GM - Toyota Thinks The Internal Combustion Engine Still Has A Future

2023-05-02 12:03:19 ET

Summary

• Toyota and other Japanese car makers are trying to extend hybrids to delay electrification of transport in Indonesia.
• Toyota still talks “customer choice” while not offering fully electric vehicles.
• Changing emissions regulations in China, the US, Europe and soon Australia mean massive increases in BEV adoption. This is a threat that Toyota fails to acknowledge.
• Toyota’s claim to be clean energy focused is increasingly being challenged.
• It's getting too late for Toyota to enter the BEV transformation race. Investors might re-think what this means.

It's interesting to think about how one engages with an automotive manufacturer. When I think of Toyota (TM), the " oh what a feeling " branding immediately springs to mind and I realize that superb advertising by Toyota has created that "up" feeling of someone jumping high into the air. Toyota's recent advertising has changed subtly and it's now focused on 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 and leaves the vehicles and Tesla technology to speak for itself. 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 ( OTCPK:BYDDF ) Atto 3 fully electric SUV (BEV, battery electric vehicle). I contend that this is a challenging place for Toyota to find itself and a time for investors to be cautious about contemplating investment in the world's biggest auto manufacturer.

Toyota will continue commitment to multi-pathway approach

While the rest of the car industry has advanced plans to exit the internal combustion engine - ICE, Toyota strongly reaffirms its intention to expand its hybrid offerings, especially in Southeast Asia (see below). Toyota's "Multi-pathway Approach" has a BEV component but also HEVs (hybrid electric vehicles), PHEVs (plug-in hybrid electric vehicles) and FCEVs (fuel cell electric vehicles). Note that HEVs derive all of their power from use of gasoline. They have a small battery which gets charged by the gasoline internal combustion engine. PHEVs have a small battery which can be charged with electricity, but once this small distance has been traveled, the car then uses gasoline for motoring. FCEVs are hydrogen powered.

Toyota loves to promote the concept of "choice" and for the next few years this means giving customers who want to purchase a BEV the choice to change brands.

Joining the BEV race

Toyota has a new CEO , Koji Sato, who started last month, but I don't discern a change of emphasis from the company. Toyota talks a lot about electrification and those not paying attention might think that this means joining the transition to BEV that the overall industry is making. 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 token gestures about BEVs. Clearly things are shifting and a recent report 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 have a $25,000 BEV and Volkswagen ( OTCPK:VWAGY ), BYD ( OTCPK:BYDDF ), Ford ( F ), GM ( GM ) and a host of other BEV manufacturers will all have well established BEV portfolios in market. Until 2026 Toyota will use its already outdated e-TNGA hybrid ICE/BEV platform for its BEV vehicles. And there's 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 and 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) F-150 Lightning, Tesla Cybertruck)? My understanding is that 12 hydrogen vehicles were registered for Australian roads last year. Curiously there's a market developing in Australia for repurposing near new Hilux and Landcruiser vehicles with a BEV configuration. Toyota is missing the chance to get ahead of the game with its own BEV versions of these vehicles.

Toyota sales in Asia Pacific

Toyota has a dominant position in a number of Southeast 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.

Largely Japanese legacy car makers (especially Toyota) dominate the Indonesian car sector which is Southeast Asia's largest vehicle market. Five companies represent 95% of light four-wheel transport in Indonesia and the two-wheeler market is even more concentrated with just two companies commanding 96% of the market. The Japanese car makers have essentially no intention of changing their hybrid focus of ICE vehicle production, 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 ( OTCPK:HYMLF ). Recently 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's 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's 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 objects to introduction of fuel emissions standards in Australia

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

BEV demand is booming in Australia with a change of government. BEV 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 five new BEV models by 2026, none are scheduled for Australia.

