We live in a turbulent world with lots of change. Being the world’s number 1 carmaker has not made Toyota (OTCPK:TOYOF) (NYSE:TM) immune to tricky times, and 2024 has been a roller coaster tide. There have been obvious setbacks this year, with data rigging scandals and unhappiness about the independence of the board. I address here where I think Toyota sits in the middle of this turbulence. For me, the big one is that Toyota very recently announced that the ICE era isn’t over and Toyota, Mazda (OTCPK:MZDAF) and Subaru (OTCPK:FUJHF) are doubling down on improving the ICE. This alone is grounds for investors to pay attention, as it represents a “Kodak” moment for Toyota. Toyota made a big statement about electrification with the Prius (released in 1997 Japan; 2000 US), but today Toyota is the company seen to be leading attempts to stave off the electrification of transport.
Toyota’s certification irregularities, Is Toyota OK?
It started with issues concerning Toyota’s partnered activities with Daihatsu and Hino. Daihatsu was found to have manipulated safety tests on a range of their vehicles, while the Hino issue revolved around falsified emissions data involving 600,000 vehicles.
These regulatory issues got worse recently when a number of Toyota brands became involved in issues surrounding model certification. Problems with pedestrian and occupant protection tests and errors in crash tests were discovered involving a number of Toyota’s vehicles (Corolla Fielder/Axio, Yaris Cross and discontinued models Crown, Isis, Sienta and RX). Shipment and sales of three models currently produced in Japan have been suspended as of June 3, 2024. In a press conference shortly after the announcements concerning the Toyota vehicles, Chairman Toyoda spent a lot of time hosing down the issue so as to “not fan the flames of anxiety unnecessarily among customers”. This is a problem for Toyota.
A related area that might become a problem for Toyota is its move to exit ICE only manufacture in favour of conventional hybrids in Australia, which is described by Sean Hanley (Toyota Australia VP Marketing & Franchise) as follows: “Toyota has been implementing our HEV strategy over an extended period and remains committed to innovating across a diverse array of powertrains, which is the essence of our multi-pathway approach to decarbonization”. The problem with positioning conventional hybrids (which are solely powered by gasoline) as producing substantially fewer emissions than gasoline only vehicles is that there is clear evidence that the low emissions figures for hybrids produced in lab tests underestimate emissions from real-world results.
Facing the end of the ICE by doubling down
Is the Japanese car industry led by Toyota really serious about another chapter for the Internal Combustion Engine?
Toyota Chairman Akio Toyoda made the following statement at Tokyo Auto Salon in January 2024: “Engines still have a role to play as a practical means of achieving carbon neutrality! So let’s refine engine technology! Let’s start such a project! The Toyota President Koji Sato followed up with: “Together, let’s build a future for internal combustion engines.” A release titled “The Engine Reborn – Three Companies Develop ICEs for Decarbonization” outlined new engine developments by three Japanese carmakers, Toyota, Subaru and Mazda, in early June 2024.
The above announcements made me reflect on what happened at the turn of last century with the release of motorised vehicles. When the horse and cart was challenged by the Internal Combustion Engine (ICE), I’m not aware that there was a move to introduce more efficient horses to combat the ICE revolution.
This is what the Japanese motor industry, largely influenced by Toyota, is seeking to do. It is claiming that there is a new era coming for the ICE at a time when the world is taking seriously the need to exit the ICE for wheeled transport in favour of the BEV (Battery Electric Vehicle). Toyota accepts the plan to electrify transport, but for Toyota, this doesn’t mean full electrification. The ICE remains the way energy gets delivered, although some of it may charge a battery…
The three companies each described new versions of the ICE. For Subaru, it was a horizontally-opposed engine, with the key aspect seeming to be the system’s compact size. Mazda reinvented the rotary engine combined with an electric drive-train. Again, a focus was on the geometry of the engine. Toyota introduced 1.5/2.0L in-line 4-cylinder engines, which reduced both volume and height of the engine. All engines claimed to be moving towards biofuels, but biofuels still produce emissions. The focus on profile of the engines from all three companies seemed to be about lower bonnet profiles to reduce aerodynamic drag, hence increasing fuel efficiency. Perhaps I’m missing something, but these attempts to reposition the ICE seem to be fiddling at the edge of emissions-producing ICE technology.
Toyota thinks that SE Asia, Africa, South America will be slow to electrify. That is not how it is happening.
There are PHEVs and then there are other PHEVs
Plug-in Hybrid Vehicles (PHEV) get a lot of press at the moment. Plug-in hybrids come with various capacities. Toyota has a very small PHEV market and the battery in the Toyota PHEV is small and not the latest technology (hence the BYD partnership, see below). Toyota’s PHEV car is basically an ICE with a battery boost. In China, PHEVs are electric vehicles that have an ICE for longer distance driving. The batteries are bigger and modern.
Note that the total number of PHEV vehicles sold in Australia Jan-May 2024 was 6,099. This means that in Australia Jan-May 2024 87% of NEVs sold were BEVs, while PHEV sales comprised 13%. There is a very long way to go before PHEVs can be seen as potentially overtaking BEVs. To say otherwise is pure marketing hype. And it is important to note that Toyota does not offer any PHEV models in Australia, and it refuses to say when they will be offered.
