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Image: Gov. Arnold Schwarzenegger And Tesla Motors
Justin Sullivan  /  Getty Images file
California Gov. Arnold Schwarzenegger, Toyota CEO Akio Toyoda and Tesla Motors CEO Elon Musk pose in front of a Tesla Model S at Tesla Motors in Palo Alto, Calif.
Alison
By Allison Linn Senior writer
msnbc.com
updated 5/27/2010 6:09:49 PM ET 2010-05-27T22:09:49

When rival automakers Toyota and GM decided in the early 1980s to build cars  together at the Northern California NUMMI auto plant, many questioned whether the unusual arrangement would work out.

Nearly 30 years later, and only a month after Toyota followed GM's footsteps in abandoning the NUMMI plant, Toyota has made another surprise decision: A $50 million investment in a small startup called Tesla, which plans to make electric cars at the NUMMI plant.

The 11th-hour deal announced last week marks the latest chapter in NUMMI's storied history. It also offers a rare piece of good news for Toyota, which has struggled in recent months with a spate of recalls and fallout from the wildly unpopular NUMMI plant closure.

“This is like a public relations bonanza for them,” said Robert E. Cole, professor emeritus at UC Berkeley’s Haas School of Business, who has followed the NUMMI story closely for decades.

The sprawling New United Motor Manufacturing Inc. facility in Fremont, Calif., closed last month after first General Motors and then Toyota pulled out of the groundbreaking joint venture, leaving 4,700 workers without jobs.

The partnership had offered Toyota a chance to establish a foothold in the U.S. market and gave GM the opportunity to learn from Toyota’s famously efficient manufacturing philosophy.

In the end, experts say, the lessons learned from the plant and from the Toyota manufacturing philosophy in general had a ripple effect on a far broader swath of the U.S. manufacturing industry.

Now, industry watchers say the new deal between Toyota and Tesla could serve a different purpose: To burnish the images of both companies.

For Tesla, the deal — which calls for Toyota to buy $50 million in common stock when Tesla goes public — offers another measure of legitimacy as it begins the transition from offering a very expensive car on a very small scale to catering to a broader market.

“They certainly get some credibility,” said Susan Helper, a professor of economics at Case Western Reserve University and an expert in auto manufacturing.

The surprise announcement last week was made “in the 11th hour,” just before the company was about to sign a deal for another space elsewhere in the state, said Diarmuid O’Connell, Tesla’s vice president of business development.

Until then, O’Connell said Tesla had not thought it would be financially feasible to take on the NUMMI space, which is a more attractive option for the company because it is closer to their Palo Alto, Calif., headquarters and is already designed for auto vehicle assembly. The company said in an SEC filing Thursday that it had agreed to pay $42 million for the property.

Initially, O'Connell said company plans to use just a small portion of the plant, he said.

Steve Curtis, a spokesman for Toyota, it’s too early to say exactly how the deal will play out.

"We're going into this with a wide open approach," Curtis said.

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He added that Toyota Motor Co. President Akio Toyoda felt a personal attachment to the NUMMI plant, where he once worked, and was happy to see that Tesla would use it.

Big guy/little guy
Experts say there could be other benefits to Toyota beyond just a jolt of much-needed good publicity.

The deal with a quick-moving, entrepreneurial company, also could infuse a bit of fresh thinking into the large company, which has recently been accused of being too stodgy, said Michelle Krebs, senior analyst with Edmunds.com. She noted that it’s a far cry from the circumstances that brought Toyota and GM together in the 1980s.

“With Toyota and GM you had the two giants of the planet operating together, learning from each other. They both knew how to do mass manufacturing,” Krebs said. “What’s interesting about the Toyota/Tesla situation is it’s a big guy learning from a little guy and a little guy learning from a big guy.”

