Why the Toyota-Tesla Deal Makes Sense

Toyota is interested in the electric car market too. The company announced a new partnership with and sizable equity investment in the young American electric car company Tesla. Although Toyota has had great success with its hybrid vehicles, it had not shown much intention of entering the electric car space -- until now. The move is a good one for both automakers.

The two companies "intend to cooperate on the development of electric vehicles, parts, and production system and engineering support," according to the press release. Toyota will also purchase $50 million in Tesla equity. Additionally, Tesla will purchase an old factory in California that had been formerly used as apart of the now defunct Toyota-GM partnership.

Smart for Toyota

Puts Automaker Immediately Into the EV Race

Two of Toyota's chief competitors -- GM and Nissan -- are on the verge of releasing mass market plug-in electric vehicles. Toyota's ability to leverage Tesla's electric car expertise should significantly condense the time it would have taken Toyota to produce a vehicle of its own. Even though the company still won't get a new electric car out as quickly as GM and Nissan, there's little doubt that Toyota will now produce a high-volume electric car before too long.

Cheap Foray Into the EV Market

Not only does Toyota now have Tesla's expertise at its fingertips, but it came relatively cheap. If it were to attempt to develop an electric vehicle platform on its own from scratch, the investment would have been far more significant than the $50 million piece of Tesla it purchased. This also hedges Toyota's risk: if the electric vehicle market turns out to be a dud with consumers, the company would have wasted a huge investment developing its own expertise and infrastructure.

Helps Public Image

After the accelerator fiasco, Toyota could use a strong dose of good public relations. Since electric cars are associated with environmental protection and green aspirations, it will likely give Toyota's public image a little boost.

Smart for Tesla

Toyota Is a Partner You Want

In fact, this deal is arguably even better for Tesla than Toyota. The company was created in 2003, and is still a relatively small operation. By trading some of its engineering expertise for some of Toyota's production and distribution knowledge, its business model should strongly benefit. No auto company has been as successful as Toyota over the past few decades.

Boosts Its Brand

The majority of Americans have probably never heard of Tesla, but almost everyone has heard of Toyota. Tesla should be able to leverage Toyota's popularity to create greater awareness of its own brand. Although Tesla has focused on luxury electric vehicles up to now, its aspirations to make mass market vehicles will be more easily achieved through better brand recognition.

Helps Sustain Its Growth

This deal should allow Tesla to continue to grow quickly. First, there's the investment. $50 million might not sound like a huge amount of money for a big automaker, but for a small one, that can go a long way. Moreover, for Tesla this deal is all about expansion. Tesla plans to build its Model S as a higher volume family car than its Roadster. Toyota's knowledge will help this effort succeed, as the Japanese automaker knows all about manufacturing cheaper vehicles with widespread consumer appeal. But this is just the beginning for Tesla. The Model S will only occupy a small part of the factory -- leaving lots of room for additional new models, according to the New York Times.

Partnerships like this aren't always easy. It's fairly likely the culture of each firm is quite different. Toyota is an established Japanese automaker, while Tesla is a young American start-up. But if Toyota and Tesla manage to work well together, then they should both reap huge dividends through their cooperation.