Toyota Boosts Investment In BEV Batteries To Reinforce Carbon Reduction Strategy

Summary

• New U.S. plant to add battery capacity for pure battery-electric vehicles (BEVs) to capacity for gas-electric hybrid batteries.
• First, Toyota BEV models for U.S. can shift from import to North American production thanks to new capacity and Inflation Reduction Act incentives.
• Toyota current vehicle sales in U.S. suffer from supply-chain woes, which executives forecast to remain problematic through 2023.
• TM remains an attractive addition to the portfolio of long-term investors, with significant opportunities to grow.

Toyota Prius Prime Plug-in Hybrid Electric Vehicle

Angel Di Bilio

As several large global automakers race to convert their entire model portfolios to the battery-electric (BEV) format and phase out internal combustion engines - ICE, Toyota Motor Corp. (NYSE:TM) is pursuing a different, more incremental course.

Toyota will introduce BEVs slowly and more gradually than its rivals, citing what it believes to be limited, slowly growing consumer demand. Toyota's BZ4X, its first BEV in the U.S., has debuted and will be followed by the Lexus BZ later in the year, based on the same BEV architecture, with luxury materials and appointments. Both models will be manufactured in Japan and imported to the U.S. in relatively small numbers.

(The BZ4X was recalled and sales halted shortly after the sale of only 258 vehicles, due to a problem that could cause the wheels to fall off. Toyota has offered to buy back the affected vehicles. A spokesperson said the company is endeavoring to resolve the mechanical problem.)

Import to local

Production of future Toyota BEV models is likely to start in the U.S. - and in greater numbers - in about three years, as soon as Toyota completes a battery line at an 1,800-acre site near Greensboro, North Carolina. Earlier this year, the automaker had announced a $1.2 billion investment to build batteries at the site, though the batteries were of a type used for gas-electric hybrids only.

Site of Toyota battery plant in N.C. (Toyota)

In 2021, Toyota said it intended to invest $70 billion on future electrification efforts.

The latest $5.6 billion of battery investment announced Wednesday will cover an additional $2.5 billion for capacity to build BEV batteries in N.C., probably using lithium-ion chemistry - presumably for BZ4X and perhaps other BEV models.

In Japan, Toyota said it will invest about 400 billion yen (about $3.1 billion) in the Himeji Plant of its affiliate, Prime Planet Energy & Solutions Co., Ltd. (PPES), for batteries and in Toyota plants and property.

If consumer demand justifies requires more battery production for BEV models, Toyota is prepared to accelerate its investments, executives have said.

A Toyota executive acknowledged in Automotive News that the company had originally intended to expand gas-electric hybrid battery production in North Carolina and lately has pivoted to add BEV batteries instead.

Incentives from U.S.

North American production of BEVs is critical because the newly-passed Inflation Reduction Act provides incentives while stipulating local production of the vehicles, including the batteries. Other requirements of the new law are complex as well and may require some rethinking about which minerals are used in the batteries and where they are mined.

Having pioneered the fuel efficient gas-electric hybrid power train, first introduced on the Prius, Toyota has expanded hybrids and plug-in hybrids across its model lineup. The Lexus NX plug-in and plug-in versions of the Prius and RAV4 have proven popular because they offer gas-electric operation as well as all-electric operation - albeit for relatively short distances. The Lexus NX, for example, can travel 37 miles on all-electric power.

Toyota electrified lineup 2021 (Toyota)

Toyota said it "believes that there is more than one option for achieving carbon neutrality. It also believes that the means of reducing CO2 emissions as much as possible and as quickly as possible while protecting the livelihoods of its customers vary greatly depending on the country and region. With such in mind, Toyota will continue to make every effort to flexibly meet the needs of its various customers in all countries and regions by offering multiple powertrains and providing as many options as possible."

Hybrids still key

Hybrids have proven to deliver superior fuel economy. They also can be tuned to increase torque and power for models that are designed specifically for customers oriented toward performance driving rather than reducing carbon emissions. As such Toyota's models prove extremely popular in less developed countries where the electricity grid is weak and where BEVs are unlikely to attract customers for some time.

In the U.S., hybrids sidestep the range anxiety that some customers harbor toward BEVs, as well as any need to find charging stations, which remain scarce, especially outside of California.

Environmental activists and left-leaning media outlets have been outspoken in their criticism of Toyota, arguing that the automaker is worsening climate change by failing to move more swiftly toward emission-free power trains, such as BEVs. Toyota rebuts the charges with data illustrating the amount of carbon saved by gas-electric hybrids - which are more accessible to mainstream motorists because they are available today and at prices lower than those charged for most BEV models.

