Toyota, Subaru Join Forces for Advanced Vehicles

Toyota Motors (TM) announced that it plans to raise its stake in Subaru Corporation from 17% to 20%. Toyota and Subaru stated that this strategic alliance intends to leverage its capability in developing advanced vehicle technologies.

According to the deal, Toyota and Subaru would jointly produce all-wheel-drive vehicles. Subaru has expertise in sport-utility vehicles (SUV) and all-wheel-drive technology.

Last month, Toyota and Suzuki Motor Corporation stated that they would buy small stakes in each other. Toyota indicated that it would invest up to $742 million based on the stock value of Subaru. In turn, Subaru will also buy a stake in Toyota. This deal places Subaru on the list of Toyota’s growing Japanese alliances after Mazda Motor Corporation and Yamaha Motor Corporation.

Another report indicates that Toyota Motors plans to launch hydrogen fuel-cell car models with China’s Guangzhou Automobile Group and FAW Group. In a move to gain a strong foothold in the Chinese green-car market, Toyota is keen on this collaboration.

Toyota also plans to produce “intelligent connected” vehicles in partnership with GAC and FAW. Compared to its rivals General Motors (GM) and Volkswagen, Toyota has a lower market share in China. According to Reuters, Toyota is strengthening its presence and plans to sell 2 million vehicles in China per year.

The global automobile industry is not just about manufacturing the best cars and selling them to consumers. It’s also about bringing revolutionary products and services to the transportation industry, including robocars, electric vehicles, and newer forms of mobility services. Smaller carmakers such as Subaru and Suzuki are finding it challenging to keep pace with these rapid developments.

Partnerships with leading players like Toyota help these smaller car companies leverage scale, access the latest technology, and manage the development costs of manufacturing such vehicles. This is the CASE (Connected, Autonomous, Shared, and Electric) era.

Toyota president Akio Toyota stated, “Our companies …want to pursue the possibilities of making ever-better cars suitable for the CASE (connected, autonomous, shared, and electric) era by bringing together our strengths.”

Car manufacturers around the world are treading this path to lower manufacturing and development costs. Earlier this year, Ford (F) and Volkswagen signed a deal to collaborate on autonomous vehicles, mobility services, and electric vehicles.

Last year, General Motors (GM) announced a collaboration with Honda Motors (HMC) for large-scale investment in developing an autonomous vehicle for the Cruise network.

Instead of entering into cross-border deals, Toyota is more inclined to invest in smaller domestic carmakers. In our view, it’s critical that automakers join forces to counter rising manufacturing costs and stay competitive in this evolving market.

Environmental regulations in China, the EU, and the US require carmakers to manufacture more EVs so that consumers buy them. However, the problem is that electric cars aren’t such a profitable segment. McKinsey states that the cost of producing each of these vehicles is $12,000 more than those powered by the internal-combustion engines.

The manufacturers cannot recover these costs by pricing. So, they can sell only a few premium models, which makes the electric vehicle challenging to sustain in the long run.

Battery costs form the single most significant cost component, about 25%, says a study by JPMorgan Chase and BCG. It may take another five to seven years for the battery costs to drop. Until then, carmakers will have to absorb these costs. The strict emission policies around the world leave no alternative for carmakers but to produce EVs.

McKinsey further suggests that partnering with other automakers, redesigning the model, and leasing batteries are some of the ways which can lead to a cost reduction of $5,700–$7,100.

Toyota Motors has a strong foothold in the hybrid vehicle market and has a competitive advantage in this segment. So, the company’s investments and plans to further develop its electric vehicles business are crucial to its growth.

According to the IEA, global electric vehicle sales are poised to reach 23 million in 2030. As a result, Toyota Motors well placed to capitalize on this growth. The company has stated that it’s already in the process of producing all-electric cars by 2030, and it plans to sell more than 5.5 million electric vehicles by then.

I feel that Toyota’s margins look promising due to its cost-reduction initiatives. Moreover, Toyota is continuously adding synergies to reduce its development and manufacturing costs. It will be interesting to see how Toyota travels its growth trajectory and positions itself through these partnerships.

Toyota Motors is trading 1.4% lower at $136.38 at 12:36 PM EDT, while its peers General Motors and Honda Motors are also trading in the red. Toyota Motors is trading just 1.5% below its 52-week high.