Toyota's New CEO Rethinks EV Strategy

Toyota is one of the world's leading automakers, with a reputation for quality, reliability and innovation.

The company's shares are traded on the Tokyo Stock Exchange and it has a market capitalization of over US $200 billion. Toyota is a major player in the global automotive market, with a significant presence in Europe, North America, Asia and other regions. The chief executive has always said that he is not a skeptic about electric vehicles, but a realist.

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Akio Toyoda, CEO of Toyota, has called himself a spokesman for the "silent majority" of people in the auto industry who have doubts about the single-minded focus on electric vehicles (EVs). He argues that hybrid gas-electric vehicles like Toyota's Prius can be just as environmentally friendly as EVs, and that other companies are pushing consumers to make a leap into EVs without a fully developed charging infrastructure in place.

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"I personally feel that I belong to the older generation when it comes to digitalization, electrification and connectivity," said Mr. Toyoda, 66 years old. He went on to announce that 53-year-old engineer Koji Sato would take over as president and CEO in April, while Mr. Toyoda would become chairman. "For me to take a step back is important."

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The transition to electric vehicles is a landmark moment not only in the car industry but in the complicated shift to green energy throughout the business world. Some companies, investors and governments are pushing for big leaps into renewable energy and green technology, arguing that the consumer and the infrastructure will catch up to the changes. In the auto world, Mr. Toyoda is among those who have advocated for moving more slowly and deliberately.

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Government agencies and investors are incentivizing companies to move into EVs with subsidies and tax breaks. New EV tax credits in the U.S. law dubbed the Inflation Reduction Act don’t apply to hybrids that don’t plug in. The European Union has mandated zero-emission new car sales by 2035. The state of California will also only allow new sales of EVs, plug-in hybrids and hydrogen-cell vehicles beginning in 2035.

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Electric vehicles are taking an increasingly large share of the European and U.S. markets, and one fifth of the world’s largest car market, China, is already made up of EVs.
Even before Toyota’s first change at the top in 13 years, it was considering some changes to its EV strategy. The company has been studying rivals including Tesla Inc., and considering bigger upfront investment in its EV technology and manufacturing capabilities.

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Toyota is considering rolling out a new platform for its EVs, which would be a shift from its current strategy of using an existing platform for gasoline-powered vehicles. This would allow the company to expand its EV battery factories in the future. Last month, Mr. Toyoda wondered aloud how much longer he could keep up his arguments for a more incremental and multifaceted approach. Thanks to his efforts, “the silent majority has been put more at ease,” he said. “But who is going to continue to do this?” he asked. “Until more comrades emerge, am I going to do this until I collapse?”

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At the racetrack, Mr. Toyoda asked Mr. Sato to be the president. Mr. Sato agreed. Toyota has been a driving force in the automotive industry for generations, with groundbreaking innovations like just-in-time manufacturing and a commitment to continuous improvement. In the 1960s and 1970s, Toyota rose to prominence by challenging the Detroit-based auto manufacturers, eventually establishing a global network of factories, including over a dozen in North America.

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By the time Mr. Toyoda took over as CEO in 2009, there were signs that the company had been growing too quickly. Its focus on becoming a global leader was eating into profit margins and causing some to question whether quality was being sacrificed. The grandson of Toyota Motor founder Kiichiro Toyoda, Akio Toyoda was 53 at the time—the same age Mr. Sato is today.

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Mr. Toyoda was weeks into the job when a car driven by a California patrolman crashed over an embankment and burst into flames, killing the driver and his family. Reports blamed a floor mat that became lodged against the accelerator pedal. In the months after the crash, Toyota recalled more than eight million vehicles for fixes. The company temporarily halted production and sale of several vehicles in the U.S., and Mr. Toyoda testified before Congress in 2010 to explain the situation.

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On the anniversary of his congressional testimony, Feb. 24, Toyota employees remember the company's commitment to preventing similar problems from happening again. A tree near the Toyota museum is dedicated to this annual remembrance. Mr. Toyoda said he had to clean up problems caused by a rush to expand too quickly, exacerbated by a global financial crisis that pushed Toyota into the red. He has often spoken of his loneliness at the top during that period, saying he felt bullied by career executives who, in his telling, didn’t believe a family scion had the grit to lead a global auto maker. He was determined to prove them wrong.

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After Japan's devastating earthquake in 2011, Toyota's vehicle sales, revenue and profit slowly began to improve. The company's lineup of hybrids, which began with the pioneering Prius in the late 1990s, grew to include a full range of RAV4s, Corollas and other hybrid-equipped models. By 2016, Toyota was selling more than two million hybrids per year. Mr. Toyoda slashed costs and reduced the number of executives. As a result, by 2020 Toyota became the world’s largest auto maker by unit sales, surpassing Volkswagen AG.

