Toyota (NYSE:TM) pioneered electric motoring with the Prius hybrid. However the company did not follow through, as battery technology improved, with a transition to fully electric vehicles. Instead it continued with a hydrogen vehicle program, assuming that battery electric vehicles (BEV) would fail to succeed in providing sufficient range. Toyota recently announced that it would enter the BEV market, but it maintains its hydrogen and hybrid vehicle programs. My take on this is that both of these programs will eventually need to be exited. Here I discuss news from India that will be hugely negative for Toyota's hybrid program in India and which are favourable for Tesla entering the Indian market.
I've covered recent plans by both India and China to dramatically expand their electric vehicle programs. Last week the Indian GST Council met to review tax rates on many products. This included taxes on hybrid and BEV cars.
Toyota's hybrid vehicle program
The news from India was bad for Toyota, which has a presence in India with its Camry hybrid and plans for a number of other hybrid models. Hybrids have been placed with luxury vehicles with a peak tax of 43%, while BEVs attract just 12 % tax. Vikram Kirloskar Vice-Chairman of Toyota Kirlosker Motor made the following comment "We feel a little let down. There is a lack of policy clarity. It is better to be technology agnostic, set broad emission guidelines and let the consumer decide." This statement indicates a lack if understanding of the firm intention of the Indian Government to fully electrify its transport sector. Note also that India's implementation of renewable energy for power generation to run an electrified transport system is proceeding rapidly, with 175 GW wind + solar PV expected by 2022 and a further 75 GW solar PV expected before 2030.
Toyota's plan was to aggressively push hybrids in India in response to consumer pushback against conventional internal combustion engine (ICE) cars. There had been encouragement for both hybrids and BEVs until this latest announcement, so the move against hybrids is going to create some issues. Probably a bigger issue is the likely massive increase in car numbers at a time when pollution in India is already at a critical stage. Getting rid of ICE cars, even when combined with a battery in a hybrid, makes sense.
I've thought for some time that a hybrid vehicle makes little sense when a battery big enough to provide range security becomes available. That point has now been reached. The implications are severe not only for Toyota, but also a large auto-components industry for ICE cars.
Hence I find it difficult to understand that the new Camry comes with a 2.5 liter inline 4 cylinder engine or 3.5 liter V6. This sounds like the battery to make it a hybrid is more of an accessory than a serious part of the car. It does improve the fuel efficiency and is used to start and accelerate the car. Toyota still considers that hybrid vehicles have a major future, despite the fact that hybrid sales have been static since 2012, with a small uptick in 2016. Toyota indicates that the cumulative global target for sales of its hybrid vehicles by 2020 is 15 million. Toyota achieved 10 million cumulative hybrid sales in January 2017. With annual sale of hybrids in 2016 of ~1.2 million, this indicates that Toyota does not envisage significant growth of hybrid sales in the period between now and 2020.
Toyota's highest ranking European executive, Exec VP Didier Leroy, indicated this week at the Automotive News Europe Congress in Barcelona that Toyota is aware of the need for change. He resisted the idea that Toyota is playing catch up on several fronts, instead arguing that the pace of change is so great that even companies as big as Toyota need to partner on reinventing mobility strategies. Leroy Didier did observe "We are still proud to be a carmaker, but we know that there are many changes in the world." Having observed this, Toyota needs to address what kind of carmaker it plans to be.
Tesla (NASDAQ:TSLA) tries to get on the front foot in India
Tesla is lucky that its vehicles are in favor in India, but even so getting into the Indian market is not trivial for a foreign manufacturer. The Indian Government is looking for Tesla to set up a manufacturing facility in India. Given the massive stimulus of solar PV in India and the coupling of batteries with solar PV to provide grid management (e.g. frequency regulation) and storage to provide dispatchable power, perhaps India might be a candidate for one of several Gigafactories that Tesla is beginning to consider as it expands its BEV and home and grid storage offerings? This might become part of a way that Tesla can capture a slice of the Indian market.
Elon Musk seems to be in discussion with the Indian Government concerning possible concessions to help Tesla enter the market before it sorts out manufacturing. There is clearly serious intent on the part of the Government to build an all electric fleet by 2030, which is a Herculean task. This involves sorting out how to get Government programs structured to facilitate a massive change of direction to full electrification. Charging stations are going to be a significant part of this implementation effort.
Toyota led the introduction of hybrid vehicles, but whereas its competitors are evolving clear strategies around electrification and autonomy, one gets the sense that Toyota has yet to face up to the fact that its hydrogen fuel cell and hybrid programs have a limited future. The longer Toyota delays in addressing these two core automotive programs, there is likely to be confusion both in house and amongst customers (me being one of the latter).
India has given Toyota a wakeup call about its hybrid program, which might be considered unfair as India previously encouraged both hybrid and BEV cars. If it helps Toyota to face the reality that the BEV is the power train that is going to dominate transport from here on, then pain in India might lead to long term gain. Toyota has made a start with its BEV initiative. It just needs to make clear that it is serious by doing something about its hybrid and hydrogen fuel cell programs.
Meanwhile Tesla is trying to figure out how to get into the Indian market, for good reason as it might become the third biggest car market in the world by 2020. The signs are that the Indian Government might be willing to engage, even though price is going to be tough for Tesla in India.
I am not a financial advisor. I'm interested in transformation of the transport and power industries as the world commences to decarbonise. If my perspective helps you to view these transitions differently, please consider following me.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.