In time, this may become known as the worst deal of the century.
Toyota and electric car maker, Tesla announced yesterday a new partnership to develop electric vehicles and the necessary engineering and manufacturing support to back them. As part of the deal, Toyota will purchase $50 million of common stock in Tesla as soon as the fledgling automaker goes public. Tesla also takes over Toyota’s recently shuttered NUMMI manufacturing plant in Fremont, California for an undisclosed sum.
This is great news for Tesla. But what’s not clear is why Toyota would agree to such a hugely lopsided deal.
Akio Toyoda and Elon Musk pose with California Governor, Arnold Schwarzenegger at a press conference Thursday (Photo: SF Chronicle)
Tesla has burned through $236 million in capital since it’s 2003 founding. The Silicon Valley automaker has so far delivered about 1,100 of its $109,000 Roadster electric sports cars and hopes to produce its next vehicle, the Model S electric sedan, by the end of 2012. Tesla also qualified for $465 million in federal loans last year to be used to purchase a factory and get the Model S to market.
The new deal gives Tesla a fresh infusion of capital and a deal to produce a Toyota-branded vehicle with a Tesla electric powertrain by 2012. This gives the young automaker a vote of confidence from a major global player and a steady stream of revenue until the Model S comes to market. Investors will no doubt be salivating in anticipation of the IPO.
Tesla also receives a modern factory with a trained workforce that’s eager to return to work. Tesla has never manufactured a vehicle from scratch – the Roadster’s chassis and body is built by Lotus Cars in England – and Toyota will supply critical engineering support to get the two new models to market. Toyota’s manufacturing expertise will allow Tesla to overcome an enormous hurdle that may have otherwise delayed the introduction of the Model S by many months.
Global recall scandal notwithstanding, Tesla also stands to benefit from Toyota’s reputation for quality and efficiency. And since the Toyota-branded product will launch first, Tesla has time to iron out the kinks in their processes before the Model S comes to market.
The Tesla Model S on display next to the company’s $109,000 Roadster
But why would Toyota willingly enable a competitor with such a generous offer?
From a dollars and cents standpoint, the Japanese automaker will gain virtually nothing from this deal. Toyota saddling up to Tesla is the automotive equivalent of MIT developing curriculum for the University of Phoenix.
Toyota does not need Tesla’s help to develop electric vehicles. They’ve already proven their basic competency with the RAV4 EV of the 1990’s and are the undisputed market leader in gas/electric hybrid technology. Toyota also has a joint venture in place to produce battery packs with Panasonic and has shown working prototypes of plug-in hybrids and hydrogen fuel cell vehicles.
Put simply, Toyota already knows how to work magic with electrons.
Is this partnership perhaps motivated by guilt from shutting down the NUMMI plant earlier this year? Toyota CEO, Akio Toyoda reportedly met with Tesla CEO, Elon Musk for the first time six weeks ago, right around the time the NUMMI closed its doors. Toyoda, himself, apprenticed at the NUMMI plant years ago and said that he, “learned much about working in America (there) so I feel a personal attachment to the plant.”
Though the CEO is obligated by Japanese business culture to provide for his workers, he must know that a niche manufacturer like Tesla is only capable of hiring a handful of the thousands of workers who were laid off at NUMMI.
The truth may be less about money and more about company culture.
Since coming to power in June of 2009, Toyoda has made it clear that he is unhappy with the trajectory established by his predecessor. He berated his senior managers for allowing the company to grow too quickly, sacrificing quality and customer satisfaction along the way. Weeks later, Toyota was drawn into a global recall scandal that has so far affected over 9 million vehicles worldwide.
The partnership may signal the fresh direction that Toyoda has been seeking. The San Francisco Chronicle reports that Musk and Toyoda spent their time together talking and driving around Los Angeles in a Tesla Roadster. It was a pivotal day for Toyoda, who said, “Simply put, I felt the wind, the wind of the future.”
“He really sees value in understanding how a fast-moving Silicon Valley startup operates,” Musk revealed of Toyoda. “He’s sort of looking at this and saying, ‘We need to go back and remember what it’s like to be a startup.’”
In a press release, Toyoda referenced his own company’s roots and said that 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.” But if a startup spirit is all that the CEO is in search of, why not just hire some senior managers from Silicon Valley and allow employees to wear jeans every day?
The partnership instead removes an enormous barrier for Tesla, teaching them world-class techniques for how to build cars with impeccable quality. The student will quickly become master and may soon threaten its own teacher.
For Mr. Toyoda’s sake, let’s hope that the inspiration he feels from this deal will translate to his own company’s products.