TM - Toyota Still Struggling With The BEV Transition

2023-10-31 13:13:16 ET

Summary

• Toyota is not currently transitioning to the BEV (battery electric vehicle) and exiting the ICE (internal combustion engine).
• In the US Toyota claims 31.5% of its vehicle sales are “electrified” cars (with an ICE), when its BEV sales are just 1% of the US BEV market.
• Toyota maintains commitment to “electrification,” not “electric” vehicles. It seems still to see the future as not being BEV but rather hydrogen-powered vehicles.
• It's not clear whether this means a continued focus on hydrogen fuel cell vehicles, or its latest adventure with a hydrogen combustion engine.
• Time is running out for Toyota to join the rest of the auto industry which is electrifying rapidly. Investors might take note of the risk of buying a stranded asset.

2023 is beginning to look like the year when it became clear that a fully electric future for wheeled transport is coming via the BEV (Battery Electric Vehicle) and that it's coming fast. Just about all car makers have now announced an intention to exit manufacture of vehicles with an ICE (Internal Combustion Engine). The clear exception is the Japanese auto industry, and in particular Toyota Motor Corporation ( TM ), the world's largest car maker. Toyota refuses to plan exit from the ICE and lacks urgent short-term BEV introduction. It continues to argue that the BEV is a mistake and that Toyota has better solutions to decarbonize transport. Here I update on Toyota's 2023 actions in relation to the ICE/BEV transition. I argue that it's one thing to give your competitors a start, but when BEV adoption exceeds double-digit percentages for new car sales, it begins to look serious for continued participation. This has implications for Toyota's future.

The rise of the BEV

Figures for the rise of the BEV are astonishing just about everywhere, but especially in China. For new car sales, Japan's BEV sales in 2022 amounted to 1.5% whereas China's BEV sales were just under 20% in 2022. In the first half of 2023 Chinese BEV sales amount to 24% of new car sales, with plug-in hybrids accounting for an additional 12%. For the first seven months of 2023, electric vehicle sales in China amounted to almost four million cars. While China is leading the way, the global outlook for electric vehicle sales is growing rapidly as indicated by the IEA Global EV Outlook for 2023.

The US also is growing its switch from ICE to BEV but there are some complications. The US BEV market is dominated by Tesla ( TSLA ). The cheaper BEVs with good range come from China and are less readily available in the US. The China/US standoff is having an impact. Also, as is true for much that's happening in the US currently, the ICE to BEV switch has become somewhat political, with some in red states arguing that the switch is all a big plot.

The US BEV market

There has been a lot of talking down the BEV market in the US with General Motors Company ( GM ) and Ford Motor Company ( F ) both pulling back on their BEV plans. While still growing their BEV sales in Q3, GM and Ford BEV sales are between 3% and 4% of their total sales currently. It's true that the US lags in BEV adoption, but in Q3 2023, 313,086 BEVs were sold in the US, meaning that BEV sales in the US have grown for 13 quarters. US BEV sales now comprised 7.9% of the US car market (compared with 6.1% in Q3 2022). Of interest is that European (Mercedes-Benz Group AG ( OTCPK:MBGAF )) and South Korean (Hyundai Motor Company ( OTCPK:HYMTF ) and Kia) BEVs are beginning to gain traction. The noticeable absence is cheaper but quality Chinese manufacturers (notably BYD Company Limited ( OTCPK:BYDDF )), although Volvo (Chinese Geely Automobile Holdings Limited ( OTCPK:GELYF ) owned) is making gains. Tesla continues to dominate with US market with a 50% Q3 market share of BEV sales. Toyota's presence in the US BEV market is negligible, with just 2,827 Toyota and 1,394 Lexus BEV sales (a total of 1.3% of the US BEV market in Q3).

And yet Toyota gets headlines which indicates that Toyota US "electrified" vehicle sales surged 81.5% in September of this year and accounted for 31.5% of Toyota's September sales. Readers not paying attention might think that Toyota has embraced electrification, but this is not true.

Another interesting observation, which is a threat to Toyota, is that in the US BEV prices are falling, being down 22% compared with last year. Tesla dominates this price cutting (Tesla vehicle prices are down 25% this year). The cheapest Tesla is now $38,880. The Tesla Model Y is now the best-selling passenger vehicle in the US, outselling the Toyota RAV4 for the fourth month in a row in September 2023. I'm Australian and I've abandoned Toyota (after 24 years as a Lexus owner) to purchase a BYD Atto 3, which is a superb modern vehicle (Tesla without the drama) that is cheaper than the Toyota RAV 4.

What about Toyota?

Toyota's transition to zero emissions transport remains a distant promise without detail. It continues to talk about zero emissions, but still seems to hope that Toyota's contribution will be the rise of hydrogen-powered vehicles. For a number of years now it has had a very limited release of a fuel cell vehicle, the Mirai, but recently it's muddying the waters with talk of an internal combustion engine which runs on hydrogen.

The intention to join the BEV transition shows more intention than reality. For example the small bZ3X BEV SUV, was a no-show at the recent Japan Mobility Show. Maybe it will be shown at the upcoming Los Angeles Motor show? There were several other concept BEV vehicles discussed, including a dual cab Utility Vehicle and a large SUV (Landcruiser Se), but they remain concepts.

What about the batteries in Toyota hybrids?

