Toyota faces disaster

From The Driven

The world’s largest automaker made two major announcements last week which signal that it finally recognises that the future is electric. But it may be too little too late for the company that revolutionised manufacturing half a century ago.

The first announcement was that Toyota would develop a dedicated EV platform after its disastrous half-hearted attempt with the BZ4X.

The BZ4X design, which shared its platform with petrol and hybrid cars, meant its first fully electric offering had redundant components that resulted in much higher manufacturing costs compared to Toyota’s “clean slate” EV competitors.

Japanese newspaper The Asahi Shimbun reported Toyota doesn’t expect to launch its EV range until 2027-28. At the rate at which global EV market share is growing, Toyota will be lucky to retain a tenth of its 10 million unit market share in major market on that timeframe.

The second announcement made last week was that Toyota’s CEO, Akio Toyoda will stand down in April to make way for a new generation for the company.

“The new team can do what I can’t do,” he said in a statement.  ”I now need to take a step back in order to let young people enter the new chapter of what the future of mobility should be like.”

The grandson of Toyota’s founder Kiichiro Toyoda, Akio has received a barrage of criticism in recent years for his failure to identify the world’s shift to EVs while pouring billions of dollars into white elephant technologies like hydrogen.

In the 1970s, Toyota led a manufacturing revolution that changed the world. 50 years on and the automotive giant has grown complacent, taking its market dominance for granted and developing a false sense of security.

In 1991 a group of MIT researchers published a book called “The Machine that Changed the World”. The book was the result of a five-year, five-million dollar research project to identify and understand key manufacturing principals that had enabled Japanese automakers to dominate their US and European rivals since the 1970s.

Engineering students around the world are encouraged to read the book as it provides an excellent history of automotive manufacturing, from Henry Ford’s development of mass production through to the lean manufacturing revolution which forms the basis of modern advanced manufacturing around the world.

You can’t talk about modern manufacturing without talking about Toyota and the 100 year Toyoda dynasty.

Born in 1867, Sakichi Toyoda, considered the “father of the Japanese industrial revolution”, reinvented the loom, dramatically increasing its productivity and set up factories to sell his inventions to the world.

Sakichi’s son Kiichiro Toyoda then expanded the family business to automotive manufacturing and founded the Toyota Motor Corporation in 1937.

In 1967, Kiichiro’s cousin and mechanical engineer Eiji Toyoda took over the presidency of the company and with Toyota’s chief engineer Taiichi Ohno, is largely credited with the development of lean manufacturing principals including the “Just-in-time” Kanban system, “Kaizen” continuous improvement and 5S organisational housekeeping.

These developments lead to a step change in innovation and productivity in the Japanese automotive ecosystem and enabled Toyota to dominate the global car market for the next 50 years.

At the time, US and European carmakers had to scramble to learn and copy Toyota’s manufacturing methods or face wipeout. Projects like the MIT study enabled them to make the necessary changes and survive.

A disruption like the one Toyota inflicted on US and European carmakers in the 1970s is now about happen to Toyota itself, but with one important caveat. While US and European carmakers were able to survive the lean manufacturing revolution, Toyota could struggle to survive the current disruption which is now well underway.

The disruption, which seems to have been largely undetected by Toyota’s top executives, is the exponential growth in market share of electric vehicles coupled with China attaining a new stage in its industrial transformation.

Nothing articulates the challenge Toyota faces better than some recent key figures. In December, fully electric vehicles made up 33% of all new car sales in Germany and the UK, up from less than 10% in both markets just 2 years earlier.

In China BEVs made up 25% of the market in December 2022. Up from just 5% in 2020.

What these numbers reflect is that technology shifts don’t happen in a linear fashion and that once certain market thresholds are reached, growth can accelerate dramatically. In the case of Germany and the UK, EV share was below 5% for ten years but once that share reached 5-10%, it then grew rapidly to a 33% in just 2 years.

And that speed of market share growth is getting even faster. In Norway, which has lead the world in EV growth, it took three years for EV market share to go from 12% (2014) to 32% (2017). The much larger German and UK markets saw an even faster uptake over just 2 years from 7% (2020) to 33% (December 2022).

Automotive manufacturing is incredibly complex and it’s much easier and faster to scale up existing production than it is to develop new production lines for new products.

Therefore as global EV demand surges its much easier for companies like Tesla and BYD, who already produce EVs in high volumes, to scale up their existing production to capture that new demand than it is for companies who don’t already produce EVs at any significant volume.

This is a major problem for Toyota where EVs make up just 0.2% of total production. Despite being the largest automotive manufacturer in the world, Toyota doesn’t even make the top 20 when it comes to EV production.

By October, Toyota had only sold around 14,000 BEVs globally in 2022. An annualised production rate of less than 20,000. For comparison BYD produced 911,140 BEVs in 2022. Tesla produced 1,310,000 around 650 times more fully electric vehicles than Toyota.

One third of new car sales in Germany and the UK are now fully electric vehicles. That equates to Toyota losing almost a third of its addressable market in those countries in just a few years. This could climb towards 50% by the end of this year.

BEV sales in Norway went from 30% market share in 2018 to 80% in 2022. That’s 50% of the market in just 5 years. If the global EV market share follows a similar S-curve, by the time Toyota launch its EV range in 2027-28, over 50% of the world’s car sales will be BEVs and virtually none of those will be coming from Toyota.

Cathy Wood, from Ark Invest, forecasts an even more dire situation for Toyota. She predicts that fully electric vehicle sales will reach 90% of global car sales in 2027 as consumers become aware of the shift taking place, causing demand for petrol and diesel cars to collapse completely.

In that scenario, Toyota will have little to offer to a rapidly changing market, but would be just one of many problems facing Toyota. The company is one of the most indebted companies in the world with $US170 billion in current liabilities on its most recent balance sheet.

On the asset side of the ledger, Toyota is showing $US215 billion in property, plant and equipment. These assets are largely factories that produce internal combustion engine vehicles which the world is rapidly moving away from.

These asset valuations assume that Toyota will maintain its 14% share of the $US3 trillion global car market.

As EVs continue to take large chunks of market share away from 19th century ICE technology, Toyota’s ICE factory valuations are going to become impossible to justify.

Like coal and gas power plants, Toyota’s ICE factories are stranded assets. The ramifications of this will be enormous, especially for Japan whose economy is dominated by ICE vehicle exports.

Decreasing sales from a vanishing addressable market will mean Toyota will find it harder and harder to service its debts. A vicious circle right when Toyota needs to spend billions developing EV production.

Can Toyota perform a miracle pivot to EVs?

Tesla is the fastest growing car company in history.

In 2013 Tesla produced 22,477 electric vehicles which is roughly the same number of BEVs Toyota produced in 2022.

When discussing production growth during an interview with Financial Times in May 2022, Tesla CEO Elon Musk said “Our growth rates are faster than any large manufacture production in the history of the earth, We're faster than the (Ford) Model T”

Scaling automotive production is hard. Even with record production growth rates it took Tesla 9 years to go from 22,000 to 1 million EVs per year.

So even if Toyota is somehow able to match Tesla's production growth rate on BEVs, it would only hit 1 million EVs by 2031, by which time many analysts believe the global car market will be 100% electric.

Toyota currently produce around 10 million petrol and diesel cars per year.

If the predictions about EV market share growth are accurate and if Toyota is somehow able to reach an annual production rate of 1 million EVs by 2031, it would still result in a 90% drop in sales for Toyota.

50 years ago Toyota spearheaded a manufacturing revolution that enabled it to become the world's largest automotive manufacturer.

It's difficult to see how Toyota will survive the electric vehicle revolution.