Spectators at the Nascar Cup Series race in November had front-row seats for a debate over the auto industry’s future. A plane sponsored by nonprofit group Public Citizen flew past Phoenix Raceway carrying a banner: “Want exciting? Drive electric. Want boring? Drive Toyota.”
The flyby followed an open letter to Akio Toyoda, chief executive officer at the world’s largest carmaker, from groups including Public Citizen criticizing its slow rollout of electric vehicles. “No automaker has been able to keep up with the surging consumer demand for battery electric vehicles, but Toyota has not even attempted to meet it,” they wrote. “Toyota can and must shift swiftly to EVs or risk obsolescence.”
While the NGOs’ motivations were green ones, their message reflected a wider concern in the $2.25 trillion global automotive industry that Toyota Motor Corp. and other Japanese carmakers risk losing their leading position by failing to shift to EVs fast enough.
As the auto industry undergoes its biggest transformation in a generation, these storied brands are falling behind.
Tesla Inc. is the world’s top EV maker by vehicles sold, followed by companies including China’s BYD Co. and Germany’s Volkswagen AG, according to Bloomberg Intelligence. No Japanese carmaker makes the top 20, leaving them on the sidelines of the auto industry’s fastest-growing sector. For the first three quarters of 2022, sales of battery-powered vehicles grew around 80% from a year earlier while total vehicle sales fell about 4%, according to Bloomberg data.
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“It’s becoming a material part of the industry, and so far the Japanese are missing out on that,” said Colin McKerracher, an analyst with BloombergNEF.
Japan’s biggest auto brands have long been consumer favorites around the world, typically accounting for more than a third of new car sales in the US and dominating markets from Southeast Asia to Africa.
Their absence from the EV segment is particularly baffling because of their early start with eco-friendly vehicles, including Toyota’s Prius, the mass-market hybrid launched a quarter of a century ago and one-time top pick of Hollywood stars seeking green credentials. In 2009 Nissan Motor Co. unveiled the Leaf, an all-electric hatchback considered a pioneer in mass-market EVs. That same year, Mitsubishi Motors Corp. also launched its first EV. In 2010, Toyota invested in Tesla.
Enthusiasm over the early EV models, though, quickly faded due to tepid sales. Convinced the battery revolution would happen only slowly, Japanese carmakers focused on gasoline-electric hybrids and cooperated with the ambitions of Tokyo technocrats to develop hydrogen fuel-cell vehicles, a nascent technology with potential to be even greener than EVs.
In September, CEO Toyoda said battery-electric vehicles “are just going to take longer than the media would like us to believe.” The company also says it’s on a mission to reduce CO₂ emissions but doesn’t want to limit its focus to all-battery cars.
“In this diversified world, in an age where we do not know what the correct answer is, it is difficult to make everyone happy with only one option,” the company said in a statement.
Now, even as high gasoline prices and government incentives boost demand, Japan’s automakers have little to offer those seeking to avoid gasoline-powered cars, including potential Tesla buyers turned off by Elon Musk’s controversial management of Twitter.
The battery vehicles they do sell can be disappointing: Toyota in May launched the bZ4X electric SUV but halted sales in June because a defect could cause its wheels to fall off. Sales have since resumed, albeit in limited quantities.
Read More: Bloomberg Green’s Electric Car Ratings
“The Japanese car industry needs to catch up,” said former Nissan executive Masato Inoue, chief product designer of its first EV, the Nissan Leaf, who now teaches at the Istituto Europeo di Design in Turin, Italy. “It already could be too late.”
His former boss, the former Nissan Chairman and early champion of the Leaf Carlos Ghosn, agreed.
“Nissan lost its early-mover advantage,” he said, predicting Japanese carmakers will likely struggle to catch up with rivals including Chinese EV maker BYD. Electrification investment announcements now “are too little, too late.”
While such criticism is to be expected from Ghosn, who was arrested in 2018 on charges of financial misconduct at Nissan and lives in Lebanon after staging a dramatic escape from Japan, he’s not the only one who’s pessimistic.
Critics worry the automakers are replicating the decline of Japan’s semiconductor and consumer electronics industries. These once reigned supreme with products like NEC’s memory chips and Sony’s Walkman, but were caught flatfooted by major disruptions such as Apple Inc.’s iPhone and failed to innovate their way out of commoditization.
“Japanese automakers look like they’re already left behind, and incapable of taking a lead position,” said Shingo Ide, chief equity strategist at Nippon Life Insurance’s NLI Research Institute.
Six major Japanese automakers had about 40% of the US market for passenger vehicles in 2021, roughly the same as before the pandemic started. But in the second quarter of 2022, their share fell to 34%, and by the third quarter it was 32%, according to Bloomberg data.