Toyota talks about "electrified" rather than "electric" vehicles, yet likes to imply that its hybrids really are electric vehicles. It does have some PHEVs (Plug-in Hybrid Electric Vehicles) with moderate-sized batteries , such as the RAV4 Prime PHEV, which has a 18.1 kWh lithium-ion battery that theoretically allows 42 miles of electric driving. However under a number of conditions the ICE cuts in. The claim is 38 mpg when driving in hybrid mode, but this is a Toyota estimate. This is not a spectacularly low fuel consumption for a smallish car.

But a lot of Toyota's hybrids are far from being electric vehicles even though Toyota always seeks to include its hybrid vehicles as electric vehicles, without making clear that Toyota's hybrids are not electric vehicles in the sense that the vehicles use external electric input. All of the input power driving a conventional Toyota hybrid comes from gasoline, although the vehicles do have energy-saving features (e.g., regenerative braking). A number of the Toyota hybrids have tiny NiMH batteries (charged from the internal combustion engine motor) that are used to enhance performance. For example, the 2024 Toyota Land Cruiser has a 1.87 kWh nickel metal battery that uses technology outmoded by the emergence of lithium-ion batteries. A battery of this size has negligible capacity to reduce fuel consumption.

Toyota talks a good talk about the solid-state lithium-ion technology that it's developing even as the rest of the electric vehicle industry gets on with using continuously advancing new lithium (and sodium) chemistries. Of particular note is the emergence of lithium iron phosphate batteries that are increasingly used in new generation electric vehicles. These batteries are more robust, not prone to fire and have a longer life than the lithium-ion batteries that contain cobalt, nickel and manganese.

Toyota still has hopes for hydrogen

Given the above, it still seems that Toyota prefers to stay with ICE vehicles at this time (including pure ICE cars). There's some sign now of awareness of the need to change and plans to take the Lexus range to become fully BEV by 2030, but given Toyota's failure to embrace the BEV it isn't yet time to conclude that Toyota management has got the electrification message.

Indeed when one digs it still appears that Toyota management hopes that eventually the world will agree with it about the rise of hydrogen vehicles. There are straws in the wind which support this view. For example last week Toyota and JAF (Japan Automobile Federation) unveiled a hydrogen road service vehicle to assist Japanese hydrogen-powered drivers in case of emergencies such as running out of fuel. This vehicle is suggested to play a key role in creating a "hydrogen society"… one emergency response vehicle for the whole of Japan? And the idea is that in its spare time, the vehicle will be able to deliver hydrogen for home generators and stationary power generation units in the future. When I first saw this article I thought it was a joke, but it seems that it's a serious project from Toyota.

An extraordinary presentation which starts on Toyota's hydrogen fuel cell technology and ends on a hydrogen combustion version of the Toyota Corolla Cross is quite bizarre. Does Toyota really think that an Internal Combustion Engine fueled by hydrogen is going to make the BEV obsolete? Having the Chairman of Toyota get excited about the sound of the hydrogen ICE convinced me that Toyota is really convinced that BEVs are not a solution, although I bet that the BEV team within Toyota has a different view.

Is Toyota still the leader in vehicle manufacturing?

Toyota has a well-deserved reputation for quality vehicle manufacture, which is based on deep understanding of the key elements for successful manufacture, but it isn't clear that it's any longer the leading vehicle manufacturer. Tesla has innovated in many areas and the different elements of its comprehensive vehicle manufacture suggest that Toyota is now no longer the leading vehicle manufacturer. When the Mexican Tesla Gigafactory opens it seems likely that a quantum step forward in manufacture will become clear. I've covered the Tesla innovations in my March 2023 article covering Tesla Master Plan 3. I addressed six innovations, perhaps the most striking of which is a 40% reduction in manufacturing footprint due to massive simplification of the manufacturing steps.

In terms of profitability, Tesla is by far the most profitable global car maker, with Toyota a distant seventh. While Toyota was the biggest global car maker in 2022, China is by far the largest automobile manufacturing country with 27 million of 85.4 million cars manufactured in 2022.

Conclusion

We live in times where reality can be hard to get a fix on. Marketing magic can confuse what is real and what isn't. Toyota is an amazing marketing company that has succeeded in becoming influential not only as a manufacturer but also by influencing governments. Australia is one of the only countries without fuel emissions standards and Toyota's influence on Australian Government vehicle policy has played a part. Finally this year the Australian Government is contemplating emissions standards that will undoubtedly accelerate BEV uptake. Toyota continues to seek to water down this initiative.

I think the BEV story is helping to unmask a huge amount of hype by Toyota as it seeks to delay the end of the ICE (internal combustion engine). The pace of BEV adoption and the depth of innovation across the entire industry begins to make clear that the BEV revolution really has arrived, despite Toyota's protestations that people want choice to continue to buy vehicles with an ICE. Last week in Australia, Toyota's VP of Sales Sean Hanley was quoted as claiming that BEVs are impractical for Australian roads and that hybrids are a better solution. These comments provoked a strong reaction from Tesla and the Australian EV Council.

The change is happening and it's being accelerated by the climate emergency. BYD is eating away at Toyota's markets with its well-priced BEVs in areas that Toyota thinks it will own for a long time. This is a good time to review your Toyota investment.

I'm not a financial advisor but I follow closely the electrification of transport and how the major car manufacturers are approaching the end of the internal combustion engine. I hope my perspective is helpful for you and your financial advisor as you contemplate investment in Toyota.

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