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Toyota may finally be realising its predicament about avoiding the BEV transition. Two unsourced reports from Reuters indicate to me that while the looming challenges are at last becoming recognised by senior management, it isn’t clear that the need to change fast has been accepted. For a start, no real progress is indicated before 2025, even as there is an avalanche of BEVs coming now. The avalanche is coming not from niche startups but the big end of the car industry (eg Volkswagen (OTCPK:VWAGY), BYD (OTCPK:BYDDF), Ford (F)) as well as of course Tesla (TSLA). Here I dig a little deeper and reflect on the Reuters reports in light of my recent research on Toyota. I continue to think that investors would be wise to avoid investment in Toyota until there is tangible evidence that Toyota is taking action to exit the ICE and adopt BEV technology.
The car industry is having a tough time in 2022, with various reasons for the slump, not the least of which involve parts shortages, war and fear of recession. Key players all see decline in their year on year share price performance as is shown in the Figure below, with Toyota (NYSE:TM) (-20.9%) the best performing out of Toyota, Ford (-21.4%), GM (GM) (-28.4%), Tesla (-36.4%), BYD (-41.7%) and Volkswagen (-49.1%).
12 month share price charts for car makers (Seeking Alpha)
As I develop in this article, I don’t see the above statistics as being very meaningful in thinking about the future of the auto industry players as the transition from ICE (Internal Combustion Engine) to BEV (Battery Electric Vehicle) takes hold.
How car makers are responding to the electrification of transport is a key metric that will determine success going forward. Other than Tesla, which was formed as a BEV company, the rest of the companies in the above chart are ICE manufacturers, but Toyota is the outlier as the only company in the group which has been reluctant to indicate clearly that it will exit ICE manufacture. However, Toyota did make a big splash in December 2021 about electrifying its portfolio. I was sceptical at the time and I remain so.
There is a lot of commentary that suggests that Toyota is changing, but more often than not the commentary is about Toyota waiting until the time is right to make the transition. A core issue about what will be the right time to switch to BEVs involves customer choice. Toyota has been adamant that customers prefer their hybrids to a BEV and they have gotten away with this (I’m not sure how) even though they don’t offer customers the choice of a BEV. This is changing fast because customers are now getting lots of choices in terms of BEVs and they are buying BEVs. The problem for Toyota is that essentially none of these vehicles have a Toyota brand.
In a recent article I pointed out that Toyota is including in its “electrified” vehicle line-up hybrids (eg 2023 Tundra TRD Pro) that have a tiny battery (1.75 kWh) that provides essentially no electric driving. These hybrids with a big ICE have small batteries to fine tune performance. They are not “electrified” vehicles by anyone other than Toyota’s definition.
The excitement about Toyota’s plans to build batteries in the US was seen as evidence that Toyota was entering the BEV world, despite the fact that they clearly stated in the fine print that the batteries are for their hybrid vehicles. These batteries are very different from a battery that powers a BEV.
When Toyota made the big announcement about going electric in December 2021, there were 30 BEV vehicles planned for release by 2030. There were no specs or details about any of these 30 models. The Reuter’s report includes the suggestion that Toyota is revising its plans, with development apparently halted on an unspecified number of models (including a Crown BEV?).
The bottom line from all of the above is that there have been a lot intentions announced by Toyota since December 2021, but there is meagre evidence of execution. Other companies are building major BEV infrastructure, while Toyota has released one BEV, the bZ4X with Subaru, that had a very limited release planned. Before this release even gathered momentum the entire fleet of bZ4X vehicles was recalled due to a defect with attachment of wheels (and also a seatbelt issue) and this recall lasted several months; only recently has the recall been reversed.
Toyota predicts that it will sell 8.2 million vehicles in 2022 (Sustainability Data Book, updated Oct 2022). The Sustainability databook goes into some detail about emissions and there are plans to reduce driving emissions. However, the figures indicate small percentage emissions reductions for driving and the assumption is that the car has an ICE. Where zero emissions vehicles are considered, the text is mostly about FCEV (Fuel Cell Electric Vehicle) ie hydrogen powered.
The Reuter’s reporting suggests a substantial increase in production of the bZ4X, but by substantial increase this means 6-12x current production, which has just restarted after several months when all bZ4X vehicles were recalled. The current production number is 1,000 vehicles/month but this includes those which Subaru (OTCPK:FUJHY) will sell (sold as the Solterra). Increasing the numbers to 12,000 vehicles/month would mean 144,000 annually for a BEV that is already questionably configured compared with recent releases. And in typical Toyota fashion when considering BEVs, the numbers are qualified because they indicate that they may have difficulty in sourcing parts and they are still saying customers don’t want BEVs. This is one of the world’s largest car makers which produces 8.2 million vehicles annually. Am I missing something here? Note also that the bZ4X is not available for purchase (only leasing) in Japan.
Whereas BEV manufacturers are producing BEVs on a BEV-specific platform, the Toyota bZ4X BEV is produced on the TNGA platform which has been developed for ICE vehicles. Volkswagen has made clear that the cost structure for BEV manufacture on an ICE platform is substantially more expensive than using a BEV-specific platform. Toyota seems to have acknowledged this now.
You don’t have to look far among emerging BEV manufacturers to see respect for Tesla, with Ford’s CEO Jim Farley being explicit with his employees about Ford’s need to pay close attention to Tesla. He gave four key issues regarding Tesla to his staff in a presentation. These were : i) Tesla’s direct to customer sales model; ii) Tesla’s relentless attention to maximising battery use, which means better range for same sized batteries; iii) Tesla is very focused on customer experience and they improve this through data logging of the customer drive; iv) Tesla emphasises the huge benefits of BEV simplicity versus ICE; Tesla doesn’t talk down the BEV. Toyota has been dismissive of Tesla, but perhaps that is changing?
