Toyota: The Incumbent Dilemma

For a long time, the automotive industry was viewed as a “boring” industrial cyclical sector. However, in the last decade, with the emergence of EVs

Despite the recent surge in electric vehicle (EV) popularity, largely driven by the entry of new automakers like Tesla and Rivian, the top five automakers in 2023 were still established manufacturers, outselling the newcomers by a significant margin.

For instance, Toyota sold 10,565,814 vehicles in 2023, while Tesla sold 1,808,581 EVs and BYD sold 3,024,417 vehicles. This indicates that the established players are facing pressure to adapt but are far from being out of the game.

One company that has been at the forefront of discussions related to new technologies is Toyota. The Toyota group includes the Toyota and Lexus brands, as well as Daihatsu (cars), Hino Motors (trucks and buses), and Toyota Industry (mainly forklifts, logistic tools, and looms).

With a volume of cars sold that is more than 5x that of Tesla, Toyota has a market capitalization that is only 1/3rd of the EV leader. In other words, the market values a sold Toyota car 15x less than a Tesla.

The Incumbent Dilemma

Toyota's existing volume of vehicle sales and overall activity can work both ways:

On the one hand, it gives Toyota a massive war chest to invest in new technologies like EVs, as it can generate large amounts of cash flow from its existing operations. This cash flow can be used to fund R&D, factory construction, and other capital-intensive activities. For instance, Toyota announced plans in September 2023 to invest $7.4 billion in battery production in Japan.

On the other hand, Toyota's massive scale and legacy operations might also make it slower to adapt to new technologies and market trends. This is because it has a lot of sunk costs in its existing technologies and supply chain, which might make it harder to shift toward new paradigms like EVs. For example, Toyota was initially skeptical of the ability of early EVs to take over the auto market. This was because EVs would either have too short a range or be too expensive to grab the mass market of people just needing a “good enough” car for everyday use.

While EVs have definitely made massive inroads and seem the future of the industry, it appears that Toyota's expectation of a relatively slow switch toward EVs is ultimately vindicated, especially out of China.

Another factor is that Toyota is selling all over the world, and in many places, it is only now that the network of charging stations and electric grids are starting to adapt to EVs.

Focus On Hybrid

If Toyota has been slow with EVs, it was a pioneer with hybrids, notably with the first luxury hybrid under the Lexus brand back in 2005 with the RX 400h.

Today, “electrified vehicles” make up 43.2% of Toyota and Lexus sales, with the vast majority being HEVs (Hybrid Electric Vehicles). The Prius hybrid model has built a reputation as a blend of luxury, efficiency, and green credentials (even though EVs have slightly overtaken its green image).

To this day, the company is still optimizing the concept, with a new Guinness world record for the highest MPG (miles per gallon) for a coast-to-coast drive in September 2024 achieved with a Prius.

The trip was from Los Angeles City Hall to New York City Hall in a Prius LE and achieved a fuel economy average of 93.158 MPG for the entire trip (2.53 L/100km). For reference, the previous record was in the mid-70s MPG.

Of course, this was done with an eye on optimizing performance, but the new Prius model in 2023 has an equally impressive EPA-estimated 57 MPG combined (4.13 L/100km).

Moving Toward EVs

After a long wait, Toyota is finally moving forward into the EV market with a very determined strategy.

In September 2023, it released its battery technology roadmap that will be the cornerstone of its EV manufacturing capabilities. It includes in its plans:

Battery Tech Roadmap

Something unique in Toyota's approach to EVs is that it will embrace a wide variety of battery designs, instead of trying to focus on just one or two at a time and switch to new technology later on.

“We will need various options for batteries, just like we have different variations of engines. It is important to offer battery solutions compatible with a variety of models and customer needs.”

Takero Kato - President of Toyota BEV Factory

So, there will be four battery techs for Toyota:

Overall, Toyota will embrace its proprietary LFP design for lower-cost models, offer “performance” Li-ion for high-end vehicles, and target ultra-long range with or without solid-state battery for luxury models.

Of course,