Toyota (TM) Spotlight: Playing it Safe with a Well-Rounded Approach

A Changing Auto Industry

For a long time, the automotive industry was viewed as a “boring” industrial cyclical sector. However, in the last decade, with the emergence of EVs, the industry has become much more exciting for investors. This has brought to the spotlight new automakers reinventing how cars are designed and built, like Tesla, Rivian, BYD, etc.

This sea of change has, however, obscured a simple fact. In 2023, the top 5 automakers were still “legacy” manufacturers, outselling the newcomers by a wide margin:

In comparison, Tesla sold “only” 1,808,581 EVs and BYD 3,024,417 vehicles. So, the established players are certainly under pressure but also far from being out of the game.

This is especially true for Toyota, a company that has recently made headlines multiple times for news related to new technologies. The Toyota group contains the Toyota and Lexus brands, as well as Daihatsu (cars), Hino Motors (trucks and buses), and Toyota Industry (mostly forklifts, logistic tools, and looms).

Currently, the more than 5x volume of cars sold by Toyota compared to Tesla translates into a market capitalization that is only 1/3rd of the EV leader. Or said differently, the market values a sold Toyota car 15x less than a Tesla.

The Incumbent Dilemma

Toyota’s existing volume of vehicle sales and overall activity can work both ways:

• It can be a hindrance, as it means sunk capital, old designs, and practice, making the company slower to react and less able to change.
• It can also provide a wealth of experience in manufacturing, managing supply chains, etc.
• It also gives Toyota a solid revenue stream and capital-raising ability to finance initiatives to develop hybrids, EVs, and other new technologies.

Contrary to appearance, Toyota is not reluctant to embrace electrification; it is just looking to do it when it considers that the technology is ready for mass adoption.

This is because it is after all the largest automaker in the world. It does not need to upend the industry to create a new branding. It does not need to create hype to raise startup funds to build a factory. It does not need to figure out how to build a car from scratch or find the right suppliers and partners.

From the onset, Toyota was skeptical of the ability of early EVs to take over the auto market. This was because EVs would either have too short a range or be too expensive to grab the mass market of people just needing a “good enough” car for everyday use.

While EVs have definitely made massive inroads and seem the future of the industry, it appears that Toyota’s expectation of a relatively slow switch toward EVs is ultimately vindicated, especially out of China.

Another factor is that Toyota is selling all over the world, and in many places, it is only now that the network of charging stations and electric grids are starting to adapt to EVs.

Focus On Hybrid

If Toyota has been slow with EVs, it was a pioneer with hybrids, notably with the first luxury hybrid under the Lexus brand back in 2005 with the RX 400h.

Source: New Atlas

Today, “electrified vehicles” make up 43.2% of Toyota and Lexus sales, with the vast majority being HEVs (Hybrid Electric Vehicles). The Prius hybrid model has built a reputation as a blend of luxury, efficiency, and green credentials (even though EVs have slightly overtaken its green image).

To this day, the company is still optimizing the concept, with a new Guinness world record for the highest MPG (miles per gallon) for a coast-to-coast drive in September 2024 achieved with a Prius.

The trip was from Los Angeles City Hall to New York City Hall in a Prius LE and achieved a fuel economy average of 93.158 MPG for the entire trip (2.53 L/100km). For reference, the previous record was in the mid-70s MPG.

Of course, this was done with an eye on optimizing performance, but the new Prius model in 2023 has an equally impressive EPA-estimated 57 MPG combined (4.13 L/100km).

Moving Toward EVs

After a long wait, Toyota is finally moving forward into the EV market with a very determined strategy.

In September 2023, it released its battery technology roadmap that will be the cornerstone of its EV manufacturing capabilities. It includes in its plans:

• For the next-generation BEVs (Battery Electric Vehicles) to hit the market in 2026.
• An expectation of 5m BEVs to sell by 2030, of which 1.7m will be this next generation of BEVs.
  • It is worth noticing that this 1.7 million units, while below 20% of current sales, would be as large as all of Tesla’s current sales.

Battery Tech Roadmap

Something unique in Toyota’s approach to EVs is that it will embrace a wide variety of battery designs, instead of trying to focus on just one or two at a time and switch to new technology later on.

We will need various options for batteries, just like we have different variations of engines. It is important to offer battery solutions compatible with a variety of models and customer needs.

Takero Kato – President of Toyota BEV Factory

So, there will be four battery techs for Toyota:

• “Performance” lithium-ion batteries with a range target of 800km (500 miles) and charging time of 20 minutes or less, expected for 2026.
• “High-performance” lithium-ion batteries with a range target of 1,000km (620 miles) and charging time of 20 minutes or less, expected for 2028.
• “Breakthrough” in solid-state battery with a range target of 1,000km (620 miles) and charging time of 10 minutes or less, expected for 2028.
• “Popularization” LFP (Lithium Iron Phosphate) batteries, using Toyota “bipolar” nickel-using design to increase cruising range by 20% compared to the current one, and a cost reduction of 40% with a charging time of 30 minutes or less, expected in 2026-2027.

Source: Toyota

Overall, Toyota will embrace its proprietary LFP design for lower-cost models, offer “performance” Li-ion for high-end vehicles, and target ultra-long range with or without solid-state battery for luxury models.

Source: Elektrec

Of course, this puts the company on a direct path to compete with all current EV manufacturers, as its luxury line will compete with the likes of Tesla and Polestar. The LFP batteries will also compete with Chinese EVs and future low-cost models from companies like Tesla.

Building Factories

Japan is aware of the importance of developing its EV supply chain to stay competitive against South Korea and China and relies heavily on Toyota to be a center of success in this field.