Toyota has a “Sustainability Data Book” (last updated October 2022). While there are lots of intentions to reduce emissions in the manufacturing cycle as well as when the vehicle is driven, some key phrases remain in the text which indicate that Toyota is not yet ready to exit the ICE.
For example consider the following quotes (from the October 2022 document):
“To reduce CO2 emissions of BEVs, conversion to renewable energy is crucial. But the progress in conversion varies among countries and regions, making it difficult to achieve complete conversion. It is therefore not easy to achieve carbon neutrality only with BEVs. So, reduction of CO2 emissions from the existing powertrains, such as gasoline vehicles and hybrid vehicles, many of which are present in market, should also be promoted by introducing low carbon synthetic fuels, such as biofuel and e-fuel.” (Emphasis from author.)
“Toyota has a variety of powertrain lineups of electrified vehicles, vehicles that convert electricity into power to move, such as HEVs, PHEVs, BEVs and FCEVs. In diversified markets of different countries and regions, there is no one-size-fits-all solution. Toyota therefore endeavors to propose various solutions and prepare as many options as possible for our customers.” This is code for : Toyota will continue to manufacture vehicles with an ICE.
When Toyota acknowledges that the end of the ICE is coming, I will begin to think that the change has been accepted. While it hides reference to cars with an ICE in the fine print, I assume that senior management is still resisting change. In terms of emissions reductions, Toyota highlights hydrogen technology development and makes no mention of BEVs.
The resistance to electrification extends beyond Toyota to be a Japanese national approach. An article covering the formation of Keidanren (Japanese Business Federation) Committee on Mobility provides an insight into thinking about the automotive industry in Japan and how strongly it is influenced by Toyota. This committee has three Chairs : Keidanren Chair Masakazu Tokura (Sumitomo Chemical Co), Japan Automobile Manufacturers Association (JAMA) Chair Akio Toyoda (Toyota) and Japan Auto Parts Industries Association (JAPIA) Chair Koji Arima (Denso Corp). In its first (September 2022) meeting Akio Toyoda seemed to take a leading role. There was a lot of talk about carbon neutrality, but curiously hydrogen (a hydrogen engine-powered, not FCEV, car?) got a prominent position and BEVs were barely (if at all) mentioned. It seems to be focusing as a lobbying group for 5.5 million workers with strong focus on political engagement. Curiously, a lot was made of Japan’s leading role in reducing CO2 emissions through hybrids (and other electrified vehicles?). Note that Japan has a vanishingly small BEV uptake.
In light of the above, I suspect that Toyota may have worked itself into a corner domestically as it has more than just issues within Toyota to confront. The pro-ICE/anti-BEV position has national Government approval.
While Japan works itself into a corner, the rest of the world is getting on with electrification with full BEV implementation. Obviously Norway leads the way but recent moves to ban the sale of new cars with an ICE in Europe by 2035 involves 27 countries. California has enacted similar legislation to ban the sale of new cars and passenger trucks with an ICE. The California announcement makes clear that already zero emissions vehicles are a key part of California’s economy. It is expected that the California ban will have a much broader influence concerning ban of ICE sales on new cars in many parts of the US.
While many are focused just on the rise of the BEV, I’m looking for evidence as to how the global ICE (Internal Combustion Engine) personal transport fleet will be retired. Of course if this happens it will have a major impact on a number of today’s industries. First and foremost will be the dramatic impact on gasoline (including diesel) consumption. This means danger for the ICE car makers (including hybrid vehicles that still contain an ICE). Secondly the ICE support industry, which keeps a lot of small businesses alive, will be decimated because the ICE is a much more complex technology than a battery and electric motor. This is part of the reason that Toyota has influenced the Japanese Government not to adopt BEV technology in Japan, because the argument is that 5.5 million workers rely on employment in the ICE industry. This is perhaps why Japan is lagging badly on BEV adoption.
It is hard for those not paying attention to understand that even the biggest companies can fail. In the car industry look no further than GM. It took bankruptcy to get GM to address failings that were clear long before resolution through bankruptcy led to change. Of course GM’s failure was years of unprofitability and failure to address a whole range of business and workplace issues. Toyota is profitable and it’s clear that many investors can’t conceive that Toyota could fall from being at the pinnacle of the auto industry. I think I reflect the issue that confronts Toyota currently. I’m a huge Lexus fan, but I’ve decided that my upcoming purchase is not a Toyota because they refuse to make the kind of vehicle (a BEV) that I want to buy. This issue has been building for years now and even with the rumoured acknowledgement by Toyota senior management that it needs to commit to exit from the ICE and adoption of the BEV, I remain unconvinced that the latest rumors reflect a serious change. We are hearing more platitudes while not a lot of concrete changes. Indeed it seems that Toyota has a review going on that will not be concluded until next year.
When I see clear evidence of investment in BEV technology and acknowledgment that the ICE is not part of the automobile industry’s future, I’ll have a basis for deciding if Toyota has left the change too late to remain at the top of the automotive industry tree. There are a lot of companies both old (eg BYD, Volkswagen, Ford, GM) and new entrants (eg Tesla) who are ready to mature as leaders of a new electrified automotive industry.
I am not a financial advisor but I follow closely the electrification of everything and the underlying reasons that this transition is urgent. I hope that my comments about Toyota are helpful to you and your financial advisor as you consider investment in Toyota specifically and in the transport industry more generally.
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Disclosure: I/we have a beneficial long position in the shares of BYDDF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.