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In recent years, as electric vehicles have captured the imagination of some investors, Mr. Toyoda has said that he wanted to make up his own mind about the role of EVs, and not get swept up by excitement about what he saw as a not-yet-mature technology. Gill Pratt, an American chief scientist hired by Tesla, has said that factoring in the emissions from manufacturing and generating electricity to charge cars, a diverse lineup of electric and hybrid vehicles has similar lifetime carbon emissions to an EV-only fleet. This is even the case on a power grid getting a significant chunk of its electricity from renewable sources, he said.

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Another consideration is the limited supply of lithium for batteries. Hybrid cars require only a fraction of the lithium used in full EVs, so they may be a more practical option. "Let's not let perfect be the enemy of good," Mr. Pratt said at a roundtable in Tokyo on Friday.

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Mr. Toyoda gave talks making the case for a diverse lineup of vehicles that would include EVs but not only them. He said that it was hardly environmentally friendly to have coal-fired electricity plants powering cars on the road, and in developing nations of Asia it was unlikely renewables could be built out quickly. Mr. Toyoda argued that a diverse mix of vehicles was needed to create a sustainable and environmentally friendly transportation system. "I think Ford and GM did a great job of convincing Washington that EVs were the only solution," said Steve Gates, chairman of Toyota's dealer council. "I think it's not popular to talk about things that hybrids and plug-in hybrids have done for the environment."

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As Tesla's market capitalization surpassed that of Toyota, competition in the electric vehicle (EV) market increased. In 2021, General Motors set a goal of phasing out gasoline- and diesel-powered vehicles by 2035. It has several EVs in showrooms now and more coming this year. The Detroit auto maker opened its first battery plant last year and has plans for more. Others including Volkswagen, Hyundai, and Ford are making similar moves. Toyota has remained the leader in selling hybrids and plug-in hybrids, two model types that accounted for nearly 30% of its global shipments in 2022 through November. However, sales of pure EVs—models that run on electricity only—are still relatively small.

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In the U.S., Tesla is the dominant player in the EV market, while Toyota didn't even rank in the top 10 of EV sellers last year, according to data-research firm Motor Intelligence. However, Toyota did introduce an all-electric sport-utility vehicle called the bZ4X. According to LMC Automotive, more than one in 10 vehicles sold in Europe in 2022 and nearly one in five in China will be fully electric vehicles. In the U.S., EVs accounted for 5.8% of vehicle sales last year.

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In December 2021, Toyota announced a major shift in its EV strategy. President Toyoda said the company would aim to sell 3.5 million EVs annually by 2030, a significant increase from its previous target. This move signals Toyota's commitment to electric vehicles and its belief that EVs will play a major role in the future of the automotive industry.

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The company posted a video on its website showing Mr. Toyoda driving a Lexus EV with Mr. Sato beside him in the front passenger seat. Mr. Sato can be seen egging on the boss to enjoy himself in the video. Mr. Toyoda hit the accelerator and the two men whooped out “Woo-hoo!” Mr. Toyoda, who loves to drive race cars, said the experience persuaded him that an electric car could be just as fun to drive.

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As these trends gathered momentum, Mr. Toyoda asked a longtime lieutenant to take another look at the company's EV strategy, according to people at the company.
The study included a careful examination of the strategies of Tesla, which has been an all-EV company from the start. Tesla has shaken up industry practices with innovations such as direct-to-consumer sales methods and over-the-air software updates. These people said that Tesla's unique approach has allowed it to succeed where other EV companies have failed.

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One lesson that can be learned from Tesla is that investing heavily in common parts and efficient manufacturing processes can pay off in the long run when volumes increase and economies of scale come into play. This is the idea behind the EV-dedicated platform that Mr. Toyoda said he was considering – it takes a lot of money to design this architecture, but once it’s completed, multiple models can be built from similar blueprints, resulting in cost savings over time. A competitive EV business is just one part of Toyota's bigger strategy to promote and invest in a diverse lineup of cars that includes hybrids and hydrogen-powered cars. "We have to take a 360-degree approach," said Mr. Sato, the next CEO.

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Earlier this month, Mr. Toyoda said he was worried that government policies mandating EV sales had sparked a race between auto makers to put EVs on roads as soon as possible and kill off other promising technologies. He said that he believe this was a mistake, and that it would be better to focus on developing a range of technologies that could each play a role in reducing emissions.

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"Toyota does not believe in a one-size-fits-all approach to energy policy," he said. "Different countries have different energy needs and people have different uses for cars, so a one-size-fits-all solution is not the answer."

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Toyota observers say that Mr. Toyoda's move to the chairman's role makes it easier for a new CEO to steer in new directions on EVs. Mr. Toyoda said it was the job of younger people to "come up with the answer of what future mobility should be" and added, "We need to be attentive to not being late."
Sean McLain was a contributing author for this article.