The latest announcements covering battery investments could blunt some of the disapproval; the company said that investments of this kind are years in the making and aren't undertaken in response to critics.

Toyota's current supply-chain difficulties continue to crimp vehicle production and sales. In July the company said its global production output fell 8.6% year-over-year, due to COVID outbreaks, severe weather and a persistent shortage of semiconductor chips. Accordingly, tight vehicle inventory in the U.S. led to a 9.8% drop in retail deliveries in August. Toyota executives have forecast that supply chain woes inhibiting a satisfactory level of vehicle inventory could last for another eighteen months.

Blended approach

Toyota's latest investment in battery capacity for BEVs adds visibility to the automaker's carbon reduction strategy. It also stands as proof to naysayers that the company isn't opposed to BEVs. The new production lines in North Carolina will permit the flexibility to offer BEVs according to Toyota's own forecast of rising consumer demand for the new technology, while continuing to reduce CO2 via the marketing of gas-electric hybrid vehicles in addition to conventional ICE models.

From a shareholder's perspective, this balanced approach looks most sensible given the uncertainties regarding government policy, which constantly changes; given the uncertainty over how quickly a charging infrastructure will develop - as well as the possibility that new battery technology will emerge, requiring a revamping of manufacturing capacity.

With the deepest financial resources in its industry and impressive tech and manufacturing expertise, Toyota has more options than its competitors to respond to the rapidly changing political and technological environment influencing personal transportation. That's why I continue to recommend the TM American Depositary Receipt (ADR).

In response to a shaky macroeconomic environment due to inflation-fighting actions by the Fed and other central banks, TM shares are down 30% from their all-time high at the beginning of 2022. With earnings under pressure due to supply-chain and production bottlenecks, the stock price could fall further. For the long-term investor, however, the current price certainly looks like an attractive entry point.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of TM either through stock ownership, options, or other derivatives. 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.

Comments

[Reality Chacer]

Battery technology advancement seems to have leveled off in the last 4 years. The standard for TSLA and BYD electric vehicles and other larger scale storage seems to have settled around Lithium Iron Phosphate.
Battery packs used today have about the same energy density as they did 2 years ago. The Tesla 4680 is claimed to have 15% higher energy density due to better heat dissipation. This allows them to reportedly make a bigger cell. Greater volume to surface area, but essentially the same chemistry.
The CATL new third generation battery (Qilin 3.0) has reportedly another 13% usage density again. However, this is essentially repackaging to enable better cooling and charging rates, but uses the same Lithium Iron Phosphate (LFP) chemistry.
While there are many working on new battery chemistries, no one has fully demonstrated a new battery chemistry for electric vehicles with better properties.
Looking at typical electric vehicle battery raw materials;

Lithium – Reasonably well-known concentrations close or on the earth surface. Economics very dependent of concentration and the volume of material needing to be processed to get a tonne of Lithium. Development time for new reserves is around five years, with environmental approvals taking the longest. We believe Lithium will ultimately be a supply problem. As prices rise to make new reserves viable.
Australia currently produced nearly 50% of the worlds Lithium, however Bolivia has nearly a quarter on the world untapped reserves.

Nickel – Most Nickel reserves are in form of mineralised ore bodies. Economics very dependent on concentration, depth, mining technique and logistics to smelting facilities. Development time for new reserves typically includes exploration, infill drilling, feasibility studies and construction. Ten years development time would be a minimum. An increase in reserves would require higher prices to make it economically viable.
An estimated 2.7 million metric tonnes (t) of Nickel per year are mined worldwide;
Indonesia - 1,000,000 t - 37%
Philippines - 370,000 t – 13%
Russia - 250,000 t – 9%
New Caledonia - 190,000 t – 7%
Australia - 160,000 t – 6%
Canada - 135,000 t – 5%
We believe Nickel supply for increased battery production will be a problem, and an increase on commodity pricing will be required to make new reserves viable.

Cobalt – There is around 150,000 metric tonnes of Cobalt production around the world;
Congo – 64,000 – 43% of production and 50% world reserves
Russia – 6000 – 4% of production and 3.5% world reserves
Australia – 5,600 – 3.7% of production and 17% world reserves
Canada – 4,500 – 3% of production and 3.5% world reserves
Cuba – 4,200 – 2.8% of production and 6% world reserves
Philippines - 4,200 – 2.8% of production and 4% world reserves
We believe Cobalt demand/supply will remain relatively flat as most large-scale battery manufacturers are moving away from Cobalt in favour of Lithium Iron Phosphate.

