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Tesla, Toyota project exposed corporate culture clash

Tesla Motors CEO Elon Musk holds up a

Tesla Motors CEO Elon Musk holds up a bottle of wine given as a gift from one of their first customers on June 22, 2012, during a rally at the Tesla factory in Fremont, Calif. Credit: AP

Four years ago, Tesla Motors chairman Elon Musk invited a fan to his California home and let him take the Roadster sports car out for a spin. His guest: Akio Toyoda, president of the world’s biggest automaker.

The two hit it off so quickly that within weeks, Toyota Motor Corp. agreed to buy a $50 million stake in Tesla and sold a shuttered California factory to its new partner for a mere $42 million. They also agreed to retrofit the Toyota RAV4 sport utility vehicle for electric power, and considered extending the collaboration to an electric Lexus RX SUV, a person familiar with the matter said at the time.

Today, the ties are unraveling as sales of the codeveloped RAV4 electric vehicle wind down, with fewer than 2,000 deliveries to date. Once lauded by Musk as a springboard for a deeper partnership, the SUV stood little chance of becoming a hit after Toyota slapped it with a sticker price of almost $50,000 — double the gasoline version — and limited its availability to California.

More fundamentally, the tie-up was marred by clashes between engineers, according to people with knowledge of the matter, and highlights how quickly marriages of convenience can turn sour in the auto industry. Toyota is now distancing itself from Tesla’s core electric vehicle market and embracing fuel cells, a technology Musk ridicules.

“Just because two companies are successful doesn’t mean when they come together, they will succeed,” said Ashvin Chotai, managing director of Intelligence Automotive Asia. “When you’ve got somebody threatening the status quo in an industry, and they try to cooperate with the biggest player, it’s bound to lead to so many complexities.”

Representatives at Tesla and Toyota declined to comment on specific details of the RAV4 EV’s development.

The two companies’ motivation for entering the project highlighted their respective weaknesses. Toyota, which sought to learn from its more nimble partner, will trail the industry average pace for churning out new models for the next five years, according to Bank of America Merrill Lynch. Tesla, founded in 2003 — almost 80 years after Chrysler, the next-youngest American carmaker — is in the midst of an expansion that will test its manufacturing capabilities.

Back in May 2010, as the emerging alliance took shape, Palo Alto, California-based Tesla’s chairman, who’s also CEO, called the partnership “historic” and said Toyota was a company he long admired. In describing his test drive of the Tesla Roadster about a month earlier, Toyoda said he felt “the wind of the future.”

For Tesla, the deal meant money, its first factory at a bargain price, and the credibility that comes with working alongside an industry leader.

For Toyota, the tie-up gave the grandson of the company’s founder the opportunity to reinvigorate a carmaker reeling from its sudden unintended acceleration recall crisis. Toyota’s investment also ended up being a profitable one: its Tesla stake is now worth more than $700 million.

“When Akio got involved in this with Elon, I think it went beyond batteries,” Jim Lentz, head of Toyota’s North American operations, said in May. “It was about teaming up with this very entrepreneurial, small startup in the automobile business.”

It didn’t take long before conflicts began to emerge, people familiar with the project said. According to two former engineers at the companies, when Tesla engineers presented Toyota with early design proposals for the RAV4 EV, Toyota’s team balked at the lack of a common car component called the parking pawl — the part of the transmission that backs up the parking brake.

Instead, Tesla proposed putting in an electronic parking brake after the company experienced difficulties with the pawl it used when developing the Roadster, one person said. Toyota’s engineers were impervious and the pawl was put into the RAV4 EV.

Toyota engineers also rejected Tesla’s proposed designs for an enclosure that would protect the bottom of the RAV4 EV’s battery pack, the people said. Toyota ended up taking over design responsibilities for the enclosures and strengthened the structural integrity, they said.

Tesla ultimately added a titanium plate to its Model S sedan in March this year to better protect its battery as U.S. regulators reviewed crashes that led to the cars catching fire.

Another source of friction was Tesla’s proprietary system that captured energy from when drivers decelerated, said Jeff Liker, a University of Michigan engineering professor who met with Toyota’s RAV4 EV engineering team last year.

With Tesla’s system, releasing the gas pedal causes the vehicle to start braking, which could cause the car to jerk and take some getting used to, Liker said. Toyota’s engineers were concerned this would be a turnoff. Making adjustments was painstaking because both sides were protective of their systems.

“Toyota couldn’t share their actual code with Tesla, and Tesla couldn’t share their actual code with Toyota,” he said. “The way they explained it was like, ‘this is a black box.’ ”

Tesla values the “world-class” production quality processes it learned from working with the Toyota City, Japan- based carmaker, JB Straubel, the U.S. company’s chief technical officer, said in an interview. He said he wasn’t aware of specific episodes of tension between the engineers, and Tesla spokesman Simon Sproule declined to comment on the RAV4 EV development process.

“You had a case of two very different companies with different approaches,” said John Hanson, a Toyota spokesman. “Sure, it was a difficult project, but it also had a very tight time deadline and the product came out on schedule.”

Two years after Toyoda and Musk announced the project, the RAV4 EV went on sale in 2012 — fast for an industry where redesigning models can take seven years. Since then, deliveries of the vehicle have totaled 1,902 through July. The pair had planned to sell 2,600 over three years from the outset.

While the RAV4 EV hasn’t been recalled or been investigated by the National Highway Traffic Safety Administration for any safety actions, count Tony Williams among customers who are dissatisfied.

Williams, who bought the vehicle in November 2012, said his RAV4 EV has spent more than 30 days getting repairs and has needed replacements for the motor assembly, heater and power electric-power converter. Williams still drives electric, though he prefers to do so in a Nissan Leaf.

“The RAV4 is a frickin’ nightmare,” said Williams, who lives in San Diego, California.

Toyota isn’t aware of any specific widespread problems with the RAV4 EV, said Hanson, the spokesman. The company worked to resolve some of the technical issues raised on owner websites when the vehicle first went on sale, he said.

With the RAV4 EV nearing its end, Toyota and Tesla are taking different paths. Tesla is flying high with its Model S, scoring the best rating ever awarded by Consumer Reports. Musk plans to build the world’s largest lithium-ion battery factory and is readying its electric Model X for release next year, followed by the Model 3 small sedan in 2017.

Toyota, on the other hand, is looking to hydrogen-based fuel cells for the future. Musk in June mocked the technology, referring to it as “fool cells.” In October, he said that there’s “no way” fuel-cell vehicles would succeed because they’re too complex and costly.

Toyota’s response? “Competitors who dismiss fuel cells out of hand do so at their own peril,” Bob Carter, senior vice president at Toyota’s U.S. operations, said in January. When asked specifically about criticism of fuel cells by Musk and other executives including Nissan Motor Co. CEO Carlos Ghosn, Carter said “personally, I don’t really care.”

Despite the challenges, neither company has given up on partnerships. BMW is codeveloping a sports car with Toyota and Tesla is providing batteries and motors to Daimler AG’s Mercedes-Benz B-Class electric hatchback.

Toyota and Tesla also may not part ways for good. Tesla agreed with Toyota to “put things on hold and circle back maybe in a year or two,” Musk said June 3 at Tesla’s annual shareholder meeting.

“The two automakers are diametrically opposed in so many ways,” said Ed Kim, an industry analyst for researcher AutoPacific Inc. “I don’t see Toyota working with Tesla again just because EVs aren’t where their heads are at.”

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