Toyota Tries China For Hydrogen Vehicle Support

Summary

• Toyota doubles down on its hydrogen vehicle program by engaging several Chinese groups with its fuel cell programs.
• Major Chinese auto players BAIC, GAC and Dong Feng Motors have small stakes, but the new company is about promotion of hydrogen technology and fuel cell registration in China.
• No mention of concrete new product plans, which contrasts with lots of JVs in China on BEVs.
• Toyota pushes hybrid-only releases of Sienna and Venza models in the US.
• Toyota continues to seek to water down fuel efficiency standards (and hence increased emissions) in the US.

Toyota (NYSE:NYSE:TM) has a long-established dual strategy for its participation in the personal vehicles sector. Firstly, it is seeking to expand its hybrid vehicle programs and secondly, a longer term strategy is to succeed in its vision of zero carbon transport through hydrogen-powered vehicles. It continues to overlook discussion of BEV plans (except for China). Therefore, Toyota’s current planning involves a combination of rearguard action to keep its hydrogen car program alive, along with attempts to prolong the future of ICE (Internal Combustion Engine) cars in the US via introduction of hybrid-only models and rule changes about fuel emissions standards. Here I report on new developments in these two areas. My conclusion is that Toyota’s actions in both areas further isolate it from electrification of transport, which is developing irreversible momentum. Toyota might be the most powerful car company now, but if it continues down this path its future is increasingly endangered.

Toyota’s Chinese hydrogen push

With most car companies that have had hydrogen programs now abandoning or delaying them, Toyota has just announced a complex partnership for its hydrogen initiative in China.

The headlines are grand, involving 5 Chinese partners, but the reality seems to be more of a far-off future with establishment of an industry-wide promotion vehicle and an R&D company, FCRD (United Fuel Cell System R&D (Beijing) Co Ltd). The plan is for 50 employees. The goal is to promote fuel cell vehicles and develop competitive fuel cell systems for commercial vehicles that comply with Chinese regulations. Toyota will be 65% owner of the venture which is to be capitalised at $46 million and will be established later this year. The deal is about building a research lab in Beijing. This is reminiscent of much of what has happened with the development of hydrogen-based technology, being big on promotion and absent on reality in terms of actual vehicles under development.

Major Chinese auto manufacturers are on board, including BAIC Group (OTCPK:BMCLF), GAC Group (OTCPK:GNZUF), Dongfeng Motor Corporation (OTCPK:DNFGF), in addition to China First Automobile Corp. and Beijing SinoHytec Co Ltd. With BAIC, GAC and DFM each holding just a 5% stake, this has the ring of doing Toyota a favour rather than a serious attempt to get hydrogen technology into the vehicle market. Comments by senior executives from each of the partner companies are couched in the long term and need to explore what the future might look like. No one was talking about a FCEV (Fuel Cell Electric Vehicle) model that the new company might help get to market.

Always in FCEV discussions Toyota promotes clean tailpipe emissions, but never mentions that virtually all hydrogen produced currently involves fossil fuels and high levels of CO₂ emissions in its manufacture.

Chinese companies have lots of concrete vehicle manufacturing partnerships with major international car companies. However, unlike partnerships on BEVs (Battery Electric Vehicles), the fuel cell/hydrogen program is not about models for sale, but more about promotion of the hydrogen economy and developing the technology.

The contrast with the development of BEVs is stark. For example, BAIC has recently announced a partnership with Hyundai (OTCPK:HYMTF) (Beijing Hyundai, a subsidiary of BAIC Group) to sell a 490km BEV, the Festa pure electric. I didn’t find mention of the Toyota partnership on the BAIC website.

Toyota’s support for hybrids in the US

Unlike most other car companies, Toyota is aggressively pushing the sales of hybrid vehicles as it announces hybrid-only offerings of the Sienna minivan and Venza crossover models in the US.

The Trump administration has aggressively reversed a large number of environmental rules. A significant attempt to reverse proposed fuel efficiency standards (goal 54 miles/gallon fleet-wide fuel economy by 2025 sought to be reduced to 40 miles/gallon by 2025) has pitted California (and 13 other states) against the Federal Government. The outcome is in the courts currently and likely to end up in the Supreme Court. The automotive industry has weighed into the controversy, with Toyota and GM (GM) prominent in supporting the Trump Administration, while Honda (HMC), Ford (F), BMW (OTCPK:BMWYY) and Volkswagen (OTCPK:VWAGY) have backed California. California’s Attorney General Xavier Becerra has linked the attempted weakening of proposed standards with increased pollution and also with COVID-19 as this disease has been linked to pollution. Toyota seeks to be a good citizen in its actions. So it is puzzling that it seeks to support actions which are clearly damaging to the health of US citizens. The National Highway Traffic Safety Administration, which was a key party to drafting the standards, has made it clear that the rules have been formulated after extensive public and expert consultation.

The clear conclusion from Toyota’s active participation in seeking to weaken the proposed standards is that it seeks to protect its hybrid vehicle programs. California has already indicated that there is a price for Toyota’s support of making emissions worse.

Conclusion

I’ve been a consistent reporter about electrification of vehicle transport, which is clearly evident from the rise of Tesla (TSLA) and dramatic change towards electrification in the business model of Volkswagen. Notwithstanding the recent concerns about complacency by President Toyoda, Toyota continues to double down on a dual strategy that is not consistent with electrification of transport. No single company can hold back major change. Toyota is on the wrong side of history in seeking to weaken fuel efficiency standards in the US and its attempt to shore up its hydrogen program via Chinese partnerships is unlikely to stem the tide of electrification of transport. I’ve indicated that I have great respect for Toyota’s engineering expertise, but until it addresses its business strategy, my take is that investors would be wise to stay on the sidelines.

I am not a financial advisor but I do pay attention to the dramatic changes as transport gets electrified. If my comments help you and your financial advisor to see possible investment in Toyota in a different light, please consider following me.

Analyst’s 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.