This article was originally published on Opto – Invest in the Next Big Idea.
The hope is it will put the company in the driving seat when it comes to automotive innovation.
Year-to-date, the Toyota share price is up 24.39% to JPY 9,898 yen at the close on 9 September, although it has struggled in the last month, gaining just over a percentage point.
The Toyota share price closed 4.18% below its all-time high of JPY 10,330 set on 16 June and is up 46% from its 52-week low of JPY 6,780, recorded on 29 October 2020.
The Japanese automaker has outperformed many American automakers in 2021 – the Dow Jones US Auto Manufacturers Index [DJUSAU] has returned 9.81% since the start of the year. In three months to the end of June, Toyota sold 688,813 vehicles, just outselling General Motors [GM], which shifted 688,236 units. It was reportedly the first quarter since 1998 that General Motors wasn’t the best-selling automaker in the US.
Ahead of the curve
The reason behind Toyota’s successful second quarter is its decision to stockpile chips in the wake of the 2011 Fukushima earthquake and tsunami. This has allowed it to navigate the semiconductor shortage that has been squeezing car production since last year. Toyota’s ability to adapt in the face of headwinds has allowed the business to stay ahead of the curve.
It has now solidified its position as an industry innovator by pledging to spend several billion dollars on electric vehicle (EV) battery research and development and supply chain initiatives. In a presentation to investors earlier this month, CTO Masahiko Maeda said the goal was to slash the cost of its EVs by around half, including reducing the amount of electricity used per mile by a third.
There are also plans to address battery lifespan. Toyota believes it will be possible to limit the range degradation to 10% after 10 years of use.
The flexibility to adapt
Although Toyota’s bZ4X all-electric car is due to go on sale globally next year, the automaker’s executives haven’t always been staunch proponents of EVs. At the end of 2020, CEO Akio Toyoda argued that EVs were overhyped and the investment required could make them unaffordable to the average driver, according to a Wall Street Journal report.
Toyota will still champion hybrid models – because they’re seen as an affordable and effective way to reduce carbon emissions in the automotive industry – but the announced investment should help the company to make up ground on other automakers with regard to EVs.
Research published over the summer by European pro-EV campaign group Transport & Environment found that Toyota lags behind the likes of Ford [F], Volkswagen [VOW.DE] and Volvo [VOLVO-A.ST]. Scoring major automakers out of 100 for their EV readiness, the German and Swedish companies were both awarded a score of 70, while Toyota received a mark of just 35 for having “no clear battery electric vehicle (BEV) ambitions”.
“The Japanese OEM is slower in increasing BEV production as its strategy currently still relies to a large extent on hybrid electric vehicles,” the report argued.
Nevertheless, Bloomberg Intelligence analyst Tatsuo Yoshida believes the path Toyota has laid out in its EV battery investment announcement will “allow it to adapt to various changes”. Not turning its back on hybrid models completely also means that “Toyota will be able to respond flexibly” depending on various regions’ uptake of renewable energy and investment in EV infrastructure.
While Chinese EV makers Li Auto [LI], Nio [NIO], and XPeng [XPEV] aren’t direct rivals to Toyota, they are expected to compete with it in the near future. In August, Nio announced that it is working on its first brand for the mass market. Up until now, Nio has considered its premium marques as competition for BMW [BMW.DE].
“The relationship between Nio and our new mass-market brand will be like that of Audi-Volkswagen and Lexus-Toyota,” NIO CEO William Li said in a statement.
Toyota’s investment pledge will be important if the Japanese automaker hopes to protect is market dominance. The likes of Nio benefit from China’s EV battery supply chain – 70% to 80% of the world’s EV battery chemical supply is produced there. Being close to the source of EV battery production means Chinese EV makers can minimise supply chain constraints and improve manufacturing capacity.
Funds to watch
Toyota is the First Trust NASDAQ Global Auto Index Fund’s [CARZ] second-largest holding behind Tesla, with a weighting of 8.61% as of the close on 9 September. Year-to-date, the ETF has returned 14.47%.
The company’s ADR shares are held by SPDR’s S&P Kensho Intelligent Structures ETF [SIMS] and Kensho Smart Mobility ETF [HAIL]. The two ETFs have returned 12.23% and 3.36% respectively since the start of the year.
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The investment universe is changing beyond all recognition, and with a thematic focus, investors can capitalise on this wholesale disruption. From Genomics to Artificial Intelligence, disruptive innovation empowers companies to displace industry incumbents, and secure majority market share. Opto exists to identify those businesses, and help investors to invest in the next big idea.