As rivals trip over ill-timed EV push, Toyota rides hybrid boom to overtake Tesla's profit margin, but warns of Chinese threat in ASEAN

If Toyota is the star of a movie, then something is wrong with the script. According to armchair critics, the supposedly anti-electric vehicle (EV) Toyota will soon go out of business like Nokia and Kodak, because it is too slow to compete with Tesla or Chinese EV players.

The reality is that while Tesla and other Chinese EV players are discounting their cars and cutting back on production amidst a slowing economy in China – the world’s biggest EV market - Toyota is capitalizing on strong demand for its hybrids to nearly double its profit margin from 6.1 percent to 11.8 percent. The figure is higher than Tesla's 9.4 percent (after price war), once touted as industry's benchmark for profit margin.

Between July and September 2023, Toyota’s quarterly profit grew 155 percent from the same 3-month period last year, from 562.7 billion Yen to 1.44 trillion Yen. Profit for the first half of FY2024 (April through September 2023, for financial year ending 31-March 2024) came in at 2.6 trillion Yen, up 124 percent from last year.

On the back of the extremely strong results, Toyota is revising its forecast profit for FY2024 upwards by 50 percent! To 4.5 trillion Yen. Of course, the weak Yen also helps in making exports cheaper, but neither Nissan nor Honda nor Mitsubishi are seeing the same the same growth. Favourable currency exchange helps but having the right product offering matters more.

Sales of Toyota and Lexus cars grew sharply, registering more than double digits growth in all regions except for Asia, where sales were dragged down by intense price war with Chinese EV players. Sales in China (including Hong Kong and Macau but minus Taiwan) grew just 0.3 percent.

Judged from a regular January - December calendar year, sales in China dropped 4.2 percent. Surprisingly, the bigger headache for Toyota is not China, where H1 FY2024 sales have stabilized to just over 1 million units, same as last year.

Instead, it is Southeast Asia, specifically Thailand and Vietnam, which were down 5.6 percent and 44.2 percent respectively between April and September 2023, that Toyota is more concerned.

A weak economy is to be blamed but CFO Yoichi Miyazaki also said that the threat from Chinese EV players, which are growing fast in Southeast Asia, is not to be taken lightly. More on that later.

Overall, sales in Asia grew ‘just’ 9.6 percent, the lowest among all regions. Japan grew the most, at 23.3 percent, followed by Europe, at 16.2 percent, also on the back of strong demand for hybrids.

Nikkei Asia reports that Toyota is sitting on nearly 800,000 units of backlog orders in Japan alone. In the US, Cox Automotive says Toyota has just 26 days’ worth of inventory, less than half the industry average of 60 days, compared to 97 days for EVs, meaning that despite the weak economic outlook, Toyota’s mostly hybrid models sell 3 times faster than most EVs.

Far from being rendered irrelevant by EVs, sales of Toyota and Lexus hybrids and plug-in hybrids rose from 27.6 percent last year to 33.8 percent in H1 FY2024.

In markets like Australia, there is now a 2-year wait for the Camry Hybrid. In Korea, where Toyota and Lexus only sells hybrid models (GR models aside), sales jumped 64 percent after the Korean government cut EV incentives. In USA, waiting period for the Toyota Tundra Hybrid is now more than 6 months. In Japan, dealers have paused order takings for the Alphard and Vellfire Hybrid, likewise for the Prius.

Seeing Toyota’s results, Ford USA is now cutting back on production of the electric Ford F-150 Lighting to double production output of the hybrid variant. Meanwhile GM and Honda parted ways from their affordable EV partnership, citing unfavourable market conditions.

In China, EV sales are still growing, recording a very impressive 31.9 percent in the first half of 2023, but it came at a very high cost to margins, and demand is shifting back to plug-in hybrids, which grew 91.1 percent, according to data from China Association of Automobile Manufacturers.

Toyota singled out 3 main reasons for its strong growth:

• Having a full range of products that serve users from all segments and all regions, thus shielding the company from ill effects of a slowdown in one market or one segment – basically not putting all their bets in one basket, hence the Multi-pathway strategy
• Deriving value from supporting more than 100 million customers worldwide (parts, after-sales, Kinto subscriptions etc)
• Strong earning power of hybrids

You can almost hear Chairman Akio Toyoda saying, “I told you so.”

At the same time, Toyota is cutting its forecast for battery EV sales by 40 percent, to just 120,000 units due to the slowdown in China. Total vehicle sales of Toyota and Lexus models however, will remain unchanged at 9.6 million units. The difference will be made up mostly by regular (non-plugged in) hybrids.

Many perceive Toyota as delaying EVs, but to the company, it is merely sitting quietly and observing, carefully bidding its time before making a jump.

Winning over the early EV adopters is easy. Sustaining demand from regular buyers who just want a car that works best for them, regardless of powertrain type, is a lot harder, as many companies now realize.

Mercedes-Benz for example, found out that after an initial buzz, its EQ models are not selling as fast in China as the company had projected, explaining that Chinese EV sales is currently driven by price incentives, mainly on lower-end cars.

“This level of [EV] adoption has not yet happened in the premium or luxury segments,” said CEO Ola Kallenius. “Many [Chinese] customers view the S-Class with a high-tech V8 as the ultimate buy.”

“We're investing massively to build our position on EVs in China, then we'll see how things unfold,” he said.

This is the kind of situation Toyota wants to avoid. Put in money, pray, and hope that customers will come. Toyota says had it followed its peers, it would have a much lower investment capacity today, as capital is tied up elsewhere.

To be clear, Toyota recognizes the looming threat of Chinese EV upstarts, and is doubling down on its EV introduction plans – Tesla-style gigacasted chassis, solid-state batteries, Arene software, a USD 8 billion battery plant in the US – are all coming in the second half of this decade.

The key point Toyota is emphasizing is getting the EV launch timing right. It doesn’t want to rely on favourable tail winds like tax incentives because governments can easily pull back these incentives when the economy is weak, which is exactly what is happening now and if there is not enough organic demand to support the business, the company could be in trouble.

Also, all major EV markets have some form of protectionist measures, USA has Inflation Reduction Act, China puts limits on battery and motor raw material exports, the European Union wants to audit green credentials of Chinese OEMs supply chain, and so on. Toyota is observing how policy makers respond.

“For the future outlook, most probably Chinese BEVs and other OEMs will continue to expand their exports and strengthen their operations overseas. That’s something we have to expect. What do we do about it? Well, I am sure you all know, it’s not that we don’t have the BEV line up. The question is when we launch them. I cannot be too specific but exports from Japan to Southeast Asia, and China, have different tariffs in different countries. At which timing do we start local production of our BEVs, or start exporting from Japan, we really have to be watchful of the market situation as well as the competitive landscape,” said CFO Miyazaki.

Also read: Toyota: How much longer can we expect EV incentives to continue? Localization a crucial first step to launching affordable EVs, Perodua included

Outside of China, Southeast Asia is fast becoming a hot spot for Chinese EVs, mainly because compared to USA and Europe, Southeast Asian nations, especially Thailand, Indonesia, and Malaysia – all traditional stronghold of Japanese manufacturers - warmly welcome Chinese EVs.

For many Chinese EV brands, exporting to Southeast Asia is their ticket to ride out slowing EV demand in their domestic market.

Toyota has previously said that it will be launching 10 new battery EV models by 2026, contributing to 1.5 million units annual sales. However, CTO Hiroki Nakajima has also said that the timeline is a soft one, and that Toyota will not rush out an imperfect car just to meet the deadline.