• by Thom Forbes  @tforbes, August 23, 2011

It looks like government regulation is doing something that free market forces hasn't: it's bringing two competitors together to produce a product that's good for consumers, good for the environment and -- the motivating factor, of course -- potentially better for each company's bottom lines.

Ford and Toyota announced yesterday that they would collaborate on developing a gas-electric hybrid system for rear-wheel drive light trucks and sport-utility vehicles that will meet the new fuel economy standards that require that automaker's vehicles to average 54.5 miles a gallon by 2025 -- a quick squeeze of the pump handle from double the current level of 27.6 miles a gallon.

"American society can't do without trucks and SUVs," said Toyota's research and development chief Takeshi Uchiyamada. "This collaboration we are forming with Ford is not only about lowering carbon dioxide but making trucks and SUVs more affordable for the customer."

"It's a win-win for both automakers and for consumers, too," Eric Fedewa, director of global powertrain forecasts for IHS Automotive, tells Alisa Priddle of The Detroit News.

Calling it an "unusual pairing," the Wall Street Journal's Jeff Bennett and Mike Ramsey point out that Ford and Toyota already have hybrid systems for front-wheel-drive passenger cars such as the Fusion and the Prius, respectively.

"Why now and why these companies is a reflection of the way CAFE [Corporate Average Fuel Economy] standards are heading," Barclays Capital analyst Brian Johnson tells them. "The simultaneous regulatory requirements to cut emissions, combined with the need to keep capital expenditures in line, means engineering is now getting ahead of company egos. We will see more of these partnerships in the future."

Lest one underestimate the lingering power of serendipity in business, despite the kudzu-like growth of corporate bureaucracies over the past century, a chance meeting between Toyota President Akio Toyoda and Ford CEO Alan Mulally at an airport terminal sparked the alliance. They exchanged business cards, which led to informal discussions about their operations, according to Uchiyamada.

The companies will use the jointly developed technology to develop separate models under the Ford and Toyota brands, Nick Bunkley reports in the New York Times, that will go on sale later this decade.

"Clearly, Ford and Toyota will remain competitors," says Derrick Kuzak, Ford's group vp for research and development. "By working together, we will be able to offer our customers more affordable technology sooner."

The two companies will also collaborate on developing Internet-based information and entertainment systems in vehicles. "The companies already are among the industry's leaders in this area, known as telematics," Bunkley writes, "and their partnership could give them enough leverage to essentially dictate the standards that other automakers use to wirelessly connect mobile phones and other devices to vehicles."

"Ford is taking advantage of Toyota's hybrid leadership -- it has sold 3.3 million hybrid vehicles since 1997," Greg Gardner writes in the Detroit Free Press, "Toyota will gain from Ford's truck-making expertise."

Mulally is a long-time fan of Toyota. He drove a Lexus before joining Ford in 2006, Gardner reveals, and has visited Toyota in Japan several times. "We went to study with the master," he said glowingly after one visit. He and Toyoda personally hammered out the deal.

"We have a lot of details to work out with Ford before we can tell you more," Uchiyamada said in explaining why specifics and timelines for the products are vague.

Gardner says the deal is not unique, pointing to General Motors and DaimlerChrysler collaborating on a hybrid transmission that has been available in several models for both automakers and is also used in the Mercedes-Benz ML450 and the BMW X6.

"Total cost of developing a specialized platform together, instead of independently, should knock off 50% of the development cost and time," Veerender Kaul, Frost & Sullivan automotive & transportation industry director tells the Detroit News' Priddle. "I see it as Toyota needing Ford's [truck] volume more than Ford needs Toyota's technology," IHS Automotive's Aaron Bragman says.

Hybrid systems can add $10,000 or more to what a consumer currently pays for a vehicle, Chuck Squatriglia reports in Wired, "while returning a negligible increase in fuel economy. But meeting the new fuel economy standards will force automakers to embrace advanced technologies and offer them widely," lending impetus to the collaboration.

"This is the kind of collaborative effort that is required to address the big global challenges of energy independence and environmental sustainability," Mulally said in a statement. 

In his Green Tech blog on CNET, Martin LaMonica endeavors to explain "why the Ford-Toyota hybrid tie-up is a big deal." He writes: "The collaboration means that there will be far more people than just Prius drivers who can boast the superior mileage of hybrids. Now, people more concerned with horsepower and towing torque will be introduced to a technology once pigeonholed as way to show off drivers' environmental bona fides. Common sense, it seems, has finally found its way to SUV and truck makers."

Hmmmm. And all it took was a little governmental strong-arming to get them there.