BMW Announces Deal to Supply Toyota with Diesel Engines, MoU Signed for Collaborations on Alternative Powertrain, Battery R&D

BMW and Toyota have announced in a joint company press release that they have signed a memorandum of understanding (MoU) to collaborate on their next generation of future powertrain technology while they will also enter into a joint development and research programme into the next generation of lithium-ion (li-ion) batteries. They have also agreed to work to identify other areas of potential collaboration. In addition to the technology and research and development (R&D) collaboration the two companies have entered into a binding contract for BMW to supply powertrains to the world's biggest carmaker. The contract will see BMW supply Toyota's European subsidiary, Toyota Motor Europe, with BMW's latest generation of 1.6-litre and 2.0-litre diesel engines starting from 2014. The powertrains will be fitted in a number of as-yet unspecified Toyota models in the European market, which will expand the company's European diesel offering and lower range-wide CO2 emissions. The powertrains are likely to feature in the latest versions of the C-segment Auris, MPV-C Verso, D1-segment Avensis and SUV-C RAV4.

Commenting on the announcement Norbert Reithofer, Chairman of the Board of Management of BMW, said: "Toyota is the leading provider of environment-friendly series technology in the volume segment and the BMW Group is the most innovative and sustainable manufacturer of premium automobiles. We are now joining forces to further develop environment-friendly technologies and to expand our innovation leadership in each of our segments. Supplying Toyota with our fuel efficient and dynamic diesel engines represents another important step in the planned expansion of our sales activities for engines and powertrain systems." Toyota is equally pleased with the tie-up, with president Akio Toyoda stating: "It is a great joy and a thrill to enter into this mid-to-long-term collaborative relationship with BMW, a company with its own culture and history from its many years of car manufacturing in Europe, and a company that makes cars that are fun to drive. In the spirit of contributing to furthering the development of the auto industry and society, both companies will bring their wide-ranging knowledge - starting with that concerning environmental technologies - to the table and make ever-better cars."

Outlook and Implications

This is potentially a very valuable collaboration for both parties and it could end up evolving into a significant partnership which substantial benefits and synergies. There is little in the way of crossover and competition between BMW and Toyota, there is little crossover of potential customers for the Auris and Avensis that would have a 1-Series and 3-Series on their potential shopping list. That said, if Toyota's mainstream C1- and D1-segment models are suddenly available with state-of-the-art diesel powertrains, their appeal is likely to be considerably broadened, as is no doubt Toyota's intention. The one area of obvious overlap between the two companies is Toyota's premium Lexus brand. The Lexus IS is a direct competitor to the BMW 3-Series and the GS is a natural rival to the 5-Series. However, at this stage the BMW diesel engine supply deal will only apply to Toyota-branded cars sold by TME. This could result in a situation where Toyota's mainstream brand cars have the latest BMW diesel powertrains in Europe, resulting in models that outperform equivalent Lexus model lines in terms of CO2 emissions and fuel efficiency.

This is one of the more obvious drawbacks to the engine supply deal, but only for Lexus' aspirations in the European market. With the new European Union (EU) emissions regulations coming in from 2012, the engine supply contract could be seen as a move by Toyota to further lower the CO2 emissions of the company's European model range. This would ensure that by 2014 and 2015, by which time 80% and 10% of the range will have to meet the 130 g/km emissions limit (weight allowances notwithstanding), Toyota will be very well prepared to meet these targets, given the company's existing range-wide low CO2 output. For example the new BMW116d EfficientDynamics has a provisional CO2 rating of just 99 g/km while the forthcoming F30-Series 320d, which will be released next February, will have a CO2 score of less than 110g/km. These phenomenal figures show the powertrain technology that Toyota is buying into. Presumably, gaining access to this state-of-the-art diesel engine technology will not come cheap. As well as a hefty supply contract fee, BMW is set to benefit from huge R&D synergies on developing its next generation future powertrain technology, in the area of electric vehicles (EVs), hybrids and presumably fuel cells. For a company of BMW's size, and one which fiercely guards its independence, this is a major boon. The company is a world leader in conventional ICE powertrains and had made impressive headway in developing its own standalone EV programme with the forthcoming i3. However, R&D for this technology is extremely expensive and developing successive generations of EV and hybrid technology on its own would have been a significant draw on BMW's resources. Combined with Toyota the two companies' technological know-how will from a formidable R&D capability in this area as well as introducing significant synergies and cost-savings. The future li-ion battery development programme will be of particular potential benefit to BMW, given Toyota's advanced programme in this area, and the advanced post li-ion technology programme headed by Dr John Muldoon.

The recent history of collaborations between German and Japanese OEMs is hardly auspicious as witnessed by the very public and acrimonious breakdown of the relationship between VW and Suzuki. However, it appears that BMW and Toyota have taken a very different approach with their collaboration. There is a commercial supply contract already in place which will help anchor the whole collaboration while they have also defined the terms of the technology research programme in advance of the announcement. With Suzuki and VW it was as if they announced the alliance and then looked to refine the finer details only to find that no common ground could be found. BMW's existing engine development and production/hybrid components purchasing deal has the potential to develop into a global hybrid powertrain and components purchasing alliance between Toyota, BMW and PSA, especially given the good relationship between Toyota and PSA that has resulted from the TPCA A-segment car joint venture (JV) in the Czech Republic. In short, this deal would appear on first view to be a significant potential winner for both BMW and Toyota.