On September 9^th, 2024, Japan announced a $2.4B in incentive for battery making, which will include the following targets:

• Toyota’s combined annual capacity of 9 gigawatt-hours (GWh)
• Nissan’s 5 GWh annual capacity to make affordable lithium-iron-phosphate (LFP) batteries for its small vehicles starting 2028
• Panasonic’s energy unit will build a new capacity of 20 GWh by 2030 in collaboration with Subaru as well as 5 GWh additional volume each year for Mazda.

Toyota also obtained a green light for building its all-solid-state EV batteries in Japan. This follows Toyota taking full control of Primeearth EV Energy in May 2024, a previous joint venture with Panasonic.

Overall, Toyota is expected to invest at least $7B in additional battery production.

Solid State Batteries Mirage?

Long-term observers of the EV market and battery technology are a little skeptical of Toyota’s forecast on solid-state batteries, and for good reason.

At some point, Toyota was forecasting solid-state EVs for 2021, then 2022, and now for maybe 2028-2030. For example:

So, Toyota investors should likely take such announcements with a grain of salt, considering the poor track record of similar promises in the past. At the same time, it is clear that solid-state battery tech is overall making progress, and it is likely that Toyota, which worked on it for more than a decade since its first announcement in 2010, did progress as well.

Overall, solid-state batteries will likely happen, but the exact date is still open for debate.

Hydrogen

Another technology that Toyota has been working on for a while is hydrogen. It has often been commented that even as far as 2022, Toyota seemed to believe that hydrogen, not EVs & batteries was the future.

Toyota has also developed a hydrogen-burning engine, which does not rely on fuel cells but is more similar in technology to a traditional ICE engine.

“Hydrogen engines have the potential to be carbon-neutral while keeping our passion for the internal combustion engine alive at the same time.

Yoshihiro Hidaka – Yamaha Motor president – talking of the Yamaha’s 5.0-liter V8 100% hydrogen-powered engines developed for Toyota

This push for hydrogen was despite dismal reviews of Toyota Mirai, its hydrogen car (powered by a fuel cell), mostly linked to the extremely high cost of hydrogen, leading to costs similar to what would happen with a fuel-powered car as inefficient as 10 MPG (23.5 L/100km).

This did not stop Toyota so far. For example, it promoted its hydrogen car as the official vehicle of the Paris 2024 Olympics.

Toyota also announced on 13^th September 2024 that it will provide funding to help build a hydrogen supply chain, with $400M raised so far from Toyota, TotalEnergies, Iwatani, and major banks.

Overall, Toyota’s push for hydrogen seems to be a strategy to not risk missing the transition in case hydrogen production costs fall cheap enough to become an alternative to resource-intensive EVs, consuming a lot of minerals for their batteries.

It might happen, with innovative solutions to generate hydrogen cheaper like using scrap metal as a catalyst or nickel-based electrolysis. You can also read more on this topic in our article “Are Battery Cells Just Precursor to Hydrogen Fuel Cells? The Real Next-Gen of EV’s?”.

International

As a global corporation, Toyota-related news needs to be discussed in the broader international context.

India & China

One market where Toyota has been struggling is China. This is not really unique to Toyota and is more a reflection of how all foreign manufacturers are experiencing difficulties in China.

This is mostly from competition with very solid domestic brands, a price war in this market, and a much deeper penetration of EVs in the Chinese market than anywhere else.

In 2023, Toyota has seen its retail sales of Toyota + Lexus fall from 499,000 vehicles to just 411,000 year-to-year.

This trend is concerning and probably a strong driver in Toyota accelerating its switch to EVs, with several objectives:

• Limit the loss of market share in China.
• Resist the arrival of Chinese EVs on other Toyota markets all over the world.
• Avoid such future contraction in sales in markets where EVs are becoming the dominant technology, with the decline in China a strong warning of the future to come everywhere else.

Another example of Toyota (finally?) taking the overseas EV market seriously is the development, in partnership with Suzuki, of EVs tailored for India. With the India EV market expected to grow at 40% CAGR until 2027 at least, this could be an interesting target for Toyota to expand and compensate for aggressive competition from China.

Yen Weakening

In the last few years, the Japanese currency has been depreciating quickly, before a recent rebound. It has even been blamed for the flash crash of August 2024, with the yen’s sudden movements causing havoc in international financial markets.

Source: Google Finance

This has a range of consequences for Toyota.

The first one is a growth in reported operating income in yens, as the corporation makes most of its money overseas but reports in yens.

Source: Toyota

Another effect is that it suddenly made Toyota headquarters costs, R&D in Japan, and factory building planned in Japan a lot cheaper on a non-yen denominated basis.

This could save the company quite a lot of money, as it is engaged in a spending spree to catch up with its lag in EV technology and industrial capacities.

One last effect is that cars (both fuel-powered and EV) produced in Japan might be more competitive, thanks to lower domestic labor costs. It might however be compensated partially by a rising bill for imported material and energy required to build the cars.

Conclusion

Despite the rise of EVs, Toyota is still the leading auto manufacturer in the world. It is a solid contender in the hybrid market, which might become the transition technology on the way toward full electrification.

Lastly, it seems to finally take seriously the transition to BEV cars with a clear roadmap.

This new roadmap does not rely exclusively on the mass production of solid-state batteries, which has been disappointing in the past. Instead, it includes low-cost LFP and high-performance lithium-ion chemistries that are fit for all price ranges instead of just luxury models.

So it is now much more likely that by 2026, the first line of new BEV Toyota cars will arrive and progressively replace the existing selection based on fuel-powered engines.

Meanwhile, the uncertain role of hydrogen in the future of transportation stays a wild card that might turn either into a technological dead end or a serious contender to BEVs. In that second case, Toyota would be ready to leapfrog its competition with its numerous fuel-cell and hydrogen combustion engines.