2023-04-11 11:02:06 ET
Summary
- Toyota continues to resist a pivot to an electric future.
- It is likely that Toyota maintains this stance even after a CEO change.
- New CEO, Mr. Sato, likely has a similar view as the previous CEO, which is that the electric future will come slower than many think.
- The Japanese government will likely not aggressively push Toyota to go electric as the government's best interest lies within the traditional combustion engine vehicle industry.
- Thus, as the world pushes for an EV future, Toyota may continue to face pressure.
Introduction
Whether you like EVs or not, it is likely that EVs will rule the automotive industry in the near future. Government policies around the world and leading automakers have been calling for and are aggressively supporting an electric future. Yet, one of the world's leading internal combustion automakers, Toyota ( TM ), continues to resist change for an EV future. Toyota, most importantly, is likely to continue to contemplate an EV transition going forward instead of fully committing to what seems like an inevitable trend, potentially leaving the company behind the competition. EVs are not for everybody today, but world leaders are shaping the world for an EV future, accelerating the global adoption of the EV. Therefore, because Toyota lacks a full electric transformation commitment with a likelihood of continued resistance, I believe Toyota is a sell. In the short-term, the company may fare well as internal combustion engine vehicles continue to sell, but over time, as the pie for internal combustion engines gets smaller, I believe Toyota will lose the competitiveness that it holds today.
EV Transition
There are mixed opinions surrounding EV adoption. While they are environmentally friendly, many individuals point out that EVs' limited range, limited charging infrastructure, and not-so-environmentally friendly lithium or electricity production create a negative sentiment toward EVs. However, despite these viewpoints, governments and leading automakers around the world are heavily invested in the idea of an all-electric future in hopes that many of the current problems will be solved in the near future.
Starting with the United States, IRS is providing a tax credit of up to $7500 when purchasing an EV to accelerate the pace of transition away from internal combustion vehicles. Further, the Environmental Protection Agency is also preparing an emissions law that would aid the government's goal of achieving an EV sales ratio of 67% by 2032.
The United States is not alone in an aggressive transition to an EV. The European Union has strict CO2 emission standards forcing automakers to adopt an all-electric future by 2035 . China , Taiwan , Indonesia , South Korea , Australia , and many more governments around the world are pushing for a similar future.
Governments are not the only organizations that are pushing for this future. Corporations within the automobile industries are also very aggressive in preparing for an EV future. Volkswagen ( VWAPY ) is preparing to only sell electric vehicles by 2033 while GM ( GM ) is aiming to only sell electric vehicles by 2035. More automakers such as Ford ( F ), who sees a 50% electric car market share by 2030 , are also gearing up for a similar future.
Overall, the global government and corporations alike are intent on bringing the electric future in the coming decade. Thus, I believe these actions from governments around the world create an arguably predictable future: electric vehicles will quickly overtake internal combustion engine vehicles whether an individual or a company likes it or not.
How does this hurt Toyota?
Toyota is a global automaker and the company, as the picture below shows , is heavily reliant on the majority of the markets where the governments have pledged an EV future, which includes the United States, the European Union, Australia, Indonesia, and Vietnam. Over time, I believe Toyota's total addressable market will inevitably be squeezed.
Toyota's View On EV Future
Despite the arguably apparent trend in the industry, Toyota's key leadership seems to continue its negative view on the all-electric future. Toyota's previous CEO, Akio Toyoda , continued to argue on October 2022 that EV adoption will be slower than many believe as gas-banning regulations will be difficult to achieve prompting the company to delay a move to go all-in on EVs. Then, a new CEO Koji Sato took over in 2023 and was handpicked by Akio Toyoda. Thus, it is highly likely that Mr. Sato will honor his predecessor's viewpoints and decisions, which explains Mr. Sato's failure to bring a concrete plan for an EV transition as of today.
Toyota's leadership for the past years has maintained a solid view when it came to EVs, and that view was that the world may be wrong on a fast EV transition. I believe this bet is extremely risky as it is not just the global automakers that are pushing for an all-EV future, global governments including the world's biggest and most influential countries, the US and China, are strongly pushing for this future. Thus, resisting a change of this magnitude will likely bring significant risk to the company in the coming few years as the share of EVs continues to grow in the automobile industry.
Toyota Will Likely Not Fully Commit to EVs
Despite Toyota changing its leadership, I believe that Toyota will maintain its stance on its reluctance to embrace the EV future due to two major reasons.
One, Mr. Toyoda handpicked Mr. Sato to take his position, and considering that Mr. Toyoda had a firm view regarding the EV transition, it is highly likely that Mr. Sato has a similar view. I believe it to be unlikely that Mr. Toyoda would have picked someone that would share a conflicting viewpoint as himself.
Two, Toyota is a Japanese company, and it is likely that the Japanese government is against a full EV transition as it may be in the Japanese government's best interest to delay the EV future for as long as possible. Japan's manufacturing sector accounts for about 20% of the entire economy , and 89% of that manufacturing sector relies on the automotive industry. In comparison, the US automobile industry accounts for 3% of the GDP while it accounts for about 10% of the German economy . The massive Japanese automobile industry accounts for about 5.5 million jobs or about 8.3% of Japan's entire workforce. Considering that EVs have about half of the number of parts as internal combustion vehicles, many of these jobs are at risk of disappearing. Therefore, the Japanese government is likely reluctant on pushing for an EV future as the country's economy heavily relies on the traditional auto industry in my view.
As the views of Toyota's leadership and the Japanese government are probably aligned, I believe it is highly unlikely that Toyota will commit to any major actions to transition to EVs anytime soon.
Risk to Thesis
If Mr. Toyoda is right about an EV adoption likely to take longer than what the world expects, it could pose a threat to my less than bullish thesis. Despite the global efforts spanning from international governments and global conglomerates, if the EV adoption is slower than estimates, Toyota may continue to thrive.
Summary
It has been a known fact that Toyota is resisting an EV future, but beyond this, I believe that the company will not pivot and change its position anytime soon. Not only is it likely that the new CEO, Mr. Sato, has a negative view of the EV future, but the Japanese government will likely share the same viewpoint due to the government's interest heavily tied to the success of the internal combustion vehicle market. Therefore, as the world aggressively transitions to EVs, I believe Toyota will face increasing pressure and headwinds going forward.
For further details see:
Toyota Will Likely Not Pivot To Electric Anytime Soon