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Revolutions represent abrupt changes in the status quo. I’ve been writing about the electrification of transport (the rise of the BEV, Battery Electric Vehicle) for a while now, but in updating the Toyota (NYSE:TM) story I confess to be astonished at the change of pace happening now. A major question for a company like Toyota, which has been a leader in the car industry, concerns how long it remains safe to pursue a “business as usual” strategy as your competitors and new entrants begin to own the post-revolutionary space. A cohort of commenters on my previous articles concerning Toyota have confidently asserted that Toyota will shift when the time is right and it’s not threatened by being late to the party. Here I present evidence of how real the threat is becoming for Toyota; it’s clear that its ICE (Internal Combustion Engine) and hybrid vehicles are losing customers to new entrant BEV vehicles. I think time is running out and suggest that this is not a time to contemplate investment in Toyota.
Setting the scene
Before we dive into the details of Toyota’s story it’s important to provide some context around the situation for the global car industry. A lot of things are impacting investor sentiment in 2022, and Toyota’s share price tracks this closely. Therefore my specific analysis of Toyota should be seen in the more general context of huge turmoil in the global car industry, which reflects short term crises (COVID, Russian invasion of Ukraine, inflation, supply chain issues etc) as well as an industry entering a profound change in technology. The stock price of every car maker has been adversely affected in 2022, with many paralleling the year-to-date 24.6% fall in the S&P 500 (eg Toyota (-27.6%), Hyundai (OTCPK:HYMTF) (-29%) and others performing even worse (eg Tesla (TSLA) (-36.7%), GM (GM) (-44.9%), Ford (F) (-45.3%), Volkswagen (OTCPK:VWAGY) (-45.6%). My commentary here is more about the profound technological changes that I suspect are being overlooked by issues like supply chain, lockdowns and war. I stand by my focus on the qualitative technological issues, because they’re surely beginning to bite and they will determine the survivors of what’s likely to become a time of profound success or failure for a number of companies that seem too big to fail or conversely barely appear on the radar yet.
Toyota unveils a new kind of hybrid that isn’t about electrification and emissions reductions
A big issue that’s arriving by stealth is a major change in Toyota’s hybrid offerings. Until now Toyota has made a big deal of its evolutionary approach to electrification of transport, with the introduction of hybrids to provide what it sees as a transitionary technology combining electrification while still retaining an ICE (Internal Combustion Engine). This has meant developing hybrid vehicles that have a battery capable of powering short distance driving (a few to tens of miles) and also providing a plug-in capacity so that the vehicle can be charged, thereby reducing gasoline consumption for short distance travel. Here I spell out a change which no longer focuses on hybrids as a step towards electrification.
In September a right hand drive version of the Toyota Tundra was seen in Melbourne Australia. The report suggested that the Australian version of the Tundra has commenced testing development work to continue until late 2023, with launch expected in 2024. From photographs of the camouflaged vehicle it appears similar to the Capstone pickup truck which is the premium Tundra variant sold in the US. Toyota confirmed that extensive testing for rough Australian conditions will be conducted (involving 300 vehicles?). The Capstone is a hybrid with 3.5L twin-turbo V6 ICE, with a tiny 1.5 (or 1.75?) kWh battery. Specifications in the US make clear that “transitioning to primarily electric power is not the Tundra’s top priority.” The hybrid is to provide a smoother drive experience rather than to avoid using gasoline; its average fuel efficiency is 20.1 MPG. It isn’t focused on maximizing the miles from the battery and indeed it doesn’t really work to drive on battery only. The hybrid in the US adds $US3,500 to the cost of just the ICE version, with essentially no electric-powered driving benefits.
This is no RAV4 Prime hybrid (which is not yet available in Australia), which gets 30-35 miles of real world EV driving from its 18.1 kWh Lithium ion battery when fully charged.
The Capstone Tundra seems like the kind of truck that might be in competition with the Rivian (RIVN) R1T BEV, and by 2024, I’m pretty sure the Tesla (TSLA) Cybertruck will be available. Toyota seems to be seeing the Tundra as competition for the Ram 1500 or Ford (F) F-150 in the US, which are other gas guzzling ICE vehicles…. except that Ford is going electric in a big way with the F-150 Lightning BEV.