So the PHEV story, like much of what happens in a revolution, is complicated. My personal perspective on the PHEV is that, having experience of a BEV through purchase of a BYD Atto 3, I find it hard to understand why one would purchase a PHEV. It still has an ICE and hence the cost of gasoline (compared with free fuel because I make my own through my solar panels). There is a big simplification not having an ICE and for me and, as is the case for the vast number of BEV owners, it is hard to pick a downside. Even in Australia, which is just getting a charging network sorted out, I have had no problems in travelling 500 km without hassle. Range anxiety is today a marketing construct rather than a reality.
The power of marketing
Toyota has massive investment in marketing, and it does it well. Toyota is the only car company (ranked at 14th) in the 20 biggest advertising spenders in Australia. In the US, Toyota is the NFL’s official automotive partner. Its Superbowl ad was for the Tacoma, a full-on ICE with 19-24 mpg. So much for electrification of its products.
Here is a recent Australian Toyota ad, which sounds like Toyota has gone electric. This ad was shown 3 months ago. Toyota’s three electric cars recently released in Australia had the following sales figures: the bZ4X was released in February with 208 sales, followed by 103 in March, 74 in April and 73 in May for a total of 458. Toyota’s sales of the bZ4X in Australia were planned to be capped at 1500, but so far, this looks like a target that won’t be met, despite a huge advertising campaign.
The Lexus RZ and the Lexus UX are the other Toyota BEVs sold in Australia, with RZ sales of 95 from Jan-May 2024 and UX sales of 20 from Jan-May 2024. For comparison with these Toyota BEV sales in Australia, there were 9,610 Tesla Model Y vehicles sold Jan-May 2024 and 3,386 BYD Seal BEV sold Jan-May 2024. In summary, there were 39,951 BEVs sold in Australia Jan-May 2024, and Toyota BEVs sold totaled 573. There are 60 different BEV models sold in Australia currently.
Toyota confuses the situation concerning electrification by including conventional hybrids with their “electrified vehicles”. This is untrue, as conventional hybrids are solely powered by gasoline.
Notwithstanding the above Toyota ad, I think that the current talking down of BEV vehicles and talking up hybrids (virtually all of which in Toyota’s sales are conventional hybrids) is significantly a consequence of marketing and lobbying by Toyota. Consulting groups pick up on this positioning and their reports often display the bias towards PHEV vehicles with interesting takes on statistics. An example is a Viewpoint article from “strategy&” (which is part of the PwC network) titled “Electric Vehicles Sales Review Q1 2024”. A casual reader must come away from the PwC report with the impression that the BEV transition is being replaced by a PHEV surge. The Headline at the beginning of the report is “More than one million PHEVs sold in first quarter”. The truth is that BEVs comprised 64% NEV sales in Q1 2024 and PHEVs comprised 36% of NEV sales. The relevant figures for global NEV sales in 2023 are 69.6% BEV (28.2 million) and 30.4% PHEVs (12.3 million). While the contribution by PHEVs in NEV sales has increased in 2024, it is by less than 6%.
The PwC report is factual, but it is also true that in China, where the action is happening, in May 2024 there were (rounded figures) 955,000 NEV sales (or 39.5% of all car sales), up 238,000 from May 2023. NEVs are BEVs + PHEVs + FCEV (hydrogen). In May 2024 there were essentially no FCEV sales, 538,000 BEVs and 371,000 PHEVs sold. So BEVs still dominate Chinese NEV sales.
It is clear that Toyota is not a major player in the PHEV market. I’ve indicated (above) that Toyota does not offer PHEV vehicles in Australia. Toyota does offer PHEVs in the US, and there Toyota’s PHEV offerings exceed sales of its BEVs. In 2023 Toyota sold just 14,715 BEVs and 40,000 PHEVs in the US. These sales are dwarfed by Toyota’s conventional (non-rechargeable, so entirely gasoline powered) hybrids, with over 600,000 sales in the US in 2023.
The PwC report also ignores key markets where I see the BEV revolution playing out in the near future in Australia, SE Asia, South America, all big markets for Toyota.
Toyota’s history with emerging BEV companies
Toyota flirted with a RAV4 BEV in the late 1990s, and a small number of these vehicles were sold in the US and UK. Sixty righthand drive versions were built in 1999 with a 27.4 kWh battery. The Mark 1 version had Panasonic batteries. A decade later, another version of an electric RAV4 was built with a Tesla drive train. The curious thing is that even in 1999 Toyota did not regard a BEV as a realistic option (even though they built a few) and instead Toyota was focused on hydrogen as a superior solution to the BEV. Little has changed over the past 25 years in Toyota. They still have hopes for a hydrogen car (either FCEV or more recently a hydrogen powered ICE vehicle).
In 2010, shortly before Tesla listed on the NASDAQ, Toyota invested $50million in Tesla as it was interested in Tesla’s technology.
