By on August 22, 2011

Today’s announcement of a memorandum of understanding between Ford and Toyota, uniting the two firms’ pickup truck hybrid drivetrain efforts, took quite a few industry-watchers by surprise this morning. As the industry leader in hybrid technology, Toyota has limited past hybrid cooperation to licensing its drivetrain wholesale to Nissan and a patent-sharing agreement with Ford. Moreover, the last big alliance aimed at developing hybrid technology for full-sized pickups, the Two-Mode V8 hybrids developed jointly by GM, Chrysler, Mercedes and BMW, have been a huge flop on the market, with the German partners walking away from the technology after using it in only a single application each (X5/X6, and ML Hybrid). Though Toyota and Ford have worked together to prevent a messy patent war over hybrid technology, there was little to suggest that they would take the cooperation any further, let alone join forces to hybridize full-size pickups. But if you’re looking to the marketplace to explain the Ford-Toyota tie-up, you’re looking in the wrong place: this is all about the freshly-announced CAFE standard and its generous credit system.

Of course, that’s not how the move is being pitched… at least on the surface. But in his announcement of the deal, Toyota Executive VP Takeshi Uchiyamada makes it clear that the hybrid and telematics alliance is entirely focused on the US market, saying:

Our collaboration with Ford is a move to make hybrid technology more widely available in sport-utility vehicles and in trucks. Those kinds of models are indispensable to American customers. And providing them with our hybrid technology will help conserve energy and reduce output of greenhouse gas here in the United States. That was our thinking in considering the collaboration.

How does Uchiyamada-san know how “indispensable” full-sized pickups are to Americans? The issue of full-sized trucks has dominated the debate over 2017-2025 CAFE standards, with the industry and its allies intervening to lower truck standards and increase the credit loopholes that make it easier to keep pickups relatively thirsty. This had two effects: first, the lowering of truck standards confirmed that large pickups would be worth investing in over the long term, and second, one loophole in specific provides huge incentives to hybridize full-sized trucks.

I covered the rough outlines of this credit loophole in my write up of the proposed rule, but to refresh your memory, here’s what the rule itself [PDF] says about its hybrid pickup credit

The agencies intend to solicit information on technologies that offer significant increases in fuel efficiency and reduction in greenhouse gas emissions. We intend to propose a credit for manufacturers that employ significant quantities of hybridization on full size pickup trucks, by including a per-vehicle credit available for mild and strong hybrid electric vehicles (HEVs). This provides the opportunity to begin to transform the most challenging category of vehicles in terms of the penetration of advanced technologies, allowing additional opportunities to successfully achieve the higher levels of truck stringencies in MY 2022-2025.

In other words, not only did the government reduce the required rate of efficiency improvement for trucks to nearly half what it is for cars, they also went a step further by giving credits for specific (i.e. hybrid) technology. Absent these credits, it’s highly likely that truck-dependent manufacturers would have looked to diesel power as a way to cheaply provide high-torque, high-efficiency truck powerplants, but with the feds placing their finger on the scale in favor of hybrids, Ford has no choice but to invest in the technology. And as the only Detroit-based (and therefore heavily truck-dependent) automaker to not have access to the Two-Mode technology, Ford had to move fast to find a partner. Though Chrysler and GM’s Two-Modes may not have been successful so far, they at least provide the building blocks for future development.

Besides, as we read more about the hybrid pickup credits, it’s clear that even if the 2017+ hybrid pickups aren’t super-efficient, the credits make them incredibly valuable.

The agencies intend that access to this credit is conditioned on a minimum penetration of the technology in a manufacturer’s full size pickup truck fleet, with defined criteria for a full size pickup truck (e.g., minimum bed size and minimum towing capability). The agencies intend to propose that mild HEV pickup trucks are eligible for a 10 g/mi12 credit during 2017-2021 if the technology is used on a minimum percentage of a company’s full size pickups, beginning with at least 30% of a company’s full size pickup production in 2017 and ramping up to at least 80% in 2021. Strong HEV pickup trucks would be eligible for a 20g/mi credit during 2017-2025 if the technology is used on at least 10% of the company’s full size pickups.

