Why Toyota and Tesla Are Getting a Divorce

<b class="credit">toyota.com</b>

It seemed like it would be a beautiful marriage. In 2011, auto giant Toyota (TM) and tiny upstart Tesla (TSLA) signed a $100 million arrangement for the latter to develop and supply battery packs and motors for a plug-in electric version of the Japanese company's RAV4 sports utility vehicle.

The deal combined Tesla's innovation in electric vehicles with Toyota's global presence and massive customer base. But barely three years later, Toyota said it will allow the agreement to expire.


The agreement came about shortly after Toyota ponied up $50 million for a small stake in Tesla in 2010. It turns out that there wasn't that much to develop. Toyota's alternative-car sales are dominated by the consistently popular Prius series of hybrids. The market heavily favors such models. According to the Electric Drive Transportation Association, in April of this year, nearly 39,500 standard hybrids were sold in the U.S., far outpacing the 4,187 EVs powered solely by batteries, like Toyota's RAV4 EV.

Even within the limited pure battery space, not many RAV4 EVs roll out of Toyota dealerships. According to segment tracker Electric Cars Report, only 69 were sold in April. Meanwhile, Nissan (NSANY) sold nearly 2,100 LEAFs; Ford (F) sold 116 Focus Electrics; and 97 Chevrolet Sparks from General Motors (GM) left the lot.

Tesla continues to stand atop the EV market. The company is reluctant to break out monthly sales, but in its fourth quarter of 2013 it delivered 6,892 Model S sedans.

Selling Cells

Those RAV4 EV sales will soon dwindle down to zero. Once the Tesla/Toyota agreement, which covers the production of 2,600 vehicles, is fulfilled, Toyota will cease making that version. The move reflects Toyota's overall philosophy on green vehicles: The company believes plug-in EVs are useful only as short-range commuter cars and that hydrogen fuel cells are the future of long-range eco cars.

%VIRTUAL-article-sponsoredlinks%And their range is long. According to the Department of Energy, a fuel cell vehicle can run 300 to 400 miles between fill-ups. That compares favorably to the estimated 265 miles the EPA has estimated for a single charge on Tesla's Model S, and the 84 miles Nissan says its LEAF can travel.

Advancements have reduced the high price of fuel cell technology. The National Academy of Sciences estimates the average cost for a fuel system at $39 per kilowatt hour. Contrast that with the academy's estimate for the lithium ion batteries used in EVs between now and 2030 -- $200 to $250 per kilowatt hour.

Of course, we still have a long way to go before hydrogen fuel cell technology is a viable mass market option. There are only 180 or so hydrogen refueling stations in the world. That number will need to increase by a couple of orders of magnitude for the automaker to succeed with its first fuel-cell mass market vehicle, which it hopes to start selling in 2015.

Better Off Apart?

The end of their marriage won't traumatize either Toyota or Tesla. For the Japanese firm, $100 million is barely a drop in the bucket of its sales. Plus, that initial $50 million investment Toyota made in its partner's stock in 2010 is now worth a great deal more -- the shares have skyrocketed from about $30 apiece at that time to around $210 nowadays.

Meanwhile, Tesla drew some revenue from the arrangement (around $15 million in its most recently reported quarter), and any income helps for the consistently loss-making company. More critically, it has gained valuable SUV experience, which it is no doubt using in the design and construction of its first such offering, the Model X, anticipated to hit the market in fall 2015.

A separation of two partners that could be so effective together is rarely good news. But if the ambitious plans of this pair come even close to fruition, this split might be a real boon for both.

Motley Fool contributor Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors and Tesla, and it owns shares of Ford and Tesla Motors. Try any of our newsletter services free for 30 days. ​