Toyota will engineer a half-electric renaissance

U-turn. The world’s largest automaker will pull back into the fast lane. Toyota Motor risked being left behind in an electric-vehicle revolution, and new boss Koji Sato has vowed to catch up. But in 2024, his greatest asset will be the company’s lead in battery-gas hybrids.

Toyota, whose sales neared 9 million vehicles in the year ending in March 2023, sold zero pure battery-powered cars as recently as 2019. Competitors seized the opportunity in electric-friendly markets. Tesla displaced Toyota as California’s bestseller in 2023. In China, Toyota’s first mass-produced EV, the bZ4X, was met with a cool reception as local marques like BYD gained fans. With Tesla’s once-$1 trillion valuation overshadowing Toyota, whose market capitalisation is around a quarter of that figure, and seemingly unanimous agreement that the future was all-electric, Sato went to work on a turnaround. Since taking the wheel in April, he has unveiled an electric roadmap that includes research into new technologies and revamping Toyota’s manufacturing.

There has been progress. Toyota’s pure-electric sales look set to quadruple in 2023 from 2022, albeit from a low base. And in October, the company announced a “technological breakthrough” in solid-state batteries, promising vastly longer range and quicker charging. Sato’s masterplan will take time: next-generation models only hit the tarmac in 2026. But rivals’ pace has slowed, along with demand. Global electric-vehicle sales were just shy of 10 million in the first nine months of 2023, per Canalys, suggesting a roughly 30% increase for the full year. That’s down from triple-digit gains in 2021. General Motors and Ford Motor have scaled back or deferred EV investment plans, while declining prices and growth have sapped Tesla’s operating profit margin. Meanwhile, Toyota has a mature technology it can exploit in the form of hybrid vehicles. The company pioneered this combination of battery motor and gas engine with the Prius in 1997. The idea is enjoying a renaissance in the U.S. and China, and analysts at Nomura reckon higher oil prices will accelerate adoption in 2024.

Toyota’s hybrid sales grew by a third to power record operating profit in the quarter ended in September. Those ever-deep pockets are helping to keep Sato’s electric dreams on track. Days after GM and Ford announced cutbacks, Toyota said it would spend an extra $8 billion on a new factory in North Carolina. Riding these successes, shares gained more than 40% in Sato’s first six months on the job. Still, Toyota’s valuation multiple of 9 times expected 2024 earnings paled next to BYD’s 14 or Tesla’s sky-high 65 times forecast earnings as of November, per Visible Alpha. Taking the middle lane between gas and electric, it can close the gap.