The agencies will propose specific definitions of mild and strong HEV pickup trucks, but expect to include stop/start, regenerative braking, minimum motor power, minimum battery voltage value and minimum energy storage capacity, or similar types of objective metrics. The agencies expect that a “mild” HEV will include moderate hybridization and not just start/stop, and that a “strong” HEV will include launch assist.

Let’s assume for the moment that the Ford-Toyota pickup drivetrain, which each company will integrate into future vehicles independently of one another, meets the government’s requirement for “strong” hybrids. If you look at the changes in maximum truck C02 targets from 2017-2025, they increase by the following amounts:

2017-2018: 5.5g/mile
2018-2019: 3.1g/mile
2019-2020: 1.9g/mile
2020-2021: 1.9g/mile
2021-2022: 14g/mile
2022-2023: 15.2g/mile
2023-2024: 14.6g/mile
2024-2025: 13.9g/mile

But under this credit system, if ten percent or more of your truck fleet have “strong hybrid” drivetrains, each truck earns a 20g/mile credit which can be applied to under-complying vehicles, “banked” for future under-compliance or “carried-back” for past under-compliance. In theory, this also means that a 2017 model-year pickup that exactly met the maximum CO2 target for that year would add 14.5g/mile to the automaker’s fleetwide efficiency rating in 2018, without improving its efficiency at all. In 2019, it would add 11.4g/mile in credits without improving efficiency, by 2020 the credit would shrink to 9.5 and in 2021 it would still be adding 7.6g/mile in credits despite not improving since 2017. If, for example, Ford had decided it could meet CAFE in that window with diesel technology alone, it would only receive additional credits if it “significantly” overcomplied with the standard, year-by-year. To wit:

The agencies also intend to propose a performance based incentive credit for full size pickup trucks which achieve a significant reduction below the applicable target. This credit could also be on the order of 10-20 gm/mile vehicle. The same vehicle would not receive credit under both the HEV and the performance based approaches.

Without a hybrid pickup drivetrain to build off of the way GM and Chrysler do, Ford has two choices for its truck strategy in 2017 and beyond: either keep costs as low as possible and hope it can undercomply with improved gas and diesel engines and improved aerodynamic efficiency and/or weight loss, or find a partner for hybrid technology and receive significant credits tied only to its use of hybrid technology rather than its actual efficiency. If that’s not a no-brainer, I don’t know what is.

But what does Toyota get out of the deal? Though it’s the clear leader in hybrid technology, its drivetrains have all been been based on transverse engines and front-wheel drive. Toyota’s expertise in full-sized, American-market trucks pales in comparison to Fords, and at this point it could even be said that Ford has the head-start on hybrid pickups, having begun joint development (with CCEFP and Folsom Technologies) on a hydraulic hybrid F-150. Autopacific analyst Dave Sullivan has another take, writing at that

Based on the press conference today, it pretty much sounds like Toyota has a RWD hybrid system in development but they need Ford’s sales volume to make it work from a cost perspective.

Whether Toyota or Ford started development first almost doesn’t matter (the press release says “both companies have been working independently on their own future-generation rear-wheel drive hybrid systems”). For Ford, a hybrid pickup drivetrain is must-have technology, due to the CAFE loopholes. For Toyota, which is less dependent on full-sizers, the need isn’t quite as dire (as CAFE offers plenty of credit opportunities for plug-in cars), but Sullivan is absolutely right that having Ford as a partner will lower costs dramatically. All in all, the deal seems to be a win-win… if only because of the way future CAFE standards were written.

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18 Comments on “Why Toyota And Ford Hooked Up: It’s The CAFE Credits, Stupid...”

  • avatar

    “But what does Toyota get out of the deal? Though it’s the clear leader in hybrid technology, its drivetrains have all been been based on transverse engines and front-wheel drive.”

    Not true. Lexus LS-h and GS-h are longitudinal RWD-based.

  • avatar

    This is VERY smart on Ford’s part and I think the market may have noticed it too given the spread btw F and GM for the day.

    GM’s balance sheet may have been cleaned up with bankruptcy but we are seeing that they are a good 2 years behind the curve on their drivetrain technology vs. the market leaders and moves like this only highlight the extra work they need to do.

    Given their truck exposure in the market and the time they’ve (over)committed to the Volt’s technology – this is an easy win they can’t exploit.

