Toyota’s Sato needs to truly believe in an EV future

Splitting bets among hybrids, hydrogen, current battery EVs and solid-state technology seems pragmatic: It’s unclear which of these solutions will unlock Toyota’s alternative-energy future. (Source: Bloomberg)

Toyota Motor Co last week delighted investors by upgrading its financial forecasts. This was helped by a continued slide in the yen and earlier over-caution about its outlook. Look closer, though, and you can see that Chief Executive Officer Koji Sato did not raise the number of cars he expects to sell, and even revealed that the Japanese auto giant is struggling to make ground in the crucial race for the electric-vehicle market.

Sato is not entirely alone. It feels a lot like EV makers’ futures are out of their hands. General Motors Co, Ford Motor Co and Honda Motor Co are among those delaying or scaling back plans for electric models amid the continued cost premium over internal combustion engines. That didn’t matter so much when the economy was strong and early adopters were quick to rush in. But now, rising interest rates coupled with a weaker global outlook have made consumers more price sensitive.

Tesla Inc encapsulated this conundrum when it dialed back growth expectations as consumers face more-expensive car loans. “As interest rates rise, the proportion of that monthly payment as interest increases naturally,” Elon Musk told investors last month. “It's that much harder for people to buy the car. They simply can't afford it.”

Yet Musk’s deep belief almost single-handedly ignited the global market for electric vehicles. And he did it with little expertise and without creating much revolutionary technology.

Sato has at his fingertips one of the world’s most powerful carmakers, more than $50 billion in cash, and thousands of the best auto engineers in the world. But it’s not altogether clear that he truly believes in an EV future beyond recognising that it’s inevitable, and so Toyota must play along.

In an interview with Bloomberg News on the sidelines of the Tokyo Mobility Show last month, he noted that people were quick to seize on the company’s comments about battery EVs and probably missed the bigger picture. “That speech made clear that Toyota had a multi-pathway approach, and that various power trains will be used,” he said, referring to an earlier announcement on the company’s push toward new drivetrains.

Hybrids, where a petroleum-fueled engine charges a battery, have been a hugely successful middle ground for Toyota and consumers. But they are starting to lose their green credentials and look like an interim measure; a gateway vehicle for many who eventually switch to all-battery.

Toyota is also considering hydrogen, an alternative fuel to carbon-based petroleum. This seems like a side bet. While the technology is promising and might make sense, it lacks the massive superiority over petroleum and electric to warrant entire industries to jump aboard. Then there are solid-state batteries that offer better range, faster charging and improved safety, but have yet to hit commercial availability. A joint-development deal with Idemitsu Kosan Co shows Toyota’s commitment to figuring it out. Yet even Sato said he doesn’t think solid-state will be a game changer, just one variation on battery technology.

On the face of it, splitting his bets among hybrids, hydrogen, current battery EVs and solid-state technology seems pragmatic: It’s unclear which of these solutions will unlock Toyota’s alternative-energy future. But it also risks stretching the carmaker thin, especially when the success of none those strategies is entirely within Sato’s control.

It’s telling that 93 percent of the electrified vehicles Toyota expects to sell this financial year will be pure hybrids. It cut by 39 percent its forecast for battery EVs — considered “true” electric vehicles because they eschew combustion engines. It sold just 38,000 BEVs last year and is targeting 123,000 this year (from an earlier 202,000 figure). Sure, the EV market is going through tough times, but Tesla, BYD Co. and at least five other automakers have already sold more EVs in China in 2023 than Toyota plans to sell worldwide for the 12 months ending March 2024.

Cutting its EV sales target kind of feels like Toyota is not even trying, and is instead happy to rest on its hybrid laurels. That strategy is working for now, especially since growth in this category will outpace broader combustion sales. But if Toyota doesn’t have the same conviction about electric vehicles as Tesla and BYD, it will be hard for its loyal customers to catch the EV bug, or believe that the Japanese carmaker is the best choice to step into this new territory.

The optimistic view is that the popularity of its hybrids will drag customers into the EV age. But the pessimistic view is that Toyota is experiencing the Innovator’s Dilemma — offering high-priced hybrids simply because customers want them instead of trying to compete in BEVs where there’s a booming market. Sato may not recognise that these cars could mark the end of many drivers’ long-term relationship with the auto giant, just as iPhone users reminisce about their last Nokia.

If Toyota is to survive this revolutionary leap in automotive technology, Sato needs to work harder to leverage what Musk and many other EV makers lack — a solid reputation for quality, reliability, cost-effectiveness and volume. And he needs to pick up some more of what they all have in spades: belief.

Tim Culpan is a Bloomberg Opinion columnist. Views do not represent the stand of this publication. 

Credit: Bloomberg