It also could give Toyota access to useful technology. While Toyota has been a leader in developing fuel-efficient hybrid vehicles, some say the company so far has not been as aggressive about all-electric vehicles. That could prove to be a serious disadvantage if competitors such as Nissan are able to trump them in that space.

“It’s kind of an additional bet,” said Helper, the economics professor. “What they’re buying is an additional roll of the dice.”

Helper said the investment, relatively small for Toyota, also isn’t too risky if it turns out that Tesla’s bet in the electric car space isn’t the right one.

“I think the space is quite complicated, and for Toyota it doesn’t really matter if this particular experiment works or not,” Helper said. “For Tesla, it’s obviously more important.”

Though still relatively obscure, Tesla Motors is already selling a sporty version of its all-electric vehicle, called the Roadster, for around $100,000. The company also plans to offer the Model S, with a base price of around $50,000, beginning in 2012.

Tesla already has attracted investments from big names such as Germany's Daimler AG and Google co-founders Sergey Brin and Larry Page. But while Tesla’s ideas have caused major players to sit up and take notice, Krebs said the company has not yet had to deal with key challenges such as manufacturing vehicles on a large scale and for a broader audience.

“Whether they’ll be successful at doing this, I think that’s still up in the air,” Krebs said. “It’s very easy to make one-off vehicles and handcraft them and charge a lot of money for them, vs. manufacturing them in huge volumes.”

That’s what makes the Toyota investment so important. Despite the recent flaws that have led to mass recalls, Toyota is generally thought of as one of the most accomplished and streamlined manufacturers in the world.

Tesla, whose vice president of manufacturing is a former Toyota executive, appears eager to incorporate some of those practices into its operations.

“Toyota is renowned for its manufacturing process and efficiencies and safety standards and quality standards, and we would absolutely hope to benefit from bringing the companies closer together,” Tesla’s O’Connell said.

Helper, who studied Silicon Valley extensively during the dot-com era, thinks auto manufacturers and high-tech executives both still have a lot to learn from Toyota. Still, she said it could be tricky to mesh Tesla’s startup culture with Toyota’s more conservative approach.

Of course, there were plenty of risks when Toyota and GM announced their partnership at NUMMI back in the early 1980s.

The NUMMI plant had previously been operated solely by GM, and even by auto industry standards it was renowned for its inefficiencies and quality lapses. In addition, the plant was plagued by friction between management and the United Auto Workers union.

Within just a few years, however, the plant was able to implement a Toyota-style model of efficient production and to vastly improve the relationship between union and management, Helper said.

“Toyota came in and basically put a lot of trust in the workers,” Helper said.

For Toyota, the unique experiment proved to be one of the major stepping stones in the company’s huge success in the U.S. market, Cole said.

“Toyota learned a lot from it and applied it to their subsequent plants,” he said.

At GM, on the other hand, there was strong resistance to change, and the company was very slow to incorporate lessons from NUMMI into its other manufacturing operations, Cole said.

“(There were) a lot of people in GM that just didn’t think that was an answer,” Cole said.

Instead, the company focused on other strategies, such as making ever-bigger cars and SUVS. That proved to be one of the many factors leading to its recent government bailout and trip to bankruptcy court.

In the end, Cole thinks Toyota stuck with the NUMMI plant long after it had proved useful to the company in large part because of its loyalty to GM. But when GM pulled out amid its bankruptcy and other troubles, Toyota eventually followed suit.

It’s far from clear whether Tesla will ever do what Toyota and GM did for the region surrounding the NUMMI plant. For now, the electric car company only plans on occupying a small part of the factory’s sprawling facilities and will not hire nearly as many workers as were laid off when NUMMI closed.

Ron Lopez, a business servicing representative with the NUMMI One-Stop Center, which is working in partnership with the UAW to help laid-off hourly workers find new jobs, said they have heard that Tesla would like to hire former NUMMI employees, but that laid-off  factory workers aren’t banking on it.

“We haven’t seen one person yet get hired,” he said.

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