General Motors Co. last year took Toyota’s crown as the top seller in the US, with the Japanese company reporting its US sales fell 9.6% in 2022. As more Americans choose EVs, Japanese brands—for decades a top choice for everyone from first-time drivers to suburban soccer moms—are the biggest losers.
“Consumers moving to electric vehicles in 2022 are largely doing so from Toyota and Honda—brands which have been unable to keep their internal combustion owners loyal until their own brands begin to participate more significantly in the EV transition,” S&P Global Mobility said in a report published in late November.
One of the biggest issues is that some markets are shifting to EVs much faster than many anticipated. About 15% of new cars sold in Germany and the UK and more than 20% in China were electric in the first three quarters of 2022, according to Bloomberg data. While EVs accounted for 5% of US sales during the period, demand will likely jump thanks to tax breaks in the Inflation Reduction Act, signed into law in August. By mid-December, companies announced almost $28 billion of investment in EV-related manufacturing in North America.
Toyota “has substantially miscalculated” in its EV strategy for North America, wrote Jefferies analysts Takaki Nakanishi and Jingfei Deng.
Cannibalization Fears
Toyota’s pursuit of hydrogen fuel-cell vehicles is backed by the country’s trade ministry, which believes that hydrogen is key to achieving net-zero emissions by 2050. The government said in June that by 2035 all cars sold should be “so-called electric-powered vehicles” with the proviso that hybrids are included.
Japan’s automakers and government leaders have been reluctant to push for a pivot to all-electric for fears it would cannibalize existing car sales and devastate a broad network of parts suppliers and subcontractors. EVs generally don’t require as many components as traditional cars.
Auto production is one of Japan’s most important industries, accounting for almost 20% of manufacturing in the country and 8% of employment, according to a report by the Climate Group, an environmental organization. Toyota has promised to keep making around 3 million cars in Japan—around a third of its global output—to maintain employment and competitiveness.
“With an electric vehicle, basically half of Nagoya becomes unemployed,” said Jesper Koll, expert director of financial services company Monex Group, referring to the city in central Japan near Toyota’s headquarters and where many parts manufacturers are based. “The growth potential of the Japanese economy is definitely shrinking.”
Realizing that EVs are no longer the niche product they once were, however, Japanese companies are now stepping up investment projects, with Toyota spending 4 trillion yen ($30 billion) to launch 30 EVs by 2030. Honda Motor Co. is co-developing an electric SUV with GM for a 2024 debut and has another partnership with Sony Group Corp. to deliver premium EVs starting in 2026. Nissan, which began delivering Ariya electric SUVs to US customers in December, has boosted spending to introduce more models.
Yet rivals are also picking up their pace with EVs. GM has been moving particularly quickly and may surpass Tesla in EV sales in 2025, according to Bank of America analyst John Murphy. GM’s EV portfolio includes the Chevrolet Bolt hatchback and compact utility vehicles, Cadillac Lyriq SUV and GMC Hummer pickup, and the company expects to launch several more EVs this year.
Executives at Toyota say all-battery cars are still too expensive or unfeasible due to lack of charging infrastructure in many markets, particularly in the developing world. The average EV price in the US was about $65,000, compared to more than $48,000 for all new vehicles, according to a Kelley Blue Book report published in December.
Gill Pratt, Toyota’s chief scientist, points out that many countries lack the charging infrastructure to sustain the EV boom, saying a mix of EVs, plug-in hybrids (PHEVs) and hydrogen-powered vehicles (HEVs) is the most realistic option in those markets.
“For these places and for customers without easy access to recharging infrastructure, PHEVs and HEVs are the most effective way to lower their carbon footprint. It is also the best way for net carbon emissions to be reduced as much as possible, as soon as possible,” Pratt said.
For all the challenges they face from nimbler players, Japan’s top automakers retain many advantages accrued during their years at the top of the heap. Having spent decades catering to mass-market consumers, they boast powerful brands as well as distribution and service networks which EV newcomers cannot match. Chinese rivals like BYD are still largely unknown in many countries and lack experience serving global customers.
“I would never count them out,” said Michelle Krebs, executive analyst with Cox Automotive, speaking about Japan’s automakers. “They’ll still be in the game.”
Yet analysts say catching up won’t be easy for the Japanese, as the competition around EVs shifts from traditional, mechanical engineering to software and services. The companies, with their late start, are missing out on the chance to get to know their EV suppliers and customers before their rivals do, said Karl Brauer, executive analyst at iSeeCars.com, a website which ranks cars and dealers.
“Even if you have all the resources and capability of Toyota to produce an EV when you’re ready, you still have to go through a learning curve,” he said. “And the other automakers are ahead of you, because they’re doing it now.” —With Reed Stevenson and Chester Dawson
©2023 Bloomberg L.P.
