Toyota in High Gear to Overtake Tesla—Existing Models Support Big EV Investment

On December 14, 2021 at Mega Web, Toyota Motor’s showroom in Tokyo’s waterfront district, CEO Akio Toyoda announced the “New EV Strategy” before the full lineup of new electric vehicles (EV).

This was Toyota’s break from the past, stating clearly the “EV strategy” instead of “electrification strategy.” In September’s press briefing, the automaker had explained its electrification strategy. And just three months later, it has made a dramatic revision. The lavish presentation of specific and ambitious figures seemed like a complete transition from Toyota’s former attitude.

Investing 8 Trillion JPY in EVs

From the previous target of 2 million vehicles, Toyota made an upward revision to 3.5 million global EV sales in 2030. To achieve this, it announced to roll out 30 EV models and make total 8 trillion JPY capital investment by 2030: 4 trillion JPY in EVs and 4 trillion JPY in hybrid electric vehicles (HV), plug-in hybrid electric vehicles (PHV), and fuel cell electric vehicles (FCV). The investment exclusively for batteries by 2030 was revised up from the previous 1.5 trillion JPY to 2 trillion JPY.

The EV-related capital investments announced by the world’s major automakers include about 11 trillion JPY by Germany’s Volkswagen (VW), 7.7 trillion JPY by Daimler, 4 trillion JPY by U.S. General Motors (GM), and 2 trillion JPY by Nissan. Since the definition and details of electrification differ by company, they cannot be compared on the same basis. Yet 8 trillion JPY would place Toyota among the top spenders.

In the past, Toyota had been claiming, “If all vehicles in Japan become EVs in the future, we will need 10 more nuclear and 20 more thermal power plants. Especially since the power mix centering on coal fire will continue for some time in Japan, from the life cycle assessment (LCA) perspective, the realistic solution is not EVs but HVs.”

However, in the latest announcement, it seems Toyota had no choice but to discard its previous logic and shift to “EV supremacy” which is the current global trend. Toyota is not only fighting against its rivals. Seeing that it must also struggle against policymakers and election campaigns of the politicians in other countries, it may have taken the practical approach.

What is most important to succeed in the electrification strategy? The answer is simply how much profit can be made from legacy cars such as internal combustion engine (ICE) vehicles and HVs.

Where does the money for Toyota’s 8 trillion JPY investment in overall EV development come from? It is the profit and cash flow from global sales of 10 million legacy cars with approximately 10% margin, based on the fact this situation will continue for at least another 10 years.

Given Toyota’s global car sales increase from the current 10 million vehicles to 13 million by 2030, Toyota’s EVs will expand to 3.5 million in the meantime.

The remaining 9.5 million vehicles will still be the legacy cars, about the same number of vehicles from 2021.This will be the “source of profit” for Toyota, to fund R&D and capital investment for EVs and batteries.

In other words, with its cash cow, legacy cars that have a high share in a mature market, Toyota can earn profits estimated to be 3 trillion JPY in FY 2022 and about 4 trillion JPY after FY 2023. That is why it can spend trillions of yen on EV production over many years. So basically, it is a business model of “legacy cars supporting EVs.”

The EV business initially generates almost no profit, while requiring an enormous upfront investment of over a trillion JPY that will continue for decades. It is doubtful whether companies currently without lucrative legacy cars or source of cash flow can make sustainable investments.

Tesla Losing Ground

This also holds true for Tesla. It sold about 1 million cars in FY 2021, and expects 1.5 million in FY 2022, and over 2 million thereafter. CEO Elon Musk’s ambitions show no sign of slowing down.

Yet, a full-fledged competition with other EV manufacturers is about to begin. Tesla’s Model S and Model Y are no longer one-of-a-kind and are thrown into a price war.

The CO2 emissions credit revenue that once supported Tesla has already lost its meaning as competing manufacturers have cleared the regulations, and the launch of the Cybertruck, said to have an order backlog of 1 million units at one point, has been delayed for more than a year. In the meantime, American EV venture Rivian began shipping the R1T, the world’s first EV pickup truck. Canoo and Bollinger, also startup manufacturers, are introducing EV pickup trucks in the near future. Tesla’s dominance is coming to an end.

Tesla does not have any legacy cars as its cash cow. Everything must be fulfilled in the EV Circular Economy.

For the fiscal year ended March 2021, Tesla’s capital investment and operating profit were approximately 1 trillion JPY each. Meanwhile, Toyota’s capital investment will head towards 1.5 trillion JPY for some time, with its operating profit expected to increase from the current 3 trillion JPY to 4 trillion JPY. Based on the free cash flow principle of financing investment with profit to enable the next growth, how will the market value of Toyota and Tesla change in the next 10 or 20 years?

As of December 2021, Tesla’s market value was triple that of Toyota. Few may think Toyota will beat Tesla again. Yet, until two years ago, no one imagined Tesla exceeding Toyota in market capitalization. So, we cannot rule out a scenario of Toyota overtaking Tesla once more.  

The stock market could be more precise in telling the current balance of power between Toyota and Tesla. In that case, not only Toyota, but the Japanese automaker industry must also be fully prepared to face the situation.

Toyota may think nothing of market capitalization, which is merely stock market expectations. The latest message from CEO Toyoda can be taken as a wake-up call for those in the company thinking they are the “number one” by “domestic standards.” When considering by “standards of the universe” that transcend national and global boundaries, like Tesla that owns the space development company SpaceX, Toyota’s future may look entirely different. It seemed to me that Toyoda’s message was pointing out the peril.

(Koji Endo, Head of Equity Research at SBI Securities)