RIVN - Toyota Still Resisting Electrification

2023-03-10 11:00:40 ET

Summary

• Toyota and other Japanese car makers are trying to extend hybrids to possibly prevent electrification of transport in Indonesia.
• The Toyota thought bubble is about refitting ICE vehicles to become BEV (or hydrogen) powered.
• Toyota still talks about “customer choice” while not offering fully electric vehicles.
• Customers are choosing BEVs, and this is dangerous for Toyota in 2023 because it means not purchasing a Toyota.
• It is getting late for Toyota to enter the BEV transformation race; investors might think about what this means.

It is interesting to think about how one engages with an automotive manufacturer. When I think of Toyota (TOYOF) (TM), the " Oh what a feeling " branding immediately springs to mind and I realize that superb advertising by Toyota has created in my mind that "up" feeling of someone jumping high into the air. Toyota's recent advertising is about storytelling that enhances " brand beliefs " rather than an actual Toyota vehicle. This is advertising at its best, and yet Tesla ( TSLA ) has made an art form of not spending money on branding through advertising. Tesla spends money on making superb vehicles that are ahead of their time, which leaves the vehicles and Tesla technology to speak for themselves. I've given my take on the recent Tesla Master Plan 3 investor event. It provides a huge contrast to where Toyota is currently positioned. To use a sporting analogy, if you want to win you need to have a team registered. In the electric vehicle competition Toyota is yet to register. Here I update how I see Toyota positioning itself and also what I think that means for the company. I'm a rusted on Lexus owner who has recently abandoned Toyota for a BYD ( BYDDF ) Atto 3 fully electric SUV (BEV). I contend that this is a dangerous place for Toyota to find itself and a time for investors to be cautious about contemplating investment in the world's biggest auto manufacturer.

Joining the BEV race

Toyota has a new CEO Koji Sato starting in April, but I don't discern a change of emphasis from the company. The Toyota story is still one of "lowering" emissions through hybrids, even as it makes bigger vehicles and most recently hybrids with vanishingly small batteries . The IEA is clear that this is a recipe for increased oil consumption . The second part of Toyota's biphasic vehicles strategy is very hard to understand because Toyota continues to push fuel cell (hydrogen) vehicles at a time when there are millions of BEV (Battery Electric Vehicles) sold. There are negligible sales of fuel cell vehicles and no sign that this will change.

The above provides the context that Toyota presents even as it makes what I'd call token gestures about BEVs. Clearly things are shifting and a recent report indicated that Toyota has had a close look at the Tesla Model Y, with Toyota engineers describing the vehicle as " …truly a work of art . It's unbelievable". The problem for Toyota is that the recent Tesla Master Plan 3 day unveiled a huge step beyond the Model Y technology, with clarity that innovations are being implemented in every aspect of engineering and manufacture. Tesla is confident of a 50% reduction in manufacturing costs and plans are well in train to produce a quality $25,000 BEV. This is likely to happen when the planned Mexico Gigafactory begins operations, perhaps late in 2024. Toyota's "accelerated" plans for BEV production envisage 2026 as a critical date for entering the BEV race. By that time Tesla will likely have a $25,000 BEV and Volkswagen ( VWAGY ), BYD ( BYDDF ), Ford ( F ), GM ( GM ) and a host of other BEV manufacturers will all have well established BEV portfolios in the market. Until 2026 Toyota will use its already outdated e-TNGA hybrid ICE/BEV platform for its limited number of BEV vehicles. And there is no sign that Toyota plans to abandon its hybrid and hydrogen pushes. This seems to be more of the same. Indeed Sean Hanley VP Marketing & Sales Australia thinks hydrogen vehicles are a better solution for larger vehicles like the HiLux, LandCruiser and Commercial vehicles. Do Toyota executives not keep abreast of upcoming BEV vehicles about to hit the market (think Rivian ( RIVN ), Ford F-150 Lightning, Tesla Cybertruck)? My understanding is that 12 hydrogen vehicles were registered for Australian roads last year.

Toyota sales in Asia Pacific

Toyota has a dominant position in a number of South East Asian markets. It shows no real interest in change as it seeks to expand its sale of hybrid vehicles. Indonesia is representative of this market sector. Transport is Indonesia's largest final energy-consuming segment. Imported oil consumption produces ~25% of Indonesia's energy emissions.

Japanese legacy car makers (especially Toyota) dominate the Indonesian car sector which is South East Asia's largest vehicle market. Five companies represent 95% of light 4 wheel transport in Indonesia and the 2 wheeler market is even more concentrated with just 2 companies commanding 96% of the market. The Japanese car makers have essentially no intention of changing their hybrid focus of ICE vehicle production in my view, and late last year this was emphasized by plans from Toyota to manufacture hybrid vehicles in Indonesia.

The switch to electrification won't happen if the legacy car makers are allowed to continue to dominate policy. The interesting sign of change is interest by the Indonesian Government in BEV deals with BYD, Tesla and Hyundai ( HYMLF ). This week President Joko Widodo announced a new policy to boost domestic sales of electric vehicles in Indonesia to complement big plans for electric vehicle battery production. Toyota failed to make progress on designating hybrids as electric vehicles in India. Why do they think that Indonesia will be different?

An air of unreality about new Toyota releases

There is an air of unreality about what is happening with Toyota's new developments. An example is a gushing article about the expected release in 2024 of a new generation Toyota Tacoma which might include a hybrid option. There is a mention that a Tacoma BEV is not out of the question, but this is presented as not really a possibility. This is happening as Ford rapidly escalates its F-150 Lightning BEV production and also addresses issues for customers requiring towing ability (range extension through a bigger battery).

