Toyota’s Large SUV Transformation Should Help Revenue And Margins (NYSE:TM)

The automotive industry is characterized by long trend cycles, almost human in their generational duration. One such trend cycle is the shift from “cars” (including station wagons) to SUVs (sometimes referred to as “crossovers”) that started around 30 years ago in the U.S. Basically, a shift from vehicles where you sit closer to the ground, to vehicles that have their “hip point” (the point where your hip is in the car when you sit in the driver’s seat) higher up from the ground.

You may have thought that a trend cycle that has been in motion for around three decades is now complete, and that another new trend cycle — perhaps a “counter-cycle” — is therefore now in its early stages of replacing the previous one. After all, three decades is a long time! Musical tastes and clothing fashion sure don’t usually last that long: For how long were wide ties and bell-bottoms the cool things to wear?

Toyota (NYSE:TM), including its premium Lexus brand, is showing that the SUV wave is not over, close to three decades after it started. Between the fourth quarter of 2022 and the first half of 2024, it will be rolling out at least four major SUV initiatives into the U.S. market that will further shift the Toyota Group’s sales mix in the SUV direction. Let’s examine these four initiatives in turn.

Lexus RX: The perennial SUV-crossover best-seller

Lexus RX was in many ways the original “soft-roader” — subsequently dubbed “crossover” — premium SUV market share leader. It arrived for the 1998 model year and by 2004 it had surpassed 100,000 annual unit sales in the U.S. market, a volume it has kept — on average — to this day.

For several years, that sales record made the Lexus RX one of the three premium best-selling non-pickup trucks in the U.S. market, along with BMW 3-series sedan and the then-smallest Cadillac (GM) SUV, at some point called SRX but later renamed the XT5. Those were the days before Tesla (TSLA) Model 3 and Model Y arrived on the scene.

Over the years, Lexus carved out a niche with the hybrid version of the RX, becoming easily the best-selling such type hybrid. It was always the bland choice, however, selling based on reliability and the overall Lexus reputation.

In the last half-decade, the Lexus RX generation that lasted until the Fall of 2022 had two major problems that it needed to cure:

• The overly aggressive and jagged styling, which had become too extreme for many eyes.

• The almost comically bad infotainment system, which used a navigation device that was known for how frustrating it was to use.

For the 2023 model year, Lexus is now launching an all-new RX, which should arrive in U.S. dealerships in the fourth quarter of 2022. It comes in four powertrain variants — only three initially for the U.S. market — and I had the chance to sample all four of them recently.

The all-new 2023 Lexus RX fixes the two main deficiencies of the outgoing generation:

• While the general styling bears a resemblance to the old RX, it is much toned down and less jagged. In other words, it now looks balanced and refined.

• The new infotainment system, which debuted in the smaller Lexus NX approximately one year earlier, and is also available in the Toyota Tundra pickup truck, marks a total shift from the old system. It is completely new from the ground up, in all aspects. Basically, it is now competitive with many of the better ones in the industry, even if some software tweaks remain until it can reach its full potential in terms of stability in particular.

When I stepped into the 2023 RX350 and RX350h (hybrid) for the first time the other month, the first thing that was apparent was that the 2023 RX seemed identical to its smaller brother, the NX. Indeed, from the driver’s standpoint, these cars look and feel the same. The main difference is that the RX introduces a few new driver assistance tools — you know, the ones that most people never asked for and wish were turned off all the time.

The basic non-hybrid powertrain, and the basic hybrid one, are both familiar from the NX and in the case of the basic hybrid also from a long list of other Toyota-Lexus nameplates over the last decade such as the Camry and ES350h. On top of these, the RX500h introduces a new powertrain that seems to be similar (identical?) to the one being launched in the Toyota Crown lifted sedan that is also set to reach the U.S. market closer to Thanksgiving 2022.

