Ford's New Partner: Toyota


Wait, what?

At a hastily called press conference in Dearborn on Monday, executives from Ford (NYS: F) and Toyota (NYS: TM) presented a surprise: The companies have agreed to jointly develop a new gas-electric hybrid engine system for light trucks and SUVs.

While major automakers occasionally collaborate on joint ventures, this kind of joint development project, where bleeding-edge technology is shared and not just sold or licensed, is pretty rare. For these archrivals -- the two leading producers of hybrids -- to collaborate on the development of something as fundamental to a vehicle's character, to an automaker's identity, as an engine doesn't seem to make sense.

Or does it?

The problem: Pickups
Here's the problem: Recent changes to the U.S. government's fuel-economy rules mean that all of the automakers who do business here are going to have to make big improvements in the fuel economy of all of their vehicles, top to bottom. While that won't be easy anywhere, there are degrees of difficulty: It's one thing to add a few mpg to a compact commuter car by using a smaller engine or decreasing its weight, it's another thing entirely to do it to a product where size, power, and durability are its key reasons for being.

A product like, say, a pickup truck.

Does this mean big pickups will have to change radically, or go away entirely? That's a nonstarter: While Toyota's Tundra pickup has been a modest success, Ford's F-series pickup isn't just the company's best-selling product, it's the best-selling vehicle in America. And pickups and their full-sized SUV cousins are similarly important to General Motors (NYS: GM) and Chrysler.

Pickups aren't going anywhere, and they're not likely to change a whole lot, but they will have to get better mileage. Automakers are already taking steps in that direction with a variety of technologies -- lighter-weight steels, more diesel engines, turbocharged V6s instead of V8s -- but there's a special reason to rush development of a hybrid system: It's favored by the new rules.

What Ford needs: Hybrids in a hurry
As I pointed out when the new fuel-economy guidelines were presented, pickups get a couple of breaks under the new rules. One of those brakes is particularly relevant: Hybrid pickups earn extra credits even if they don't get significantly better mileage. In other words, even if hybrid pickups don't represent a huge step forward in terms of fuel economy, there's still a big reason to build them.

Credits earned under the rule can be used to lower an automaker's overall scores, something that will be extremely useful as the manufacturers rush to meet the guidelines. GM and Chrysler already have access to a "mild" hybrid system, developed a few years back in a joint venture with BMW and Daimler. It's not great, but it would get them some credits under the rules -- and it's a place to work from.

Ford has no such thing, but I bet the company wants one bad. And while the company has a system under development, that urgent need explains why they got with Toyota -- anything to help speed up development of a viable system is a good thing from Ford's perspective.

But why did Toyota sign on?

What's in it for Toyota
The upside for Toyota is less immediately obvious, but it's still visible. Toyota's pickup sales volumes don't compare to Ford's, but the company would obviously benefit from having a hybrid option available -- for all of Toyota's vaunted green technology, its V8-powered Tundra is just as thirsty as its Detroit counterparts. Speeding up development and using Ford's very large truck sales volume to reduce the per-vehicle costs of such a system, which will be expensive to develop, makes a lot of sense.

Toyota's not completely averse to sharing some technology around hybrids and electric vehicles, as past deals with Nissan (OTC: NSANY) and Tesla Motors (NAS: TSLA) have shown. But unlike those deals, this one isn't likely to be visible in showrooms or on balance sheets for several years yet, which is why neither company's stock moved significantly on the news.

But this is a big deal, especially for Ford. Investors taking a long-term view have been right to worry about how the Blue Oval would preserve its extremely profitable pickup franchise as the new rules come into effect. With this deal, one part of the solution to that dilemma is starting to come into focus.

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At the time thisarticle was published Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by@jrosevear. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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