How Toyota Could Triple Its Highlander Hybrid Sales In 2020

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About: Toyota Motor Corporation (TM)
by: Anton Wahlman
Summary

Sales numbers show that Toyota Highlander is, by far, the best-selling three-row SUV in the U.S. market. Its hybrid take rate was 7%.

An all-new 2020 Toyota Highlander arrives at the end of 2019 with a much more efficient 34 MPG hybrid version in February 2020.

The all-new 2020 Highlander hybrid also will be available in a less expensive front-wheel drive version, and I estimate its hybrid take-rate could triple in 2020.

Toyota already is undercutting other three-row hybrid SUVs to the tune of at least approximately $15,000.

Toyota is placing its fuel economy bet more on hybrids than hard-to-sell pure electric cars.  There are no lifestyle habit changes needed to live with a hybrid car.

It's 42 years since Elvis Presley left us, but in 2019 we are acknowledging the departure of another sales king, the third-generation Toyota Highlander. Elvis was the king of music as verified by the popular charts, but the Toyota Highlander showed through the sales charts that it ended up as the king of the American family SUV.

Over the last decade, the SUV market has become ever more segmented. Some SUVs are body-on-frame, others are unibody, and there are different sizes of two-row and three-row configurations. Some are more off-road worthy, whereas others are more focused on minimizing the fuel penalty of operating such a taller vehicle.

The Toyota Highlander is not confused about where it resides in this three-dimensional cube of SUV definitions. It's a three-row, unibody focused on fuel economy. It would not be totally inaccurate to describe it as the modern interpretation of the 1970s station wagon: It’s a tall station wagon with optional all-wheel drive (standard AWD on the hybrid version).

The current 2013-2019 generation Toyota Highlander is ending production this year, as the all-new Highlander arrives in November 2019. Usually, during the last year of a vehicle generation, sales drop off for two reasons: Production is curtailed in order to make way for the renovated assembly line, and demand is reduced because the car is car is getting old and outdated.

During the first half of 2019, how did this aging Toyota Highlander generation fare, in the U.S. sales charts?

US sales

2019 1-6

2018 1-6

change

1

Toyota Highlander

111183

114254

-3%

2

Ford Explorer

88680

110805

-20%

3

Chevrolet Traverse

72375

74090

-2%

4

Honda Pilot

68452

76079

-10%

5

GMC Acadia

59620

50008

19%

6

Chevrolet Tahoe

53793

50523

6%

7

Kia Sorento

47018

52760

-11%

8

Ford Expedition

43569

27934

56%

9

Subaru Ascent

40108

1897

2014%

10

Volkswagen Atlas

37726

28158

34%

11

Dodge Durango

36991

32722

13%

12

Nissan Pathfinder

36312

33702

8%

13

GMC Yukon

34970

34522

1%

14

Chevrolet Suburban

29295

29861

-2%

15

Buick Enclave

27739

22420

24%

16

Kia Telluride

23227

0

N/A

17

Infiniti QX60

22836

22176

3%

18

Acura MDX

22634

21900

3%

19

Nissan Armada

18713

18445

1%

20

Cadillac Escalade

16251

17766

-9%

21

Volvo XC90

16035

15974

0%

22

Audi Q7

16033

17763

-10%

23

Mazda CX-9

11872

14716

-19%

24

Infiniti QX80

10611

8942

19%

25

Mercedes GLS

9885

10199

-3%

26

Tesla Model X

9000

9525

-6%

27

Lincoln Navigator

8856

9115

-3%

28

BMW X7

8814

0

N/A

29

Land Rover Discovery

4752

4627

3%

30

Toyota Sequoia

4564

5441

-16%

31

Hyundai Palisade

383

0

N/A

32

Cadillac XT6

74

0

N/A

TOTAL

992371

916324

8%

New entrants for 2019

72606

1897

Net of new entrants

919765

914427

1%

As you can see in the table above, the Highlander was the sales leader, and by a pretty wide margin at that. It does not mean, however, that Toyota was the three-row SUV sales leader in the U.S. Toyota is unique is that it has only two pure three-row SUVs in the U.S. market - the Highlander and the relatively low-volume Sequoia. The Lexus RX and Land Cruiser are partially three-row, but “not really” all the time and/or fully - which is why I have not included them in the table above.

Rather, you may find that companies such as General Motors (GM) and Ford (F) have more total units on this list - but they are spread over multiple brands and nameplates. Looking historically, U.S. Highlander sales first peaked during its first generation in 2005 at 137,409 units, but then fell to 83,118 units in 2009: Toyota Highlander - Wikipedia.

After that, U.S. Highlander sales have been going up every year and hit 244,511 in 2018. The current sales pace is tracking 3% behind the 2018 number, which is very good considering the Highlander’s generational change that's taking place in the second half of 2019.

There's another thing of note in the sales table above: Almost all of these three-row SUVs are made in the U.S. This includes the top 18 nameplates on the list. It's clear that the U.S. dominates this vehicle category, from a manufacturing perspective. Of the ones not currently made in the U.S., the Volvo XC90 has been announced for U.S. manufacturing by 2022.

Looking at the whole U.S. three-row SUV segment, it grew units 8% during the first half of 2019 - to almost one million vehicles. This overall size, with continued growth in a slightly declining market, is what is attracting new competition.

