Why did Toyota Invest in Uber?

We reckon that there are probably three categories of problems that Toyota needs to address:

Problem encountered by Toyota in the recent years in its effort to compete with General Motor, Volkswagen Group and Renault-Nissan-Mitsubishi alliance [1, 2] for the position as the biggest automaker in the world.

Problem encountered by Toyota in the near future with the increasing popularity of electric cars and the growing number of countries that decide to phase out fossil fuel vehicles via regulation for environmental protection reasons.

Innovative Disruptions posed by ride-hailing services platform and self-driving cars that could reduce the total number of vehicles on the road.

Toyota’s strategic move to invest in Uber as well as Southeast Asia Ride-Hailing company Grab in my opinion falls in the 3rd category of the challenges (disruptive innovations) posed by ride-hailing services and driverless technology.

From the currently available online information, Toyota has invested in Uber as early as 2016 via an undisclosed sum of capital which aims to form a "strategic partnership" with Uber in the area of operations. Under the 2016 agreement, Uber drivers can lease their vehicles from Toyota and cover their payments through earnings generated as Uber drivers. It is understood that the leasing period will be flexible and based on driver needs. Besides, both companies also agreed to conduct ride-sharing trials in countries that have yet to establish the practice.

Toyota’s most recent strategic investments in Uber (in August 2018) in my opinion has switched its focus from mainly achieving operational synergy to forming technological partnership with clearer service roll-out roadmap.

Wall Street Journal reported that Toyota will be investing about $500 million in Uber Technologies Inc as part of an agreement by the companies to work jointly on autonomous vehicles that aim at improving safety and lowering transportation costs. According to The Guardian, the partnership aims to use technology from both companies in purpose-built Toyota cars to be deployed across Uber’s ride-sharing network from 2021.

Meanwhile, in an interview with Bloomberg, Edwin Merner, the Tokyo-based President of Atlantis Investment Research Corp analysed that Toyota’s $1 billion investment in Southeast Asia’s ride-hailing company Grab isn’t necessarily about making money but about getting access to technology that fits in some place in Toyota’s broader business. He opined that if Toyota can build up knowledge on things like automated navigation, this is worth it as a kind of R&D.

Other than betting on Uber and Grab in exploring potential business synergy in the areas of ride-hailing services and driverless technology, Toyota has also invested ¥300 billion ($2.8 billion) in a separate Tokyo-based company that will build software for self-driving cars according to a report in the Wall Street Journal. The Toyota Research Institute-Advanced Development (or TRI-AD) will set out with 300 employees but Toyota hopes that it could ramp up the team to 1,000 employees as the company takes off. Toyota has an ambitious deadline of 2020 for testing its autonomous, electric vehicles. It reflects the company’s larger goal to commercially expand the availability and capabilities of self-driving cars.

According to the estimates from Roland Berger, by 2030, demand for individually owned cars might decline by almost 30%. At the same time, car-sharing and peer-to-peer mobility would increase until around 2025. However, it is expected they will then be replaced by autonomous vehicles.

The biggest ride-hailing service provider in China Didi Chuxing has framed its mission in a way that it needs to reach out to the future middle-class and convince them that ride-hailing service is a way better mobility option before they decide to buy their own vehicle.

In fact, Toyota’s German automaker rivals have also sensed the impending “cross-industry” competition mounted by ride-hailing providers. In March 2018, BMW and Daimler have decided to put their differences aside to merge their car-sharing operations (Daimler’s Car2Go and BMW’s DriveNow/ReachNow services) in order to take on Uber and Lyft in the space of mobility as a service that may become disruptive to their core business model.