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After record high profits, Wall Street types now say Akio Toyoda may have been right all along

Hans · Feb 20, 2024 04:23 PM

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 01

Akio Toyoda can now tell investors "I told you so," but he has chosen not to

The stark contrast between the falling income of battery electric vehicle-only (BEV) stalwarts like Tesla, Polestar, Nio, and Xpeng, versus the record earnings by companies with more varied product portfolios - Volvo, BYD, even supposedly BEV laggards like Toyota and Honda proves one thing – BEVs are the future, but manufacturers need profitable hybrids today to fund their BEV endeavours tomorrow. Manufacturers relying on a 100 percent BEV-only line-up are in for a very painful journey ahead.

BYD can afford to take on Tesla (and win) because half of BYD’s sales in China – its most important market – are contributed by plug-in hybrids. In war games speak, BYD has two weapons, allowing it to launch attacks on two fronts. Meanwhile, Tesla is very vulnerable to slowdowns in BEV demand, affecting its ability to invest in new models.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 02

BYD Han is available either as a PHEV or BEV

In the same week the BEV-only, money-burning Polestar had to be bailed out by Geely; Volvo Cars, also a Geely-owned company, announced a four-fold increase in its profit margins of BEV models, to 13 percent.

Volvo Cars CEO Jim Rowan said in a recent earnings call, "We are the highest premium BEV share company, and we have the highest published BEV margins in the EV sector other than Tesla.”

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Why is Volvo able to make money on BEVs while Polestar can’t? Polestar shares engineering resources with Volvo (and Geely’s Zeekr), sharing the same CMA, SPA2, and SEA (Volvo EM90 / Zeekr 009) platforms.

Chief commercial officer Björn Annwall’s comments regarding hybrids during Volvo Cars’ earnings call provided some hints.

"We see many consumers who take plug-in hybrid as the first step into full electrification, and the next car they buy is a fully electric car."

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 01

Despite its commitment to a 100% BEV portfolio, Volvo has given up on Polestar. Negotiations are underway for a bailout by Geely

Volvo Cars say it remains committed to becoming a 100% BEV-only company by 2030, but Annwall adds, “Plug-in hybrids constitute an important bridge into the fully electric future.”

Volvo didn’t reveal the profit margins of its hybrids versus its BEV models but explained that a mixed hybrid and BEV product portfolio is an important near-term hedge.

One year ago, this was not Volvo Cars' message. Hybrids were something Volvo didn't want to invest in anymore. Even in Malaysia, the XC40 plug-in hybrid has been discontinued, to focus on the XC40 EV.

Tesla was once the most profitable car company, earning as much as 15 percent for every car sold, more than double that of its combustion engine cars-heavy rivals. Today, slowing demand and intense price wars have reduced Tesla’s profit margin to 9.4%, while Toyota is riding on record-high demand for hybrids (up 46% from previous quarter) to post 11.8% profit margins.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 02

Tesla is behind BYD not because of its narrower product range, but because it relies 100% on BEVs while BYD can hedge with PHEVs

Toyota’s net profit of USD 26.5 billion for the first three quarters of FY2024 (April to December, financial year ending March 2024) is up 107.9%. Often derided for being the next Kodak or Nokia, Toyota's decision to double down on hybrids proved correct, and now they are revising their already-high annual net profit forecast by another 4.5%, to USD 33 billion, up 79.8% year-on-year.

This record profit puts them in a very comfortable position to develop better BEVs that will hit the market in the second half of this decade, the period Toyota predicts is when the real race for BEVs will start, as more mainstream buyers warm up to BEVs.

After you've made money, everyone who criticized you now wants to be your friend

Two years ago, stock market watchers like Fitch Ratings’ Satoru Aoyama criticized Toyota for stubbornly sticking to hybrids and not embracing BEVs fast enough, telling the Financial Times “Toyota is not correctly responding to calls from the market to take a lead in electric vehicles. Toyota needs to demonstrate their leadership, otherwise they could not only misrepresent their green efforts but also lose investor confidence.”