It’s interesting to read Hyundai’s (OTCPK:HYMTF) view of developing a Ute (Australian term for a pickup truck). Thomas Schemera, Hyundai Motor Group’s Head of Customer Experience, said the following: “I know that I have had many, many discussions with the Australian markets and I know that there is a big demand for (a Ute) and I really respect that. But to start developing vehicles on an ICE basis doesn’t make any sense. The author of the article concluded that an ICE Ute has been ruled out, but Hyundai may consider bringing a BEV Ute to market.
The above consideration of the Tundra Capstone hybrid reflects a bigger approach by Toyota to producing hybrids which are NOT designed to be a step toward electrification. Anton Wahlman’s recent article makes clear that the move to make hybrids that are about refining driving experience rather than electrification, is being translated to Toyota and Lexus SUV vehicles. The new Lexus RX 500h has a fuel efficiency of 27 MPG.
It will be interesting to see if Toyota tries to spin these hybrids as part of its “electrification” story. I’ve only recently realized that having its conventional hybrids (which have no plug-in capacity) as part of “electrification” is already a bit of a joke because ALL of the motive power for these hybrids comes ultimately from gasoline.
Toyota stays with the ICE in Australia
The above commentary about Toyota’s plans to introduce the luxury Toyota Tundra to Australia, which involves considerable development and expense, reflects the long-term future that Toyota sees for its ICE fleet. The Tundra won’t be released until 2024 and clearly the plan is for this vehicle to have a long life in the Australian market.
So what about plans for electrification in Australia? As befits Toyota’s embrace of the term “electrified” sure enough the Australian Toyota website has a link to “Toyota Electrified Vehicles” although true to form the image that goes with the link has the term “HYBRID.” Clicking on the link takes you to ” Toyota Electrified, Future mobility, today.” There is a sentence explaining that Toyota has a mission to power the future without fossil fuels and powering its entire range with electrified vehicles by 2050. That then takes one to “Alternative energies” which has two outcomes: “Hybrid” and “Hydrogen.” The amazing thing about the hybrid section is that it states that “Toyota Hybrids combine the power of petrol engines and the fuel savings of electric motors without waiting for the battery to be charged.” Of course this means that all of the power is derived from burning fossil fuels…. There follows links to the Yaris, Corolla, Corolla Sedan and Camry hybrids. This discussion does not even refer to the possibility of a Plug-in hybrid. Even the section “Explore our future” does not mention BEVs. In the section on Hydrogen, there’s a “meet the Mirai” section, but the fine print says only available to the “business fleet,” which as far as I can gather is ~20 cars. The Lexus website does have a section on BEV with the UX300e mentioned, but to get any information you need to provide your details to a Lexus dealer.
Meanwhile the first BEV Ute, the Chinese LDV eT60, a Shanghai-based SAIC Motor brand, is being shipped to Australia now and commercial fleets are looking to replace their diesel Utes. By 2030 Boston Consulting Group predicts that electric Utes and vans will comprise more than half of Australian light commercial vehicle sales.
Tesla Model Y comes with a bang in Australia
Last month the Tesla Model Y (manufactured in Shanghai) has become the top selling SUV in Australia, with 4,359 Model Y vehicles sold. There were several astonishing results around the Model Y sales in September. Firstly, it was the third most popular vehicle sold in Australia (after the Toyota Hilux (5,170 sold) and Ford Ranger (4,890 sold). Even more extraordinary is that the Tesla Model Y became Australia’s most popular SUV, with the formerly highly popular SUV, the Toyota RAV4 far behind with just 1856 sales, down 44% to eighth spot in total vehicle sales.
It’s a dangerous time for Toyota as it has serious supply issues, but the level of sales of the Tesla Model Y is truly remarkable. Toyota’s popular mid-sized SUV, the RAV4 now has almost a 12-month wait. Internationally the RAV4 Prime has up to an 18-month wait.
Toyota has made a big deal of supplying what customers want. The fact that Toyota doesn’t supply any BEV models in Australia has meant that customers have migrated to other car makers. It must be of great concern to Toyota that overall BEV sales in September were 7.7% of total sales and BEVs outsold the combined numbers of hybrid and plug-in hybrid vehicles…
A US comparison between the Tesla Model Y and Toyota RAV4 Plug-in hybrid makes interesting reading.
