Toyota goes on offensive with Mazda deal

Editor's note: A previous version of this report incorrectly stated where Toyota RAV4s are built. It has been corrected.

TOKYO -- More than two years after inking a loose tie-up, Toyota Motor Corp. and Mazda Motor Corp. have agreed to take capital stakes in each other as Japan’s biggest automaker brings smaller rivals into its sphere of influence.

Toyota will take a 5 percent stake in Mazda, while Mazda reciprocates with a token 0.25 percent stake in Toyota, the car manufacturers said in a joint statement Friday.

The closing of ranks comes as Toyota says it is shifting into “offensive” mode to ward of new rivals from outside the industry and invest more in next-generation technology.

Toyota Senior Managing Officer Tetsuya Otake said before the announcement that Toyota must pioneer new paths in a fast-changing industry and even explore mergers and acquisitions.

“We intend to engage in more offensive activities going forward,” Otake said. “We have to find a new direction. And one of the directions is mergers and acquisitions.”

New U.S. plant

As part of Mazda deal, the carmakers will build a joint-venture assembly plant in the U.S.

The plant will have production capacity of 300,000 vehicles a year, with half going toward the Toyota Corolla and half being dedicated to Mazda for crossovers and SUVs.

The $1.6 billion plant, expected to start operating in 2021, opens new truck and crossover capacity the both brands as they struggle to supply surging demand for light trucks.

Toyota and Mazda said they will also collaborate in developing electrified vehicles and connected car technologies. They will also step up supplying vehicles to each other.

In electric vehicles, Toyota is being positioned as working on the battery-side of electric vehicles, while Mazda works on the overall architecture. The two companies will jointly develop the hardware and software sides of electric vehicles but produce them separately, Toyota Executive Vice President Shigeki Terashi said at a joint press conference in Tokyo.

In connected cars, Toyota and Mazda will cooperate on vehicle-to-vehicle and vehicle-to-infrastructure communications, seen as a key toward self-driving and advanced safety systems.

Terashi said Toyota aims to develop an EV architecture that can be used across a wide range of segments, from minicars to trucks.

Mazda and Toyota will also supply each other with complementary products.

Mazda already manufactures small cars for Toyota at Mazda’s factory in Mexico. Going ahead, Toyota will return the favor by supplying a compact commercial van to Mazda in Japan.

Three Japanese camps

Toyota tightens its ties to Mazda as Japan’s fragmented auto industry consolidates into three camps around the country’s big three: Toyota, Nissan Motor Co. and Honda Motor Co. The budding partnerships are seen as important lifelines to Japan’s smaller automakers in an industry where scale matters like never before, partly to foot soaring costs for new safety and environmental technologies.

New pressures from Silicon Valley to develop autonomous driving systems only adds urgency.

“In the past, competition among automakers was about sales and volume,” Toyota CEO Akio Toyoda said at the joint press conference also attended by Mazda CEO Masamichi Kogai.

“We’re now facing new competitors, such as Google, Apple and Amazon… That’s why I feel it has become increasingly important for us automakers to gather new partners.”

Executives downplayed any notion that Mazda was joining the Toyota Group, saying that maintaining independent management and corporate culture were paramount.

Yet, their joint statement ends with the proviso that both companies will consider strengthening their capital ties depending on the progress of the partnership.

Also in Toyota’s tent are Subaru, Suzuki, Isuzu and consolidated partners Daihatsu and Hino.

Toyota has long held a small stake in Subaru of around 16 percent. Subaru and Toyota have collaborated in minicars and in sporty cars such as the Toyota 86 and Subaru BRZ.

Toyota entered a looser alliance with Suzuki last October. The Suzuki tie-up has yet to yield concrete results, but earlier this year the companies said they were exploring collaboration in green car technologies and in business in India. Details have been sparse.

“It’s meaningful from a development and supplier standpoint,” said Kurt Sanger, director of auto research at Deutsche Securities Japan. “It’s consolidation of a soft alliance sort, rather than a full takeover where I am imposing my will on you.”

Nissan and Honda

The slow pace of the Toyota-Mazda partnership underscores the deliberate, if seemingly plodding, approach Toyota takes toward alliances and contrasts with that of Nissan.

Nissan took a controlling stake in Mitsubishi Motors Corp. last year to form the second camp of Japanese automakers. In a whirlwind fall from grace, a faked fuel economy scandal pushed the smaller Japanese automaker into crisis early last year, opening the door for takeover.

