In a major deal for the two car makers, Toyota trades factory for stake in Tesla

The two companies said on Thursday they would cooperate on the development of electric vehicles, parts and production system. Separately, Tesla will take over a plant Toyota closed in the San Francisco area and build its upcoming all-electric Model S sedan at the site from 2012.

The David-and-Goliath handshake highlights a changing dynamic in the auto industry, where newcomers such as Tesla and BYD Co of China are challenging established players in the uncharted field of mass-produced all-electric vehicles.

At a joint news conference in California, Tesla Chief Executive Elon Musk described the investment as a "gesture of support" from Toyota Chief Executive Akio Toyoda, who approached him in a whirlwind corporate romance that included dinner at Musk's house and a test ride around Los Angeles in Tesla's pricey electric Roadster sport car over the last month.

Tesla aims to tap Toyota's expertise in mass production while Toyota wants to win back public support hurt by its Prius hybrid recalls and San Francisco Bay Area protests against its decision to close the plant that Tesla is buying.

"Toyota gets to save face in California and give the impression that they're beefing up their electric vehicle strategy, which is seen as lagging Nissan Motor's and Mitsubishi Motors'," said Tatsuo Yoshida, Tokyo-based auto analyst at UBS Securities.

"An investment of $50 million is not much for Toyota, and it seems like a win-win for everyone involved," he said.

President Toyoda, a licensed car racer who has pledged to turn the company founded by his grandfather into a more nimble one, said Toyota could learn a lot from Tesla's entrepreneurial drive.

"Toyota was once a start-up company," he said through a translator at the news conference, also attended by California Governor Arnold Schwarzenegger.

"Working with Tesla will provide us with a powerful stimulus," he said.

ELECTRIC RETHINK

Toyota will take the stake in a private placement to close immediately after Tesla's much-anticipated initial public offering, and estimated the $50 million would amount to a stake of around 2.5 percent. Musk said that another Tesla investor, Germany's Daimler AG, approved of the Toyota stake.

Toyota shares fell 1.9 percent to close at 3,355 yen in Tokyo on Friday, compared with a 2.5 percent drop in the benchmark Nikkei 225 index.

The sudden interest in Tesla signals a shift in Toyota's hitherto skeptical view of battery-run electric vehicles as a viable alternative to today's internal combustion engine cars.

While stressing that it still considered gasoline-electric hybrid vehicles the most promising and effective alternative to reducing emissions and fuel use, Toyota said Tesla's cars, capable of long range highway driving, made it rethink the real potential of all-electric vehicles.

Most global automakers, including Nissan and Renault SA, which have most vocally championed electric cars, have said the high price of batteries meant such zero-emission cars were most suitable for short-range driving.

Toyota said it wanted to know more about Tesla's technology, which packs together lithium-ion batteries similar to those used in cell phones, to see whether it could be adopted for its own cars. Toyota develops and produces batteries mainly in a joint venture with Panasonic Corp.

Tesla's $109,000 Roadster sports car has become an emblem of California's plans to reinvent itself as the hub of clean technology of all sorts. Tesla has sold more than 1,000 Roadsters in North America, Europe and Asia so far.

Production of Tesla's Model S will begin at the plant, called New United Motor Manufacturing Inc (NUMMI), in 2012 and ramp up to 20,000 per year.

Toyota closed the sprawling NUMMI plant in Fremont, Calif., in April, laying off over 4,500 workers after former partner General Motors pulled out of the joint venture plant as part of its post-bankruptcy restructuring.

NUMMI had a capacity of 400,000 cars per year, so the Model S production will occupy only a small corner of the plant, acknowledged Musk, who called it an investment in the future.

Governor Schwarzenegger said Tesla eventually could create 1,000 jobs.

The six-year-old start-up has been granted $465 million of loans from the U.S. government to build a new lower-cost model. It had been hunting for a manufacturing site in California and initially rejected NUMMI as too big.