The Tesla relationship resulted a second generation of RAV4 BEV (2012-2014) with a detuned Tesla drive train for limited sale in California (less than 2500 made over 3 years). It had ~120 miles of range and ~38 kWh usable battery charge. Toyota ceased making BEVs with this model and to this day, there is only a Toyota RAV4 in PHEV configuration (no BEV version made). By 2017, the Toyota/Tesla relationship soured and Toyota sold its stake in Tesla. Tesla became a competitor rather than a partner with interesting technology. A later potential partnership between Tesla and Toyota to build a $25,000 moderately priced BEV was mooted in 2021, but it has gone nowhere.
Toyota has had discussions over the years with BYD about joint efforts in the BEV space, and in late 2019 the companies agreed to establish in 2020 a joint company (50:50 share) for BEV research & development. The announcement talked about putting aside rivalries and collaborate to develop BEVs that are attractive to Chinese customers. The Toyota/BYD partnership has since matured with the release of the bZ3 BEV vehicle in China. The bZ3 has BYD electric motors and blade (LFP) batteries with an in-vehicle system developed through the BYD and Toyota Electric Vehicle Technology partnership.
Recently, it seems that Toyota plans to adopt BYD’s DM-I hybrid technology which is superior to Toyota’s PHEV technology in a number of areas, including cost, maturity of technology and battery quality. BYD first released a PHEV in 2008, so it has a lot of experience in the space. Toyota apparently plans several PHEV models for sale in China in the next 2-3 years, based on the BYD PHEV technology. Toyota may have plans to include its latest ICE engine technology in the PHEV.
The puzzle for me in the Toyota/BYD partnership is that Toyota has always seemed to be clear about being the leader, while BYD clearly has plans to compete with Toyota. The Tesla/Toyota partnership foundered when Toyota perceived Tesla to be a competitor.
Tesla, BYD and Toyota are all companies with a clear vision and strong brand identity. I wonder how the Toyota/BYD partnership will play out.
What the market thinks
Toyota doesn’t get a lot of attention from Seeking Alpha authors, with just 4 authors covering the stock in the last 90 days. The sentiment is mixed with 1 “buy”, 2 “hold” and 1 “sell” recommendation. It is odd that the world’s most successful car company (in numbers of vehicles sold) has only 4 Wall Street analysts covering the stock. There is 1 “strong buy” and 3 “hold” recommendations. Seeking Alpha’s Quant has been a strong supporter of Toyota until recently, with a current “hold” recommendation. The fact that it has a “F” for revisions perhaps reflects that the controversy over data rigging and governance issues might be significant in Quant’s lukewarm rating.
Conclusion
It has been a wild ride for Toyota in 2024, with the share price up 40% from January ($181) to late March ($255), and then down ~25% to today’s price of $194.54. The big question for investors is to understand what is going on and whether the changes are extreme short-term fluctuations or whether there are bigger issues emerging. My take is that 2024 started with optimism about return of customers as COVID disappears into the background, so the market saw business as usual and good times for dominant players like Toyota. Then came scandal and turbulence about corporate governance and the questions about the role of Chairman Akio Toyoda. I suspect that Toyota’s very strong reputation for quality and reliability are issues that will see Toyota come back from these setbacks as long as the scandals don’t get worse.
There is a much bigger and more challenging issue taking shape around the exit from fossil fuels and the end of the ICE. Toyota’s position is to double down on the ICE. It is spending a lot on opaque marketing based on talking about electrification, but at the same time, putting huge reliance on the continued acceptance of polluting cars with an ICE. A big slice of the Japanese car industry, backed up by Government, is acting as if the emergence of the BEV isn’t happening. In fact, the BEV is barely evident in Japan, while 40% of new Chinese car sales are NEV (BEV & PHEV). China’s dominance in the transition to fully electric wheeled transport has to be considered by any long-term investor because it isn’t going away.
I remain confused about Toyota’s recent partnerships with BYD. I think they clearly show that Toyota is acknowledging that it is seriously off the pace with battery innovation, notwithstanding lots of marketing which claims the reverse. Why BYD is partnering up with Toyota is more difficult to make sense of, other than some short-term profit. I don’t think that there is any doubt that BYD is the company that presents a major challenge to Toyota’s market supremacy. The fact that Toyota is talking about BYD’s ambitions to become the leading car company in Australia by 2030 is a giveaway. The US is trying to act as if it can stop the emergence of a technology revolution by keeping BEV prices high and stopping entry of quality Chinese vehicles to the US. I suspect that BYD doesn’t care at the moment as it is too busy attacking markets that Toyota has assumed will be late to electrify and that it owns. Watch BYD’s sales in Australia, Indonesia, The Philippines, Vietnam and throughout South America and how they impact Toyota. I urge investors to look beyond Toyota’s superb marketing and the US attempt to contain Chinese technology because the future is confronting for Toyota and the company seems ill-prepared for coping with changing times.
I am not a financial advisor, but I pay close attention to energy and wheeled transport as key areas where emissions can be (and are being) addressed quickly and cost-effectively. I hope that my perspective is useful as you and your financial advisor consider investment in Toyota. Revolutions are hard to stop, and the emergence of fully electric transport is already on the way.
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