Today, that same critic is now saying that Toyota’s diversified, market demand-led ‘Multi-pathway Solution’ is the correct one.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 03

In December, Master Driver Morizo, Akio's racing pseudonym, completed a 10-hour endurance race in Thailand in a synthetic fuel-burning Prius, with standard hybrid components

Following Toyota’s stellar financial results, Aoyama told Nikkei that pursuing hybrid vehicles was a rational strategy because Toyota sells cars in all major markets and not all are ready for BEVs, and demand for hybrids is a lot stronger than BEVs. American and European rivals, meanwhile, mostly focus on their home markets, he added.

The financial analyst pointed out that investors have been supporting the view that one had to be making battery BEVs "to be on the winning side," but failed to account for actual consumer demand.

The slowing demand for BEVs is a result of consumers choosing their cars "matter-of-factly," said the analyst at Fitch.

Meanwhile, analysts at Goldman Sachs said, "We think the market is now rethinking the potential of hybrid products, which are a strength of Toyota.”

Toyota’s stock is now at an all-time high of 3,414 Yen, surging 154% in the last five years. It recently became the first Japanese company to break the 50 trillion Yen market capitalization ceiling.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 04

Toyota Corolla Cross Hybrid

Nathan Furr, a professor of strategy at France’s Insead business school told Bloomberg, “There is always the danger that a hybrid becomes so attractive to an incumbent like Toyota, that they get trapped in it as well, and therefore are too slow in responding to the disruption. There was a time when I worried this would be the case for Toyota. But now we are seeing a slowdown in the adoption and enthusiasm for EVs among consumers, so perhaps it is a wise strategy.”

Last year, when Akio Toyoda stepped down from his President position to assume the role of Chairman, he said “If I were to sum up my presidency, I would say it was a lonely 14 years.”

“I was criticized in the newspapers and elsewhere, and I often feel saddened by the tone of the media and politics,” but said he found encouragement in what he refers to as the real public opinion.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 05

Akio Toyoda is possibly the loneliest President Toyota ever had, one who had to face the harshest criticisms

“The shareholders who wrote their support for us in the voting papers, the customers who love Toyota cars and choose us, while they may be silent, I feel that is the real public opinion.”

“Together with dealers and suppliers, we will continue to face up to the public opinion of the customers who choose our cars.”

BEV's market share ceiling is 30% in the near-term?

It should also be noted that the market share of BEVs in China have plateaued at around 30 percent. If that's lower than what you have read elsewhere, that's because Chinese statistics group all plugged-in charging-capable cars - BEVs and PHEVs included - as one and the same so they are often erroneously quoted by foreigners.

China's growth of electric vehicles are now heavily contributed by extended-range electric vehicles (EREV or REEV), series-type plug-in hybrids that use combustion engines solely as a generator, as well as plug-in hybrids (PHEVs).

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 06

This 30 percent BEV market share in China was what Chairman Akio Toyoda was referring to in his recent answer to a QnA session, after giving a lecture on Toyota Production System (TPS) at Japan’s NPS Management Institute (video here, enable captions for English translation).

Outlier markets like Norway, which has a unique economic structure and energy supply don’t count. Few media understood the context of Akio's answer, and twisted his reply into yet another anti-BEV comment, that Toyota thinks BEVs cannot go beyond 30%. It's not an opinion, it's a statistics from a BEV market that's far ahead from anyone else.

It's not OR, but AND

Toyota’s approach to transitioning to electric vehicles is very simple - it’s not OR, but AND. Toyota doesn’t believe in forcing customers to choose either BEVs OR nothing. Instead, Toyota’s multi-pathway strategy seeks to promote hybrids, AND battery electric vehicles, AND hydrogen fuel cell vehicles, AND hydrogen combustion engines, AND synthetic fuels.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 07

More importantly, Toyota seeks to quantify genuine customer demand, not subsidy-driven artificially boosted demand, which can turn negative once subsidies are removed or financing cost rises, as evident by the change in market conditions today, especially in China and USA – the two biggest markets for BEVs.