Toyota to refit ICE vehicles and turn them into BEVs?

While Toyota drags its heels on exiting the ICE for new car manufacture, an interesting reflection in January from outgoing CEO Akio Toyoda focused on repurposing the global ICE fleet. He suggested removing the ICE and replacing it with batteries/electric motors or (even more fancifully) fuel cells. Reflecting on the existing fleet is important but it is clear that BEVs built on a specific electric platform are substantially cheaper and more efficient than even building BEVs on a multipurpose platform, as Toyota currently does with the e-TNGA (Toyota New Global Architecture) bZ4X SUV. To refit an ICE vehicle is surely not going to compete, especially as the cost of new BEV production is set to fall dramatically. My recent purchase of the BYD Atto 3 BEV was substantially cheaper than the purchase price of a Toyota RAV4 hybrid.

Toyota objects to introduction of fuel emissions standards in Australia

Going along with its refusal to engage with the switch to BEVs, Toyota continues a rearguard action to block the introduction of emissions standards for Australian vehicles with an ICE.

EV demand is booming in Australia with a change of Government. EV purchases were up 86% in 2022, but still only 3.8% of new vehicles purchased were electric. With many new BEV models coming to Australia in 2023, this could herald a big increase in BEVs in Australia. Victoria's goal is 50% of light vehicle sales being zero emissions by 2030. The ratio between BEVs and PHEVs (still with an ICE) is 79% to 21%. To reach emissions targets Australia needs 1 million EVs by 2027 and 3 million by 2030. Currently Australia is a Toyota stronghold and a very long way behind Europe, the US and China. This appears to be changing fast.

While Toyota plans to launch 5 new BEV models by 2026, none are scheduled for Australia.

Toyota is in the firing line concerning "greenwashing"

In Australia this week Toyota has been referred to the ACCC (Australian Competition & Consumer Commission) for allegedly making misleading claims about its net zero ambitions and also the environmental performance of its vehicles. Greenpeace Australia Pacific's Electrify campaign director Lindsay Soutar stated " We believe that Toyota Motor Corporation's advertising is misleading Australian consumers by understating its cars' emissions and overstating its commitment to clean transport. Toyota Motor Corporation makes claims in its advertising that give the false impression the company is leading the transition to clean cars, but the truth is Toyota is not leading the transition but is acting globally to block the take-up of electric vehicles."

Greenpeace makes the following points concerning Toyota:

• Toyota's net zero plans are potentially misleading and contradict their actions in terms of the production of new cars.
• Toyota is not seeking a rapid transition to eco-friendly cars and has actively lobbied to halt, weaken or delay emissions standards around the world.
• Hybrids, hydrogen, and electric vehicles (EVs) are vastly different in their environmental impact and their consistency with zero emissions.
• The extent to which emissions reductions can be achieved in a petrol vehicle are significantly less than those that can be achieved by switching to hybrids.
• Mirai hydrogen cars are unlikely to be powered by green hydrogen in Australia and therefore cannot be considered "low emission" vehicles.
• Toyota's vehicles may not meet emission standards in real-world use as opposed to test conditions.
• Hybrids require fuel to power their electric battery.

The above developments in Australia reflect the latest global concerns about Toyota's alleged "greenwashing" efforts .

Conclusion

People love to hate Tesla, but Tesla's Master Plan 3 was quite explicit. There is an urgent need for the world to decarbonize and everything needs to get electrified. Toyota used to claim it was about a better world, but things are becoming ambiguous. Toyota agrees with Tesla that the world needs to decarbonize, yet Toyota's solution is not a decarbonization solution.

Toyota's global website has a recent discussion by its chief scientist Dr Gil Pratt as a prelude to the upcoming G7 Summit in Hiroshima in May. The discussion is about decarbonization and it discusses a lot of things that are presented as facts but which are contestable. These include that there isn't enough lithium to power a global BEV fleet; this leads to a straw man argument that putting small lithium batteries in many hybrid vehicles is a better solution than a big battery in a smaller number of BEV vehicles. The article says that decarbonization is an urgent issue and then goes to insist that hybrids are the way to decarbonize. The rest of the industry is clear that the ICE has to go as it is the major impediment to decarbonization and ICE bans are being contemplated just about everywhere. With the above views being put in an article on Toyota's global website in February of 2023, it is perhaps not surprising that Toyota is arguably regarded as one of the biggest impediment to decarbonization of the car industry.

Another way of looking at Toyota's strategy is to consider what it is doing in the marketplace. Headline news here in Australia this week was that the Toyota C-HR small SUV will become the first Toyota passenger vehicle in Australia - excluding the Prius family - available only with hybrid power … no purely ICE version and certainly no BEV version. Of course, being Australia a plug-in version of the C-HR small SUV will not be available. It is important to note that a conventional hybrid gets ALL of its power through burning gasoline. A small lithium battery may mean that a small fraction of driving produces less emissions, but there are no emissions-free miles in a conventional hybrid; the battery gets charged through burning gasoline. The above sums up where Toyota sits as the rest of the motor industry rushes to get BEV vehicles across their entire product line. I still see no sign that Toyota has accepted what the rest of the world has accepted. Think about this when considering investment in Toyota.

I am not a financial advisor but I follow closely the massive changes wheeled transport is becoming electrified. I hope that my comments help give you and your financial advisor perspective as you contemplate investment in Toyota.

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