    • 0 avatar

      Just to play devil’s advocate, but who’s to say that the Volt technology isn’t scalable to a pickup? It wouldn’t be a stretch to envision a FWD-biased 4wd pickup using a more powerful version of the Volt’s powertrain up front and a high-torque electric-only drive in the rear. This allows RWD biasing at low speeds and FWD powered cruising at highway speeds when the driven wheels matter less.

      But since believing that GM actually thought of that would strain credulity, you read it here first.

  • avatar

    This has to make me wonder about whether Toyota may be planning to go further by selling and perhaps assembling tweaked, rebadged versions of Ford trucks. A bit like the Matrix/ Vibe relationship, but in reverse.

  • avatar

    Good analysis + summary, Ed.

    …”this is all about the freshly-announced CAFE standard and its generous credit system.”

    This also explains the latest push into electric vehicles by several builders. Washington would like to hand the GM/UAW axis a fat credit for the Volt+related offspring so GM can keep building trucks that earn the money to pay UAW workers while also allowing GM to invest so the company doesn’t fail. When the special “GM rules” arrive, the other manufacturers want to be there in line to benefit.

  • avatar

    I wonder if there were any other non-disclosed protocols to this agreement…

    Ford, when it sold most of its whopper equity in Mazda widely dispersed this share, but IIRC even with like 3% of equity, Ford is still one, if not the major shareholder in Mazda.

    It could also be if Toyota had any designs on Mazda, Ford could leverage such an agreement out of Toyota as the cost of giving their blessing to a closer TMC-Mazda relationship.

    I admit that I thought the biggest driver for this deal was the IP angle, so despite my error here, I would be surprised if this deal, at least at this point, extended to Ford producing p/ups for TMC.

    • 0 avatar

      It is the IP angle, driven by the credit system. This is going to cost big bucks to develop and Toyota doesn’t sell enough full size trucks to make it economical. So rather than waste money developing their own system it makes sense to team up with the leader in this market segment. Credits are going to be the key in the truck segment and the sooner they can get this done the sooner they can start banking credits. So Toyota gets to stay in the market and Ford gets to start earning credits sooner.

    • 0 avatar

      I would be surprised if this deal, at least at this point, extended to Ford producing p/ups for TMC.

      Here’s a possible scenario.

      Let’s say you’re Ford:

      -You generate strong margins selling trucks…
      -…but the high sales volumes make it difficult to meet CAFE
      -Solution: Generate truck revenues via a different outlet

      Now let’s say you’re Toyota:

      -Your success in the large US truck market has thus far been muted
      -Large trucks are largely a North American-only product, so in order to make them profitably, your sales volumes have to be largely sourced in the US…
      -…But the competition in this space is fairly stiff, and your corporate attentions may be better spent focusing on other product types and in other markets.
      -Solutions: Either (a) exit the segment or (b) find a partner that allows you to reduce your fixed cost base, at least for a period of time until you can regroup and try again later on your own

      Obviously, there’s a lot of speculation there, so it could very well be wrong. But it’s one way to read this between the lines.

  • avatar

    Will the hyraulic EPA/Ram hybrid count as a strong hybrid?

  • avatar

    Sounds like Toyota throwing in the towel on the U.S. truck market to me. I think they’ve finally realized that they will never beat Detroit in the full-size market under normal conditions, so now they have to find a back door in; associating with Ford is how they will accomplish this. I think Toyota might swing to have a rebadged F-Series sold through Toyota dealerships with this new technology, but I highly doubt Ford would ever agree to that. With Toyota’s share declining in the bread-and-butter compact and sedan markets, I see this as kind of a desperation play to open up new avenues for revenue. When the 2013 Camry doesn’t reverse the trend, it will be even more obvious.

    • 0 avatar

      I can see Ford putting Toyota built cabs, beds, and maybe even engines in/on trucks they build for Toyota. Or a JV factory that produces the basic rolling chassis for the Hybrid truck and final assembly with the parents providing the cabs and beds. Since they are BOF it’s easy to do w/o comprising the uniqueness. Ford’s currently doing it with Navistar for their MD trucks in a JV plant.

  • avatar

    CAFE turned out to be a huge problem…it put all of us into “trucks” when what we really need is station wagons.

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