Altruistic Toyota: Too Little Too Late

About: Toyota Motor Corporation (TM), Includes: TSLA
by: Jason Mostaccioli

Toyota refreshes their royalty-free patent offer by expanding it over their entire electrification portfolio.

The US fuel cell electric vehicle market has failed to take off and Prius sales continue to diminish.

48V mild hybrid powertrains are gaining momentum and look to be the technology of choice for fuel economy and emission requirements in the foreseeable future.

Toyota's (TM) briefing last week, granting royalty-free patents of their entire electrification portfolio, felt like déjà vu. Tesla (TSLA) first announced a similar tactic back in June 2014 for their battery electric vehicle (BEV) patents. Toyota followed up a few months later offering out their fuel cell electric vehicle (FCEV) patents. Unfortunately for Toyota, their original announcement and this follow-up appear to be a precursor of implementing the wrong technology at the wrong time.

Patents are expensive to issue and maintain, costing upwards of thousands of dollars each. One has to wonder why both automakers would allow their competitors to utilize their patent portfolio for free. Altruistic or not, there are other benefits to encouraging automakers to introduce similar powertrain technologies. For BEVs and FCEVs, increasing sales builds demand for charging or fueling infrastructure, grows the supply base to drive down component fixed costs, and encourages broader consumer acceptance.

However, Toyota's initial offering had a negligible impact on the FCEV market. Barely a few thousand FCEVs have been sold in comparison to the hundreds of thousands of BEVs during the same time.

Source: Hybridcars and Insideevs

Simultaneously, Toyota Prius sales have been slowing. Toyota expanded their Prius portfolio with the c and V models, but the new additions were unable to stymie the decline. Tesla recently acknowledged the Toyota Prius being in their top 5 vehicle trade-ins, highlighting consumer's changing interests from hybrid vehicles to battery electric vehicles.

Source: Goodcarbadcar and Insideevs

Beyond basic 12V start-stop systems, most automakers have not yet implemented hybrid or electric powertrains over the majority of their portfolios. However, that is likely to change in the upcoming years as fuel economy and emission regulations increase in difficulty. The challenge for each automaker is to determine how to maintain compliance at the lowest cost to their customers and shareholders.

Source:The International Council on Clean Transportation

The chart above from a few years ago simplifies a cost and benefit comparison between hybrid systems. It shows how 12V start-stop (S/S) powertrains have the best value (lower $/%CO2 reduction is better) followed by strong hybrids (NASDAQ:HEV) and finally a variety of mild hybrids (48V). However, based on Toyota releasing their hybrid patents and recent automaker vehicle launch announcements (e.g. FCA, Audi, BMW, JLR, VW, Ford, Kia), it's likely that cost benefit gap between 48V and strong HEVs has shrunk.

The strong HEV figure in the chart above includes both the hybrid powertrain and other vehicle benefits. To obtain a direct comparison with the 48V hybrids those vehicle benefits should be removed. CO2 reduction for strong HEV powertrains is closer to 30% (instead of 38%) depending on the vehicle, original powertrain, and drive cycle. Then assume the average 48V BSG actually costs a little less, at $750, and automakers are able to squeeze out a little more CO2 reduction, at 10%.

The resulting chart would flip with strong HEV becoming the most expensive and 48V BSG right behind 12V start-stop. If the resulting projections are closer to reality, it would be unfavorable for Toyota. Not only would the value per efficiency be better for 48V relative to Toyota’s strong HEV powertrain, but the up-front manufacturing and material cost would also be approximately $2000-2500 lower per vehicle. As automakers introduce these hybrid architectures for regulatory compliance, consumers most likely won’t be able to differentiate between them. Thus, the lower cost of 48V mild hybrids will allow other automakers to undercut Toyota’s lineup with minimal impact to their marketing and vehicle branding.

Disclosure: I am/we are long TSLA. 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.