move by Toyota's CEO
It means that Toyota thinks that small, affordable cars are becoming more important around the world.

That may sound odd to Americans. After all, we just heard Fiat Chrysler (FCAU) say last week that it will phase out production of its compact and midsize sedans so that it can use the production capacity to make more SUVs and pickups.

But this isn't about the United States, where a major market shift toward trucks and SUVs means that FCA's move makes some sense. It's about emerging markets.

Daihatsu's Tanto is a mini-minivan aimed at young families. Image source: Daihatsu.

In places like India and many of the countries in Southeast Asia, advancing economic development is allowing lots of people to buy their first-ever cars. Small, affordable -- but good -- cars are already big sellers in these regions. If Toyota can win over more of those customers now, it'll be in a good position to retain them as their incomes grow and needs shift over time. 

Daihatsu specializes in tiny cars -- and tiny trucks, too
Daihatsu is the perfect partner for Toyota. It specializes in small, well-packaged vehicles with tiny 660 cubic-centimeter engines that get tax breaks in many countries. Its products include small commercial trucks as well as passenger cars. 

Daihatsu's product range includes tiny commercial vehicles like this Hijet mini-truck. Image source: Daihatsu.

Daihatsu and Toyota have jointly developed products for years. But Toyota said in a statement that taking full ownership would allow it and Daihatsu to pursue a fully unified small-car strategy -- one that will turn the Daihatsu brand into a global one under the Toyota umbrella.

"We see this as the perfect opportunity to cement our relationship with Toyota," Daihatsu President Masanori Mitsui said in a statement. "And by doing so, to embark on a new period of growth, and to elevate the Daihatsu brand to a global standard."

The takeaway for Toyota investors
This is Toyota moving to shore up and deepen an important alliance that will help it build its business in emerging markets. It's a long-term play, to win the long-term loyalty of customers who are just now stepping up to buy their first-ever cars. 

A strengthened lineup of mini-vehicles could help Toyota make inroads into the dominance of Suzuki, which controls roughly half of the new-vehicle market in India, and into FCA's large presence in Latin America. It could also help Toyota fend off the increasing threat of inexpensive small vehicles produced by up-and-coming Chinese automakers. 

Long story short, it's likely to be seen in time as an astute long-range move by CEO Akio Toyoda. 

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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