Meanwhile the Australian Government is about to introduce (for the first time!) emissions standards that are likely to parallel those in Europe and planned for the US soon. The new US standards are likely to mean an increase from BEVs being 6% of new sales to more than 60% by 2032. This heralds the end of Toyota dominating Australian government vehicle policy which led to a decade under the previous government where BEV adoption was largely prevented.

Toyota is in the firing line concerning claims about its ICE vehicles in Australia

In Australia Toyota is involved with three different claims concerning its actions relating to emissions. Two concern class actions relating to diesel emissions.

The first is largely complete as a result of substantial rejection in April 2023 of Toyota's appeal to the Federal Court of Australia after it awarded a judgment against Toyota concerning defective diesel particle filters. While the costs awarded are being reviewed, the court action means up to a billion payout to more than 250,000 owners a variety of Toyota diesel models with defective particle filters, notwithstanding that Toyota corrected the problem. The judgment confirmed sale by Toyota of defective vehicles and also deceptive conduct in relation to marketing and selling defective vehicles.

The second class action launched in the Supreme Court of Victoria in October 2022 regards Toyota's sale of hundreds of thousands of diesel vehicles that were fitted with " diesel defeat devices " that change the vehicle's emission control system such that Toyota diesel vehicles that passed regulatory tests emitted unlawfully high levels of nitrogen oxide under regular driving conditions. This action relates to some of Toyota's most popular Hilux and Landcruiser diesel vehicles.

The third action in Australia in March 2023 involves Toyota being 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."

The above developments in Australia reflect the latest global concerns about Toyota's efforts which impact emissions and how they present these activities.

Where does the truth lie?

When confronted with difficult realities, one approach to avoid facing them is to promote an alternative view. Toyota does this in relation to their view of the impossibility that BEVs can reach the penetration that is currently happening and planned for (eg more than 60% of global new car sales being BEVs by 2030).

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 positions the BEV in a way that is contestable. For example Dr. Pratt doubts that there's enough lithium to fulfil a global BEV fleet and that it requires 10-15 years to start a new mine. Reality is that there's an oversupply of lithium and this does not look like changing soon. CATL, the world's top battery manufacturer, sees a place for emerging sodium batteries in 60% (in some cases with a lithium component too) of new BEV offerings.

However, Dr. Pratt uses the suggested shortage of lithium to develop 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. It overlooks the fact that BEV vehicles are going to dominate production within this decade. It gets worse when Dr. Pratt suggests that batteries are better placed in HEVs (which are entirely powered by gasoline, including charging the battery) as he thinks this will reduce emissions. 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 no future as it's the major impediment to decarbonization. ICE bans are being contemplated just about everywhere. With the above views being available in an article on Toyota's global website in May 2023, it's perhaps not surprising that Toyota is regarded as the biggest impediment to decarbonization of the car industry.

Conclusion

People love to hate Tesla but Tesla's Master Plan 3 was quite explicit. There's an urgent need for the world to decarbonize and everything needs to get electrified. Toyota agrees with Tesla that the world needs to decarbonize, yet Toyota's solution is not a decarbonization solution. Toyota offers a rare opportunity for investors who don't accept that the BEV transition will be fast, because the rest of the industry has accepted that it has to be in the race to the BEV. It's true that, like any revolution, the BEV transition is challenging. The legacy ICE manufacturers are challenged and the BEV-exclusive new companies have a different set of challenges. My followers will be aware that I'm convinced that the speed and completeness of the transition from horse and cart to the internal combustion engine means that the car industry will be electrified faster than most of us can imagine. It also means that those who don't adapt will fall by the wayside.

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. Investors who don't believe that the transport industry will successfully quickly transition to fully electrified offerings have Toyota as a company which embodies that view. My picks in transport are Tesla and BYD because these companies are aggressively pushing full electrification. Both companies offer the additional bonus that they're not just transport companies but they also have a big role to play in energy management (through batteries) in the expansion of renewables-based grids. Hence they're also players in decarbonization of electricity.

I'm not a financial advisor but I follow closely the massive changes as 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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