Zinc - Most Zinc reserves are in form of mineralised ore bodies. Economics very dependent on concentration, depth, mining technique and logistics to smelting facilities. Development time for new reserves typically includes exploration, infill drilling, feasibility studies and construction. Ten years development time would be a minimum. An increase in reserves would require higher prices to make it economically viable.
An estimated 15 million metric tonnes (t) of Zinc per year are mined worldwide;
China - 4,500,000 t - 30%
Peru - 1,500,000 t – 10%
Australia – 1,500,000 t – 10%
United States - 800,000 t – 5.3%
India - 750,000 t – 5%
Mexico- 700,000 t – 4.5%
We believe Zinc supply for increased battery production will be a problem, and an increase on commodity pricing will be required to make new reserves viable.

Manganese – Most Manganese reserves are found in shallow mining zones. Most of the production used for specialty steel manufacturing in Blast Furnaces.
There are around 20 million metric tonnes (t) of Manganese produced annually around the world;
South Africa – 7,000,000 t – 35%
China – 4,000,000 t – 20%
Australia – 3,000,000 t – 15%
Gabon – 2,000,000 – 10%
Brazil – 1,2000,000 – 6%
Due to the low mining cost of Manganese Ore, we believe the supply chain should not be a problem. Due to the shallow mining, development time for new reserves of around three years. However, some new reserves may need a price increase to be viable.

Conclusion – We believe Lithium, Nickel and Zinc supply will be a problem for Tesla as new reserves require time and an increase in price to be viable.
We believe production of electric vehicles will be curtailed around battery supply. The increase pricing of Lithium, Nickel and Zinc concentrate required to increase reserves will mean battery cost increases are likely to counter any economies of scale for battery production.
Electric vehicle manufacturers like TSLA, BYD, F, GM are likely to be frustrated by supply constraints. Or even pushed towards designs which enable smaller batteries, like continuous small onboard chargers.

[Keith Williams]

@Reality Chacer Who is "we"?

[Keith Williams]

Here's the thing. I'm a baked on Toyota Lexus owner for more than 20 years. I love the cars. Since I've worked with Japanese companies I know about their engineering excellence. I purchased a Lexus when my friends purchased Mercedes Benz and BMW vehicles and I made the right choice.

For several years now I've patiently waited for Toyota to release a BEV which I planned to purchase, but I've given up because it is clear that Toyota has not been able to let go of the ICE. I understand the importance of the ICE industry and it will be a huge change for Japan, but the era of the ICE is over.

I need a quality vehicle, not fancy. The RAV4 hybrid is the kind of vehicle I might purchase. The purchase price for the RAV4 I'd buy in Australia is in the range $45000- $50000. That comes with all of the hassles of owning a car with an ICE and uncertain fuel prices (expensive), and of course contribution to global warming.

I've just ordered a BYD Atto 3, with extended range battery that is costing me $45,000 on the road (total cost). Range is 420-480km depending on which metric is used. The simplicity of a BEV means dramatically cheaper running costs and I will charge the car from my 10 kW solar panels... so no fuel costs as the solar is already in place to run the house (my panels make ~3x the power I use). The Atto 3 will also allow basic power to the house when the grid goes down.

I don't think I'm the only huge Toyota fan who is no longer a customer. This customer's needs are not served by Toyota any more.

It is a tragedy that Toyota has lost its way.

[BebeBell]

@Keith Williams I love Toyota’s too 👍Our Tacoma is 12 years old and has 150,000 miles. We own Toyota stock.
I have hoped for a hydrogen powered vehicle and was wanting Toy to be that co. I think we will be waiting awhile to buy ANY Toy.
Good thing we have our truck🙄🙄🙄🙄

[Keith Williams]

@BebeBell Our 1999 Lexus IS200 has been passed down within the family and now has 340,000 km trouble free motoring on the clock! It is much loved. Our IS250 has more than 200,000 km on the clock. Great cars and a pity that there isn't a BEV to continue the Toyota tradition.

The problem is that Toyota is now a very long way behind Tesla and BYD in BEV technology and experience.

I'm expecting good experience with the BYD Atto 3 and perhaps in due course a Tesla Cybertruck for our rural property.

[YO long-short]

@Keith Williams Toyotas are not the most innovative company. They take existing concepts and perfect them. I assume you would prefer a Toyota once they introduce BEVs? I too love Toyotas and just purchased a Hybrid Tundra. I will buy TM stock again next year when the BEV picture clears up. I will not buy TSLAs because there are no local service centers or local mechanics trained. That means you are stuck should there be any issues