Tokyo - Toyota and Mazda have agreed to a capital tie-up that will focus on the joint development of electric vehicles, while also building a factory in the US.
The move comes as the motor industry is faced with a major shift towards greener transport and greater use of information technology.
"Now we face a battle with new rivals mainly in emerging markets and also a battle with IT companies such as Apple and Google," Toyota president Akio Toyoda said at a joint press conference.
"I think an unprecedented battle without a map has begun," he said.
In 2015, Toyota and Mazda signed a memorandum of understanding to explore collaboration.
Toyota and Mazda announced on Friday that they would combine forces on key next-generation technology.
As they enhance collaboration, Toyota will take a roughly five percent stake in Mazda, which in turn would invest in Toyota.
Toyota has sold more than 10 million hybrid petrol-electric vehicles globally since 1997.
But it is struggling to develop electric vehicles as several countries announce plans to clamp down on petrol and diesel cars.
France and Britain have both said they will end sales of petrol and diesel vehicles by 2040.