Toyota and Tesla Announce Joint Vehicle Development and Manufacturing

Toyota and electric upstart automaker Tesla Motors stunned the automotive world late last night with the announcement of a tie-up to develop and build electric vehicles (EVs) using Tesla powertrain technology and Toyota off-the-shelf parts. The extremely ambitious plan was announced at a news conference attended by Tesla chief executive officer (CEO) Elon Musk, Toyota global president Akio Toyoda, and California governor Arnold Schwarzenegger. The plan includes several parts:

• Tesla Purchases NUMMI from Toyota: The smaller electric automaker has purchased the massive New United Motors Manufacturing Incorporated (NUMMI) plant in Fremont, California, from Toyota for an undisclosed sum. The plant is in the same general area as Tesla's headquarters in Palo Alto, California. "The Tesla Factory effectively leverages an ideal combination of hardcore Silicon Valley engineering talent, traditional automotive engineering talent and the proven Toyota production system", said Tesla CEO Elon Musk. "The new Tesla Factory will give us plenty of room to grow." The NUMMI plant was recently shut down after Toyota decided it did not need the capacity (or expense) of keeping it open; previously it had been run as a joint venture (JV) with General Motors (GM) that produced both Toyota and GM cars on a common platform. GM abandoned the JV and shut down the Pontiac brand as part of its bankruptcy in 2009, however, leaving Toyota to deal with closing the facility.

• Toyota to Invest US$50 Mil. in Tesla: Toyota has announced that it will invest US$50 million into Tesla when the latter's initial public offering (IPO) of stock goes live, most likely some time later this year. It is not known what level of ownership this will provide Toyota, however, as that will depend on the value of the stock when the IPO is instituted. Tesla's original S-1 filing with the U.S. Securities and Exchange Commission (SEC) reportedly estimated the stock offering as likely to garner about US$100 million, which would have given Toyota a significant ownership stake in Tesla, but sources report that the value of the IPO is likely to be higher than that now and both parties insist that Toyota will end up with a minority stake in the electric automaker.

• Joint Vehicle Development: In addition to the Model S US$50,000 electric luxury sedan that Tesla says is under development, the plant will build a sub-US$30,000, jointly developed Tesla-Toyota vehicle using Tesla powertrain and battery components matched with components sourced from an existing Toyota platform. Further down the road, sources have told High Gear Media that a "third-generation" car will be developed, which will comprise the bulk of the assembly inventory at the NUMMI plant. This means that the plant will ostensibly build at least three vehicles: the Model S, the joint Toyota-Tesla sub-US$30,000 vehicle, and an as-yet-unseen third-generation model.

The decision by Tesla to purchase the NUMMI plant reportedly came as quite a blow to the community of Downy, California, which had thought it had agreed a deal with Tesla to rent it 20 acres of a former NASA research park. Already, Musk says that the company has hired nearly 1,000 NUMMI employees, and it intends to take on more. Eventually the plant will employ nearly 10,000 workers between Tesla and suppliers, according to Musk. Toyota president Akio Toyoda has hailed the JV, saying that Tesla's entrepreneurial spirit has impressed him. "Through this partnership, by working together with a venture business such as Tesla, Toyota would like to learn from the challenging spirit, quick decision-making, and flexibility that Tesla has. Decades ago, Toyota was also born as a venture business", he said, according to the Detroit News. "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."

Outlook and Implications

The move by Toyota to become heavily involved with upstart automaker Tesla and develop an EV via this route instead of in-house is surprising; but the deal is not surprising from Tesla's standpoint as it had been expected for some time that a large automaker would snap it up. However, the odds-on favourite had been Daimler, which had already purchased 10% of Tesla and had contracted with the automaker to provide electric drivetrains and battery packs for its desired electric Smart car. How the partial Daimler ownership of Tesla will affect the larger partial Toyota ownership is not yet clear, and neither is it certain how all three parties intend to work together.

The surprise announcement is somewhat confusing, yet also logical on a couple of different levels. On one hand, Toyota has now divested itself of a plant that it did not need or want, but it still gets to boast about how its deal will preserve jobs, painting it in a good light at a time when it could use some good news. However, what Tesla will do with the NUMMI plant is unclear as the facility is absolutely enormous, with the capacity to build over 500,000 vehicles annually, practically 1% of the world's automotive capacity, according to the company. Toyota could not afford to keep it or fill it with parts, and it is unclear how Tesla (which has built a handful of electric Roadster models by comparison in the United Kingdom) thinks it can make use of such a massive facility. Tesla has the cash to do it, however, with nearly US$500 million in low-interest loan money coming from the U.S. government. Still, the taxes alone on the Fremont plant are likely to be prohibitive, unless the state helps Tesla through tax breaks.

It also makes a lot more sense for Tesla to tie up with Toyota than the other way around. Tesla may be delivering electric Roadsters to customers primarily in the United States, but its assembly expertise and car-making abilities reside in the U.K. plant that builds the vehicles—this is basically a contract with Lotus, given that the Roadster is a heavily modified Lotus Elise. Tesla stands to gain much from a tie-up with Toyota, including access to engineering know-how, parts bin components, and possibly even whole platforms upon which it could base its offerings. The Model S could potentially benefit from this as well, as it now looks as if the car will not arrive before 2012, over a year after the Chevrolet Volt and Nissan Leaf hit the streets. Raiding Toyota's corporate parts bins for components could save Tesla considerable cost and effort in its vehicle development plans.

At the other end of the spectrum, however, the motivations for Toyota becoming involved with Tesla are less clear. To hear Elon Musk tell it, it was purely Toyoda's decision to go ahead with the tie-up, made during a visit to Musk's house in California just a couple of weeks ago. The sale of the NUMMI plant to Tesla does allow Toyota to effectively wash its hands of the matter, and US$50 million to help get a jointly developed lithium-ion powertrain together for a Toyota-developed model is an absolute bargain. However, it raises questions over Toyota's own green marketing strategy and invites speculation about the state of Toyota's own in-house efforts to create pure EVs. Sources have already indicated that the company decided to gamble on a formulation for a lithium-ion battery that did not pan out and is now behind the industry in developing comparable batteries (hence one reason for its insistence on using hybrid electric drives and employing nickel-metal-hydride batteries in them when even Hyundai has unveiled a full hybrid Sonata with lithium-ion technology). Toyota also gains significant marketing kudos by tying up with an increasingly well-known and popular brand in Tesla, but how any vehicles from this deal would fit with the rumoured upcoming Prius brand is also unclear.