In terms of new nameplates, the Subaru Ascent joined in the second quarter of 2018, and the Kia Telluride and BMW X7 in the first quarter of 2019. The Hyundai Palisade and Cadillac XT6 joined in June 2019.

If we disregard those new entries in 2018 and 2019, the segment grew “only” 1%. That’s still better than the overall U.S. light vehicle market during this period, which has been in slight decline. You can therefore see that the new entrants constituted almost all the increase in the segment’s U.S. sales from 2018 to 2019 - 7% out of the 8%.

With all of this new competition, how will the next-generation Toyota Highlander set itself apart? Until now, the Highlander has mostly thrived based on its quality reputation. The hybrid version was not as good on fuel economy as other Toyota hybrids, so it wasn’t as much of a selling point as it perhaps ought to have been.

Recently, there have been several new entries into the segment, from Subaru, Volkswagen, Kia and Hyundai, to mention the most relevant ones. Given how good essentially all competitors are at this more mature stage of the market, a new generation in this segment needs to elevate its game and hopefully have a “hook” that will set itself apart.

I predict that this “hook” that will set the 2020 Highlander apart will be the hybrid version, and particularly its class-leading (by far) fuel economy. Unlike the outgoing generation’s hybrid, the 2020 Highlander hybrid will deliver on meaningfully better and most certainly class-leading fuel economy. In the press release from the April 17 unveil, Toyota promises a 34 MPG number (blended highway/city): World Premiere of All-New 2020 Highlander at New York International Auto Show - Toyota USA Newsroom.

The only competitors in this price class with a non-plug-in hybrid system are the Ford Explorer (all-new for 2020) and the Acura MDX, generously defined:

Hybrid 3-row unibody SUVs

base price

delivery

total

US tax credit

net price

Ford Explorer 4x2

$52,280

$1,095

$53,375

$0

$53,375

Ford Explorer 4x4

$54,475

$1,095

$55,570

$0

$55,570

Toyota Highlander AWD

$37,320

$1,095

$38,415

$0

$38,415

Acura MDX AWD

$52,800

$995

$53,795

$0

$53,795

Volvo XC90 T8 AWD PHEV

$67,000

$995

$67,995

$5,002

$62,993

As you can see in the table above, the outgoing generation of the Toyota Highlander (2019) is far less expensive than any of its very few direct hybrid competitors. I threw in the plug-in hybrid (PHEV) Volvo XC90 T8 as well, just to see the price jump to the far more elaborate hardware.

We simply don’t know yet how Toyota will price the all-new 2020 Highlander hybrid, but the new four-cylinder hybrid implementation - unlike the outgoing generation’s V6 - may indicate that Toyota could be able to hold the line on pricing. The availability of a FWD version also should enable a lower-priced Highlander hybrid. Even if there would be a price increase for the AWD version, based on my recent testing I don’t see the 2020 Ford Explorer matching the 2020 Toyota Highlander’s 34 MPG rating.

Many hybrid cars over the last two decades have had a hard time achieving the EPA-rated MPG numbers in “real driving.” Over the last decade, at least Toyota has been an exception to this frequent condition. If Toyota has a hybrid vehicle that is affixed to an EPA label of X MPG, then drivers generally get at least X MPG - and often enough, even better.

That expected 34 MPG rating, by the way, would be a significant jump from the 28 MPG in the previous generation Highlander. Now there will be a giant leap above the 22 MPG in the gasoline-only version, and likely also near a double-digit percentage jump from the Ford Explorer hybrid - which also has not yet seen an EPA-rated MPG number announced. I expect the Explorer hybrid to achieve no more than approximately 30 MPG.

2020 Highlander hybrid take-rate: Up from 7% to over 20%?

In the U.S., for the first half of 2019, the Highlander’s hybrid take rate was 7,942 units out of 111,183 total sold. That’s 7%. If the MPG in the all-new 2020 generation goes to 34, and the hybrid version also is made available in a less expensive front-wheel drive (FWD) version too, then the addressable market of this hybrid should go up significantly.

How much? I think it's reasonable to assume that it will at least approximately triple right from the beginning, to somewhere north of 20%. Over time, it should be able to hit 25% or more.

Other automakers are pushing hard to get from 1% pure electric car (BEV, battery-electric vehicle) take rate, to 2% and 3%. Meanwhile, Toyota figures that it will be more efficient to get to 20% or even a 25% take rate for its non-plug-in vehicles such as the Highlander.

A hybrid car imposes essentially no burden on the user. There's no cord which you have to remember to plug in. There are no hundreds (or thousands) of batteries you have to lug around. There's less pressure on the suspension and less tire wear. Basically, a hybrid is a very effective way of saving a high percentage on fuel, without having to do something different in managing your daily habits.

From that perspective, Toyota’s continued bet on hybrids is a low-risk bet. There's very little, at most, that can go wrong with this strategy. Many consumers - not just 2% or 4% - will pay an extra $1,000 or so for a hybrid version, which doesn’t change their behavior one bit - but rather “only” saves one-third on fuel expense. It also saves on wear and tear for other parts of the vehicle, from engine to transmission to the brakes.

Therefore, if the Toyota Highlander already was the three-row SUV sales leader in the U.S., the advent of a much more efficient - and potentially less expensive variant - hybrid version, should further expand the Highlander’s U.S. sales leadership in this segment. The gasoline-only version of the Highlander arrives in U.S. dealerships late Q4 2019, and the hybrid version arrives in February 2020.

Disclosure: I am/we are short 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.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.