BYD Atto3 is arriving in Australia at scale
The price point for Tesla is different from comparable Toyota vehicles, so people in Australia purchasing a Tesla Model Y are paying substantially more than they would pay for a Toyota RAV4. This is not the case for the BYD Atto 3 SUV, which is just coming to Australia. The price point for the BYD is less than that for a comparable Toyota RAV4 hybrid. BYD (OTCPK:BYDDF) is aggressively starting to enter the Australian market and it will be really interesting to see how it performs viz a viz the RAV4. I suspect it will do well. Very high gasoline prices have to be helpful, especially when many Australian households have solar PV on their roof and hence they may be able to provide their own electricity to charge the car.
Toyota BZ4X BEV about to be re-released
Toyota had a limited release of its first BEV, the bZ4X, in June but shortly after the BEV was recalled due to a defect that could result in wheel bolts loosening. A potential problem with airbags was also corrected. Last week Toyota announced that production was about to restart after a hiatus for more than three months. It isn’t clear how the return to availability will be managed, although presumably the 2700 vehicles involved will be the first to be fixed.
Some changes in the Australian scene
There has been a big change in Australia in recent months due to change of government and now there is a positive attitude to electrification of transport. Australia has had one of the lowest adoption levels for BEVs due to previous government policy and lack of any fuel emission policies. Now Australia is open for BEV business moving back from the previous government policy which largely reflected Toyota’s pro-ICE position. Indeed there’s talk of restarting Australian car manufacture (which closed in 2017), with a BEV industry. Tesla Chairperson Robyn Denholm is Australian and she recently urged Australia to get involved in the electric vehicle and battery manufacture sectors. Queensland state Premier Annastacia Palaszczuk has indicated that Queensland would back a Tesla Gigafactory in Queensland should Tesla be interested.
The Australian story reflects broader changes happening globally. A summary of the change in predictions about electric vehicle penetration in the US is striking. Predictions for electric vehicle penetration in the US for 2030 have increased substantially over the past four years. In 2018 the Boston Consulting Group predicted EV sales to be 21% by 2030, then in 2020 the estimates indicated 26% sales by 2030. In 2021 the prediction for EV sales increased to 42% by 2030 and now in 2022 reporting by Boston Consulting Group the prediction for 2030 now exceeds 50% (53%). This estimate came before California announced ban of new ICE sales by 2035 and also the stimulus coming from the Inflation Reduction Act 2022. These almost certainly will increase further the EV penetration predicted for 2030 by the Boston Consulting Group for the US.
Toyota and BYD to launch a small BEV in China this year
The place where Toyota is getting serious about BEVs (because it has to if it wants to participate) is China and it has partnered with BYD to produce a small BEV for the Chinese market (and only the Chinese market). This vehicle, the bZ3, is part of the new Toyota bZ (beyond zero) series. The bZ3 incorporates BYD blade batteries which use LFP (Lithium-iron-phosphate) chemistry and is similar in size to the Toyota Corolla. The plan is to release the bZ3 in China in 2022 and the hope is that it will compete with Tesla as a cheaper version of the Tesla Model 3. It seems doubtful that this vehicle will be a strong competitor for the Model 3 market. It might be interesting to see how it competes with similarly priced BYD models.
Conclusion
It’s quite staggering that Toyota, the world’s biggest car maker, has no BEVs and no plug-in hybrids even mentioned on its Australian website, but it does feature a fuel cell (hydrogen) vehicle. I find it bizarre that Toyota now has a new generation of hybrid vehicles that do not significantly impact on fuel consumption. This is weird! And it’s clear that the world is moving on and customers are voting with their feet to purchase from manufacturers who provide BEVs. All of this convinces me that Toyota management has miscalculated the changes that are accelerating as transport gets electrified. Investors might think carefully about how Toyota is positioned when making decisions about investment in Toyota.
I’m not a financial advisor but I follow closely the exit of the ICE from wheeled transport and how everything is becoming electrified with battery electric vehicles. I hope my commentary helps provide some information that is useful as you and your financial advisor contemplate investment in the car industry in general and Toyota in particular.
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