Toyota’s Hybrid-First strategy is paying off big time

In today’s high-tech, high-stakes auto industry, fortunes can change quickly, and there’s no better example of that right now than Toyota Motor.

Not long ago, it seemed that Toyota had fallen dangerously behind in the electric vehicle space. Tesla, the electric car pioneer, has grown rapidly to become the world’s most valuable automaker. Seeing Tesla’s success, other companies, such as General Motors and Ford Motor, concluded that large numbers of consumers were about to switch to battery-powered cars and trucks, and began investing tens of billions of dollars to expand their to catch up.

Toyota, however, was more single-minded – or lethargic, the critics would say. So far, the company has introduced just two all-electric models in the United States, banking on the fact that its gas-electric hybrids and plug-in hybrid vehicles, for which it has become known, would remain popular and be sufficient for the time being tackle climate change.

Amid all the enthusiasm for electric vehicles in recent years, it seemed like Toyota just didn’t get it.

“I was shocked when I first heard about Toyota’s strategy because I could see what Tesla was doing,” says Earl Stewart, a Toyota dealer in Lake Park, Florida, who also enjoys driving his Tesla Model S drives.

But over the past six months, sales of electric vehicles have slowed, and American car buyers looking to lower their fuel bills and tailpipe emissions have been switching to hybrids in droves. Now Toyota’s sales are growing and the company is reporting huge profits.

“It’s not the first time Toyota has proven me wrong, and it won’t be the last,” Mr. Stewart said.

Toyota’s sudden strength reminds us how profoundly the auto industry is changing. Development technologies such as electric vehicles, advanced microchips and software are turning what was once a stable, slow-moving sector into a dynamic industry where even fast-moving and well-managed manufacturers can be pushed off course.

Toyota, a Japanese company, is the largest car manufacturer in the world; it sold more than 11 million vehicles in 2023, more than six times as many as Tesla. The company slowly rose through the ranks of the industry over half a century, first exporting small cars to the United States, then building factories in the South and Midwest, adding a luxury brand and expanding into the segments it dominated by its Michigan-based rivals, such as full-size pickup trucks.

On a few occasions, Toyota has bucked the industry’s conventional wisdom. The introduction of the luxury brand Lexus in 1989 seemed like a risky gamble, until it took a lead in sales over BMW and Mercedes-Benz. Twenty-one years ago, Toyota introduced the Prius, a small car with a compact gasoline engine and an electric motor powered by a battery.

The combination allows the Prius to travel 50 miles or more on a liter of gasoline, and a plug-in hybrid model can make short trips without using gasoline. Other automakers dismissed the car as a curiosity, but the Prius was a hit and it wasn’t long before GM, Ford and others developed their own hybrids.

Tesla CEO Elon Musk disdains hybrids, saying there’s no point in having two drive systems under the hood. The consumer doesn’t seem to be interested. Toyota offers more than 20 hybrid or plug-in hybrid models, and these represent nearly 30 percent of sales, far more than most other automakers. Last year, Toyota sold 2.2 million vehicles in the U.S. market – more than all automakers except GM

In January and February, Toyota’s U.S. sales rose 20 percent, driven by an 83 percent increase in sales of its hybrids and plug-in models.

“We’re not saying electric vehicles aren’t a good solution to CO2 emissions,” said Jack Hollis, executive vice president of Toyota’s North American business. “They are. They’re just not the only solution, and many of our customers have told us they want choice: hybrids, plug-ins and electric vehicles.”

The strategy is paying off. In the nine-month period beginning in April last year, Toyota made $27 billion in profits, about double its profit from the same period a year earlier. By comparison, Tesla’s 2023 profit of $15 billion was up about 19 percent from 2022.

Investors have taken notice. The stock market now values ​​Tesla at less than half of its peak market capitalization of $1.2 trillion in November 2021, largely because sales are growing slower and the profit it makes on each car has fallen. Over the same period, Toyota’s valuation has risen by roughly a third to about $400 billion.

Mike Ramsey, an analyst at research firm Gartner, said Toyota’s hybrid strategy is strong and based on long-term logic, but shifts in technology or the market could undermine the company’s future performance and position.

“Toyota seems to be teetering between boring and brilliant, depending on the current state of thinking about technology,” he said. “But no matter what happens, they still seem to sell more cars and trucks than anyone else.”

One major market where Toyota is struggling is China, the largest car market in the world. Many Chinese car buyers are opting for electric vehicles, helping domestic automakers such as BYD make profits market share of Toyota, Volkswagen and other foreign manufacturers.

Toyota also has other problems. Daihatsu’s subsidiary, which makes small cars, temporarily stopped all production in Japan in December after revealing that it had cheated in safety tests.

For now, though, Toyota’s deliberate pace appears to be generally working, and several other major automakers have moved closer to the company’s path.

Mercedes-Benz, which had hoped to phase out internal combustion engine models by 2030, said last month it had pushed back that goal by at least five years. Ford has cut production targets for electric vehicles and is slowing construction of factories that will produce batteries for electric vehicles.

GM, which had stopped selling hybrids in the United States to focus on electric vehicles, has postponed the introduction of some battery-powered models. It now also plans to reintroduce hybrid and plug-in hybrid models, which dealers had been pushing for.

“Deploying plug-in technology in strategic segments will deliver some of the environmental benefits of electric vehicles as the country continues to build out its charging infrastructure,” GM CEO Mary T. Barra said in February.

Electric vehicles have so far failed to convince many car buyers because they are generally more expensive than combustion or hybrid models, even when government incentives are taken into account. The challenges of charging electric vehicles, concerns about range and their performance in cold weather have also made some people hesitant.

Hybrids don’t face many of these problems. Some hybrids cost just a few hundred dollars more than comparable gasoline-powered cars – a premium that owners can quickly recoup through fuel savings. In addition, regular hybrids never need to be plugged in.

Plug-in hybrid models, some of which can travel more than 40 miles on electricity alone and have a gasoline engine for longer journeys, have much smaller batteries than electric vehicles and can be charged relatively quickly. But these vehicles, which make up a small part of the market, may not be as financially and environmentally beneficial when traveling long distances on gasoline alone.

Toyota has plans to significantly increase production and sales of hybrids. A hybrid version of its Tacoma pickup is coming out. A redesigned Camry sedan, expected this spring, will be available only as a hybrid.

The company will also offer a range of electric vehicles, said Mr Hollis, Toyota’s chief executive. About 30 models will arrive by 2026, when Toyota hopes U.S. electric vehicle sales will increase to about 1.5 million vehicles per year. About 15,000 were sold last year.

In Florida, new Toyotas that arrive at Mr. Stewart’s South Florida dealership hardly hit the market before they are sold. As of early March, he had only about 150 vehicles in inventory, down from the 500 he carried before the pandemic.

That hasn’t stopped customers from waiting months after ordering vehicles. At one point last year he had 1,300 vehicles on order, and customers for all of them.

“I’ve been selling Toyotas since 1975 and business is better than ever,” he said. “People are lining up to buy from me.”