Mazda-Toyota Partnership: A Right Turn

(Bloomberg Gadfly) -- If you can't beat 'em, join 'em.

That seems to be the calculus around a Nikkei report Friday that Toyota Motor Corp. is set to strike a deal to take a 5 percent stake in fellow Japanese automaker Mazda Motor Corp., which would also get shares of Toyota.

The alliance could include creating a joint-venture U.S. auto plant and sharing electric-vehicle technology, Nikkei reports.

Investors in Mazda's ADRs cheered the move, sending them up more than 6 percent. 

And for good reason: It's especially smart for Mazda, which has been struggling to keep up as the global auto industry consolidates.

Mazda's 1.56 million in annual car sales pales in comparison to Toyota, which sells 10 million cars a year. But what Mazda lacks in volume it makes up in operational heft: Both Mazda's return on invested capital and gross margins are among the highest in the industry and surpass Toyota's. As Gadfly's David Fickling has written, Mazda is among the best-run car companies in the industry.

Banding together with Toyota on a new American manufacturing plant will become even more important for Mazda if President Donald Trump lives up to his protectionist promises. 

Even as U.S. car sales head south, North America remains Mazda's largest market: The region accounted for more than a third of Mazda's revenue and 21 percent of operating profits last year.

And yet none of Mazda's cars are made in the U.S. -- which could land it in big financial trouble if a proposed hike in U.S. import tariffs goes through. Mazda makes 62 percent of its cars in Japan and then ships them across the ocean. While Mazda does have a plant in Mexico, it mostly makes cheaper and smaller cars, such as the Mazda 3, rather than the big SUVs Americans buy.  

The U.S. isn't Mazda's only problem. It has also been late to the electric-vehicle party and could benefit from a partnership with Toyota, whose larger research and development budget could help accelerate both companies' push into this crucial growth market. 

Toyota also gets a few things out of the union, too.

Forming an alliance with Mazda, along the lines of what Nissan Motor Co. Ltd., Renault SA and Mitsubishi Motors Co. have done, will help Toyota in its fight to be the world's largest carmaker, keeping Vokswagen AG at bay.

Plus, Mazda could inject a bit of pizazz into Toyota's pretty boring lineup at a time when car-buyers increasingly want more than just utilitarian vehicles.

The two companies have been essentially dating for a long time: Mazda has been licensing Toyota's hybrid technologies, and Toyota has been using Mazda's Mexican plant to make some of its compact cars.

In 2015, the two agreed to share technologies, in what Toyota CEO Akio Toyoda called "an engagement announcement, not a marriage announcement." 

Well, now they seem to like each other enough to move to the next step by creating a more formal capital tie-up. The best relationships tend to form after years of friendship; and like any good partnership, this one will make both sides better versions of themselves.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

To contact the author of this story: Shelly Banjo in Hong Kong at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.