The Japanese auto industry took a step towards consolidation yesterday with the agreement by Toyota, Fuji Heavy Industries and Daihatsu to extend their co-operation in research, development and product supply. Under the agreement, Toyota and FHI will jointly develop a compact sports car, which is set to hit the market by the end of 2011 and will be powered by an engine using FHI's core technology. To cement the strengthened alliance, Toyota will increase its stake in FHI from 8.7 per cent to 16.5 per cent. FHI will use the proceeds from Toyota's investment, estimated at about Y30bn ($295m), to build a new plant in Japan where the new car will be manufactured. Katsuaki Watanabe, Toyota president, said he was excited about the car, which is still in the early stages of development and could be marketed to a wide audience in Japan and overseas. Meanwhile, Toyota unit Daihatsu will supply FHI with its speciality minivehicles and a version of its popular Coo compact car. Daihatsu, which is 51.2 per cent owned by Toyota, has supplied FHI with compact cars in Europe. By buying mini-vehicles from Daihatsu starting in the second half of 2009, FHI, maker of the Subaru brand of vehicles, will be able to focus on its core products, such as its popular Legacy mid-sized sedan. The deal between the three companies highlights the pressure on Japanese carmakers to realise economies of scale in order to better compete in increasingly globalised markets. "There will be consolidation on a global scale and Japanese auto companies are no exception [to the trend]," said Hirofumi Yokoi, analyst at CSM Worldwide in Tokyo. Pressures arising from higher development costs as well as the need to meet increasingly stringent emissions regulations will force automakers to form partnerships, he says. The agreement will strengthen Toyota's grip over FHI, which has struggled in a shrinking domestic car market that accounts for half of its vehicle sales. "We will take one step further into the Toyota group while maintaining our brand independence," Ikuo Mori, FHI president, said yesterday. FHI, which sold fewer than 500,000 vehicles globally last year, has seen its profit margin deteriorate to about 3 per cent, says Mr Yokoi. Toyota, by contrast, is poised to sell more than 10m vehicles worldwide. Toyota's profit margin so far this year is 9.5 per cent. Copyright The Financial Times Limited 2008