By the autumn, Nissan had swooped in to buy 34 percent of Mitsubishi.

Nissan has since installed many of its own executives in top leadership positions at the company, and the two former rivals are quickly working on ways to share costs in everything from procurement and production to product planning and engineering.

Go-it-alone Honda remains independent. But Japan’s No. 3 player sees an urgent need to tap outside help in areas where it lacks expertise or funding. Honda has pursued partnerships with Google affiliate Waymo in autonomous driving and Hitachi Automotive Systems in electrified drivetrains.

Mazda and Toyota first came together in May 2015, when Toyota CEO Akio Toyoda took the stage with Mazda CEO Masamichi Kogai to announce a “long-term partnership.” All areas of collaboration were on the table, they said. But for two years, they said little more.

Toyoda said the companies are a good match because of Mazda’s corporate culture of making cars known for their spirited driving dynamics.

“It has also sparked Toyota's competitive spirit, increasing our sense of not wanting to be bested by Mazda,” Toyoda said. “This is a partnership in which those who are passionate about cars will work together to make ever-better cars.”

SUVs, crossovers ASAP

Nailing down more concrete details solves problems for both companies.

First, both are short on supply of hot-selling crossovers and SUVs in the U.S. market.

Toyota now sells more RAV4 compact crossovers imported from Japan than made locally in North America. Relying on imports is risky because it exposes Toyota to currency exchange rate losses. The new plant will make small cars for Toyota, freeing capacity elsewhere for more light trucks.

A new plant Toyota is building in Mexico had been slated to make Corollas.

Now, those Corollas will be shifted to the upcoming U.S. plant, while the Mexico plant takes on expanded production of the Tacoma midsize pickup, Toyota said.

President Toyoda said adding Tacoma production to Mexico will boost North American capacity for the popular nameplate to a whopping 400,000 units a year.

The problem is even more acute for Mazda, which backed out of its only U.S. assembly plant several years ago and built a new one in Mexico. That plant, however, makes compact passenger cars -- including some that are rebadged for Toyota -- not light trucks.

The Mazda side of the new joint plant will be dedicated to crossovers.

Indeed, a dearth of crossovers fanned a 24 percent plunge in Mazda’s operating profit in the company’s fiscal first quarter ended June 30. Executives said they are rushing to supply more.

In the first six months of this year, passenger vehicles accounted for 46 percent of Mazda’s U.S. sales. But industrywide, cars made up just 37 percent of total U.S. sales.

Toyota Motor Sales U.S.A. was only a little better, with cars at 44 percent of the mix.

Trump, EVs

A new plant in the U.S. may also ease political pressure from the Trump administration, which has been urging automakers to invest more in local manufacturing.

Toyota was criticized by Trump earlier this year for building a new assembly plant in Mexico instead of the United States. Meanwhile, Mazda and Mitsubishi are currently the only Japanese carmakers without an assembly plant in the United States. The new Toyota-Mazda plant will employ about 4,000 people with a combined investment of $1.6 billion.

Toyota & Mazda to build a new $1.6B plant here in the U.S.A. and create 4K new American jobs. A great investment in American manufacturing!

— Donald J. Trump (@realDonaldTrump) August 4, 2017

Toyoda said the decision to build a plant with Mazda was “not related” to Trump’s pressure. Mazda’s Kogai said it would give his company badly needed production firepower while also creating American jobs to engender the “support of the local community.”

“Mazda is massively politically exposed and they can’t do a 300,000-vehicle plant alone,” Sanger said. “So, Toyota is stepping into the void.”

Finally, both companies can benefit from cooperating on electrified vehicles.

Again, it is pint-sized Mazda with most to gain. The Hiroshima-based carmaker plans to launch an EV in 2019, but Mazda doesn’t have the deep r&d pockets for elaborate development.

Mazda doesn’t currently sell an EV and its only hybrid offering is a version of the Mazda3 small car that is only offered in Japan. It relies on a system designed and engineered by Toyota.

Pairing with Toyota could give Mazda access to a huge toolbox of technologies.

Toyota has deepened its commitment to EVs by establishing a new unit dedicated to developing them, partly with an eye toward emissions regulations in China.

By sharing the technology with Mazda, Toyota can eke extra volume and drive down costs.