The growth of BEVs in China is the result of brute force policies, which can only be achieved in China. Elsewhere, governments introducing regulations forcing the public to buy what they don’t want will be booted out.

Jack Hollis, Toyota’s head of sales in North America – the company’s most important sales region – said in a recent dealers’ conference:

"Our dealers are not telling us that the customer wants EVs more than other things. "They're telling us they want EVs as a choice. They want plug-in hybrids as a choice. They want hydrogen as a choice. In fact, they would like to have gas engines [as a choice] but also have cleaner-burning fuels."

"Regulations (banning combustion engines) are way out in front of where the customer is at. That never works well for any industry," Hollis said. "The customers have to lead, the regulations have to be able to protect them. Not the other way," said Hollis.

Somehow, Toyota’s message of listening to customers and embracing diversity in powertrain options was weaponized by Tesla investors and BEV evangelists forcing their views to the general public. Toyota’s lobbying activities to encourage governments to consider a multi-pathway approach was twisted into an anti-BEV one.

Move to Zero, experience Toyota’s carbon-reducing / carbon-neutral solutions in Malaysia

Closer to home, Toyota Asia is ramping up its engagement with customers in Southeast Asia regarding its ‘Multi-pathway Solution.’

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 08

If you love BEVs, Toyota wants to listen to you, and hopefully by the second half of the next decade, they can offer you a car that you like. The Toyota bZ4X and Lexus RZ, both still not available in Malaysia, are just teasers of what's to come next.

If you think BEVs are too troublesome, Toyota wants you to try out their hybrids.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 09

If you want zero emission vehicles but think plugged in charging is too slow and difficult, they want to tell show you the FCEV prototypes that they are working on.

Yes, hydrogen is less efficient than BEVs, and hydrogen fuel costs a lot more than electricity, but what if you can produce hydrogen from garbage? What if hydrogen is a more environmentally friendly way of rolling out solar farms since hydrogen can be used of ‘batteries’ to store excess energy (for example, to supply power during the night)? Malaysia has a lot of hydropower, which is great for hydrogen production. Would you still want to throw out this very fit-for-Malaysia circular economy solution?

Fun fact #1: The country that is investing the most in hydrogen is not Japan, but China, the country that understands BEVs better than anyone else. Perhaps it's worth asking why?

Fun fact #2: China, despites its vested interest in battery manufacturing, has refused to adopt a European Union-style ban on combustion engines. Instead, China wants hybrids, especially plug-in hybrids, to complement BEVs. Perhaps we should ask why?

The reason is obvious, Multi-pathway Solutions, China paid attention in school and understood it. The Europeans skipped class, and are now forced to make U-turns in their land transport policies.

More importantly, you cannot talk about carbon neutrality if you don’t talk about public transport. The solution is not putting more BEVs on the road, but moving people in a sustainable manner, leaving no one behind, wheelchair-dependent users included.

This is what Toyota Mobility Foundation is pursuing. Few know that the highly congested Seberang Prai has been shortlisted for a Toyota-funded last-mile / first-mile ride connection improvement project, to solve difficulties faced by commuters in getting to the nearest public transport hub.

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 10

After record high profits, Wall Street types now say Akio Toyoda may have been right all along 11

Later this month, UMW Toyota Motor will be hosting a Move to Zero event in Bukit Jalil, where all these topics will be discussed, from electric and driverless e-Palette minibuses designed for wheelchair-bound users to roll on and off, to full-size hydrogen fuel cell Sora buses, to an endurance racing concept Prius, and single-seater electric pods (far safer than a Beam scooter) for you to ride to the nearest LRT / MRT station.

It's a semi-public event and registration is required; details will be announced in due time.


Head of Content

Over 15 years of experience in automotive, from product planning, to market research, to print and digital media. Garages a 6-cylinder manual RWD but buses to work.

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