Why The Toyota - Tesla Deal Works

Why The Toyota - Tesla Deal Works
Toyota Motor Corp’s
$50 million investment in electric sports car maker Tesla Motors is an investment in both electric car technology and much needed public relations.



In one stroke, the company has made its boldest move to date toward putting full electric vehicles on American roads in addition to giving a new lease on life to one of America's most celebrated auto plants. The investment, quite small for cash-rich Toyota, was made by President Toyoda after the company head dined at the home of Tesla CEO Elon Musk and drove the Tesla electric roadster.

Tesla is a maker of electric sports cars, but a niche one at that. The company has sold over 1,000 $109,000 roadsters worldwide so far, with plans to build a second, lower-priced car with the idea that it can eventually reach about 20,000 sales a year. Toyota’s investment in the company, which adds up to about a 2.5% stake, is a shot in the arm for financially struggling California, as well as giving Toyota a new story-line for the public to focus on after months of bad headlines surrounding product recalls and government investigations.

As part of the deal with Toyota, Tesla has purchased the New



United Motor Manufacturing (NUMMI) factory in Fremont Ca., which Toyota recently closed, to build the lower-priced, $49,500, luxury electric car it hopes will give it sales volume and staying power. Toyota had already let go over 4500 workers who had been making Toyota Matrix cars and Tacoma pickup trucks, an unpopular move that preceded the automaker’s recall woes.
Toyota's Image Problem

Since last fall, Toyota has been embroiled in a public relations firestorm related to the recall of millions of vehicles for acceleration and braking problems. The company faced scrutiny by Federal regulators, paid a $16.4 million fine and perhaps for the first time in their history, sprouted the seeds of doubt in the minds of millions of American consumers who came to trust Toyota products more than the domestics.

If Tesla’s sales volume goals materialize, officials say the plant could eventually employ 1,000 workers, many of whom would be expected to be hired from the experienced pool of workers put out of work when the factory closed last month. That move alone is worth a good deal to Toyota in the state of California, although it's unlikely that the plant will recover all 4500 jobs in the near term.

The NUMMI plant has arguably been one of the most significant auto plants of the last 25 years because it was operated as a joint venture between General Motors and Toyota, starting in 1984. It was Toyota’s first foray into manufacturing in the U.S., at the time a controversial move for GM, which was facing up to the mounting competition from Japan. The factory, previously one of GM’s worst and most notorious factories for poor quality and labor relations, has been the subject of several case studies on the topics ranging from worker re-training to meshing U.S. and Asian cultures into one enterprise.

GM pulled out of the venture last year when it went through Chapter 11 bankruptcy, and killed off its Pontiac brand. NUMMI had also been making the Pontiac Vibe at the plant.

As workers are rehired at the plant for production, which is expected to begin in 2012, it is an open question as to whether the workers will be United Auto Workers union workers. Tesla is not bound by contracts to use union workers. The UAW workers that had been employed at NUMMI had, as part of the grand experiment of the GM-Toyota joint venture, agreed to much more flexible work rules than were found at other UAW plants.

“Our union’s hope is that this venture will give first hiring preference to former NUMMI employees who are already trained and highly skilled,” said UAW President Ron Gettelfinger. But actual talks between union representatives and Tesla will be down the road.

A Hedge Against A Bigger Market?

The move by Toyota is interesting beyond the public relations value. Toyota already has more production in the U.S. than it can use now given industry sales running at around 11.5 million a year, down from the 16 million rate just a few years ago. The company has a money losing plant in San Antonio, Texas, and a plant it stopped production on in Mississippi. By investing in Tesla, say officials with knowledge of the deal, it gives Toyota an opportunity to re-use NUMMI capacity at a later date if it needs more manufacturing capability, especially for electric and hybrid vehicles. Most analysts expect the U.S. auto industry to rebound back to 15 million vehicles a year by 2015 or sooner, so having production at NUMMI to go back to as a Tesla partner could be advantageous.

“This is a very inexpensive move for Toyota that seems to have the potential to pay off in many ways down the road—politically, image wise and even from the standpoint of leaving options for future production open,” says Dennis Keene, a Los Angeles-based independent marketing consultant.

Tesla is receiving $465 million in loans from the U.S. government for investment in the new model and the plant. Additionally, Tesla is gearing up for an initial public offering (IPO) of stock to the public to raise capital, and the Toyota investment and co-venture will help the IPO. “This move by Toyota is probably worth a lot more than $50 million to Tesla in terms of the company’ credibility as it tries to sell its stock offering,” says auto industry analyst Stephanie Brinley of AutoPacific Group.

Will Toyota's Electric Strategy Change?

The move is curious, however, because Tesla’s recipe for achieving electric power has traditionally been via lithium-ion batteries, a technology that is similar to what is used for cell-phones and laptop computers. Toyota has not been a big proponent of this technology as a solution for electric vehicles.

Toyota Motor President Akio Toyoda said Toyota is still curious about pursuing lithium-ion technology, and views Tesla as an ideal partner to sort out how effective the technology will be from the standpoint of cost and performance.

"I spent time at NUMMI and learned much about working in America there, so I feel a sense of attachment (to the plant)," Toyoda said. He also said in a statement that through the venture, Toyota hopes to learn from Tesla's "challenging spirit, quick decision-making and flexibility."

Toyota is not the only big-name investor in Tesla. German automaker Daimler--parent company of Mercedes-Benz, smart and Maybach—last year took a 10% stake in Tesla. The purpose of the investment was to