This “performance hybrid” powertrain that now powers the 2023 Lexus RX 500h and 2023 Toyota Crown emphasizes performance over fuel economy. Whereas the regular “economy hybrid” version is rated at 36 MPG, this new “monster” hybrid is rated at only 27 MPG. I had the opportunity to drive both powertrain variants in the Lexus RX back to back, and the difference is like night and day, in precisely the manner that their descriptions suggest: One drives just like the other similarly powered Toyota/Lexus hybrids, and the other one — Lexus RX500h — drives with a lot more power, especially from the rear wheels. You have to experience it to believe it.

The fourth powertrain version won’t make it to the U.S. for at least many more months, and that is the plug-in hybrid (PHEV) version. It will surely be a staple in the European market first, but I got a chance to take it for a spin. I was pleasantly surprised that the electric motor-battery combination could handle a decent amount of “daily driving” power without having to add the blended combustion engine power short of “max throttle” need. I suspect this version will arrive for U.S. consumers late 2023, as a 2024 model.

Unlike the previous-generation Lexus RX, this new generation does not come with a longer-wheelbase version to house an almost comically tiny third row. This change takes us to the next Toyota-Lexus member on the SUV family tree.

Lexus three row SUV

The previous generation Lexus RX had a laughably small third row in its long wheelbase version. It did not seriously compete in that corner of the market. This will be addressed in the third quarter of 2023 with an all-new model that is not simply a longer version of the all-new RX.

Whereas the new 2023 Lexus RX is manufactured in plants located in Japan and Canada, there will be another Lexus 3-row SUV made in Princeton, Indiana, USA. Initial production is scheduled for some time around the middle of 2023, so expect it in dealerships by the Fall of 2023. Unlike the outgoing RX, it will have a serious third row that can fit adults. Other than that, we know very little about this vehicle. It may be heavily geared to the North American market, which is why it will be manufactured in Indiana, USA.

Toyota three row SUV

Toyota will get a version of the above-mentioned three-row SUV as well. The current Toyota Highlander SUV already has a third row, but it is relatively small compared to many competent competitors. As such, it is an impediment to its sales numbers.

With the SUV market being so large overall, it therefore makes sense for Toyota and Lexus to have both Toyota and Lexus versions of such a larger unibody three-row SUV. This vehicle will enter production either shortly before or shortly after the Lexus version, so expect it in U.S. dealerships during the Fall of 2023 as a 2024 model.

Toyota BZ5X

Toyota launched its first meaningful battery-electric vehicle (BEV) in 2022 — the BZ4X — with initial deliveries in the second quarter. There was a recall and stop-sale almost immediately after launch, and as of September deliveries had not resumed. Surely that will happen relatively soon.

The BZ4X is a decent-enough all-electric SUV, but we all know that the North American market for larger SUVs is… also large. As a result, we recently learned that Toyota will launch the BZ5X in January 2024, and that it will be made in Georgetown, Kentucky. Think of it as the all-electric analogy to the gasoline-hybrid 3-row Toyota and Lexus SUVs that will enter production approximately half a year earlier in Princeton, Indiana.

Impact on Toyota’s revenue and earnings

Toyota is a company that is coldly focused on launching new products that maximize return on investment. There are rarely any “loss leaders” or other vanity projects that lack economic justification. Rather, Toyota is simply trying to focus on what the consumer wants to buy in relation to the cost to develop and manufacture said products.

This SUV action plan from Toyota-Lexus follows this philosophy. Following last year’s Toyota Corolla Cross — an SUV that fits between the RAV4 best-seller and the quirky small C-HR — these four new models flesh out what Toyota-Lexus needs to do in order to be competitive in the SUV market for the next few years:

• The all-new RX solves the problems of infotainment and design, and introduces two new powertrains.

• A larger 3-row Lexus SUV solves the problem of the outgoing generation RX having a comically small third row seat.

• A larger 3-row Toyota SUV solves the problem of the Highlander having a third row that is smaller than some key competitors.

• The Toyota BZ5X solves the problem of the BZ4X only addressing a part of the U.S. market for SUVs — and unlike the BZ4X, it will therefore be made in the U.S.

These are the kinds of moves that will help Toyota gain market share in the growing market segments. Any one of these individual steps does not constitute a moonshot, but together these rather small but solid small steps all point Toyota in the right direction of higher market share and improved margins.