Toyota’s unexpected buy-out of its Daihatsu subsidiary (the Japanese giant already owned just over 51% of the small car maker) could be the first sign of consolidation by the Japanese makers for the production of small and inexpensive cars.

Buying up Daihatsu is probably the first step for Toyota to break into small budget cars for emerging markets. Daihatsu, which is probably best known for its tiny Japanese market Kei-cars, sold a modest 794,000 cars last year which reports say was a fall of slightly more than 13% of the previous year. 

Daihatsu's home Kei-car market is also dying, according to Reuters’ reporting in Japan, caused by a combination of an ageing population and a new generation of young people who seem to be uninterested in car ownership. 

Suzuki and Daihatsu are locked in mortal combat in the home market and also caught up in a price war in Indonesia.

So, it shouldn’t be a surprise that just before the Daihatsu announcement, the Japanese press had been full of speculation that Toyota was also in collaboration talks with small car supremos Suzuki. 

Indeed, media reports insist that the Suzuki story is still live and Toyota boss Toyoda is said to have refused to answer questions on the subject at a recent press conference. 

So are we looking at what could be a pan-Japanese project to try and muscle in on the global small car market, without managing to kill each other’s businesses? 

Even if Suzuki doesn’t get involved with Toyota’s strategic move, the small car market in developing nations is tipped to be one of the most important over the next few years.

A 2013 report by consultants McKinsey (‘The Road to 2020 and beyond’) predicts that by the end of the decade the majority of automotive profit will be found in the developing ‘ROW’ markets outside of Europe, North America and Japan/Korea.

McKinsey says the ROW accounted for £24bn of automotive world profits in 2012 (more than the £17.5bn of established markets) and that figure will rise to £39.7bn by 2020 (vs just £23.5bn). The report also says that emerging markets accounted for 50% of global sales, and this is expected to rise to 60% by 2020. 

‘One major growth opportunity is in smaller vehicles (subcompacts, micro-cars, and superminis); these already account for more than 30% of global sales and could reach more than 30 million vehicles in 2020. More than 60% of this market is located in emerging economies, where sales are set to grow 5 - 6 % a year until 2020’, according to the report.

Even accounting for the recent slowdown in Brazil and China, the numbers are still significant. 

Localisation of production of these specifically-engineered cars is also essential. As McKinsey says ‘…the location of current production and supply bases is not sufficiently aligned to future sales. Moreover, there is potential for “portfolio mismatch” as smaller vehicle classes are growing more strongly than others, particularly in fast-growing emerging markets.’

This is clearly what Toyota, Daihatsu and Ford have acted on in the last few days. Building cars profitability in these price-sensitive emerging markets can only succeed with cooperation on platforms and component sets and with vehicles that are are engineered specifically for these markets. 

But if you can get that right, it looks like there’s a serious business case in budget cars for emerging markets.

Toyota couldn’t have gone it alone into the budget market. It has proved very difficult  for advanced car makers to build truly inexpensive new platforms and vehicles. 

VW is a case study in this phenomenon. The German company was trying to break into the budget market in China and India. It was fascinated by Suzuki’s ability to engineer good cars at very low costs and so bought 20% of the Japanese company. 

However, the relationship soon soured and VW’s long-promised and self-engineered budget car family for China has not seen the light of day. VW’s Western mindset made it difficult to make a vehicle cheap enough and yet be ‘good enough for the VW badge’ according to one source.

This is why using Daihatsu’s expertise in cheap micro cars and the Daihatsu brand is the ideal way for Toyota to properly crack emerging markets. Getting Suzuki on board (a company that sells around 2.8m vehicles annually) would really give Toyota’s budget car plans proper economies of scale that it needs.

Surprising as it may seem, there’s big money in very small cars.