Toyota Motor Corporation is thriving. For the fiscal year through March 2022, Toyota’s consolidated earnings jumped 36% over the previous year, to ¥3 trillion, its highest ever (a dollar was worth 130 yen at the time of the announcement). The earnings drove Toyota’s share price to all time high, for equity market capitalization of ¥35 trillion, solidifying its position as the most valuable Japanese company though it doesn’t make the world’s top 30.
As 2022 draws close to its end, Toyota holds onto its value, with its market capitalization at $200 billion. The company is as valuable as Volkswagen, General Motors and Ford Motor combined. So it’s in good shape, it seems, but here’s a catch. Toyota is worth less than a half of Tesla that is valued at $530 billion, as of November 21, though the gap has become considerably smaller from the time Tesla was valued over a trillion dollars. In the last several years, ‘up start’ Tesla shot up in value on a frenzy over the future of electric cars and Tesla’s surging earnings after years of unprofitability.
The car industry is on the cusp of the most radical change since the turn of the 20th century when drilling of crude oil led to the birth of internal combustion engine (ICE) cars. In this burgeoning age of EVs, champions of ICE cars in the last century are all burdened with legacy divisions that carried these companies for 100 years or longer. In much of the developed world, all the new cars sold in the mid-2030s would have to be EVs. This change would inflict severe damages to all existing car makers and sprawling support industries, possibly rendering them almost useless.
Among the existing car makers, Toyota looks slow in its shift toward EVs. CEO Akio Toyoda feels an immense responsibility for all those employed not only by Toyota but also by its numerous suppliers. Unlike GM’s Mary Barra, Toyoda is not in a position to launch a big plan on EVs while keeping his mouth shut on what he is going to do with legacy divisions. This is one big problem Elon Musk is free from. He simply keeps delivering EVs. Among all the Japanese corporations, Toyota Motor stands out on its ability to make cars, deliver profits while taking care of employees’ welfare. In the middle of the 2007-09 financial crisis that led to GM’s Chapter 11 filing, not a single Toyota employee lost a job though some seasonal positions were closed for good. This is the load carried by ‘Japanese management’ that takes care of employees perhaps too well, sometimes until it is too late.
Akio Toyoda, 66, is a grand son of Kiichiro Toyoda who in 1937 founded what is the world’s largest car maker today. He ardently follows his grand father’s teachings. Looking after employees is at its core, as well as innovation in production process. On top of CEO, he holds the title of ‘master driver’, which he earned through years of apprenticeship, besides his executive job, under the predecessor master driver for the company. He has a final say, from a driver’s perspective, on a new car model if it is good enough to hit the market. He claims that he drives 200 cars in a year. In addition to running the world’s largest car maker, he runs races on weekends, or sometimes week days in the cases of overseas races, including a 24-hour race at Nurburgring, Germany. He believes that races offer critical insights to car making in advanced application of engineering and technology to cars. Nobody knows about cars better than Akio Toyoda.
Once in a century radical change for the car industry is called CASE revolution. CASE stands for connected, autonomous/ automated, shared and electric. This is way beyond simply making cars at factories. Potential entry of tech giants into cars’ operating system could make conventional car makers merely makers of boxes at low margins. In order to protect the car industry that employs 5.5 million workers in Japan including support industries, Toyota has to excel in the changing industry. In the mid-2010s, Akio Toyoda made a strong push for a new direction. As a proof of seriousness, he founded Toyota Research Institute in Palo Alto, CA, and recruited Dr. Gill Pratt as Chief Scientist, from Defense Advanced Research Projects Agency (DARPA). Dr. Pratt reportedly hit it off with Akio Toyoda on his vision on artificial intelligence. Then in January 2018 at the Consumer Electronics Show in Las Vegas, NV, he declared that Toyota would become a mobility company that helps people move in a variety of fashion, beyond the realm of traditional car makers. He also said that Toyota’s rival could be Apple, Google or Facebook.
Toyota probably has no problem in producing EVs on a large scale as the CEO says that the company is going to do everything. Yet the CEO has no interest in making boxes while relying on someone else, Google or Apple, for the software that runs cars. He has a vision of all the Toyota cars on the roads around the world be connected if it is where the future is heading to. He claims that Toyota is in a stronger position than Tesla on ‘connectedness’, simply due to the sheer number of their cars on the road. He converted a former Toyota factory at the foothill of Mt. Fuji and created ‘Woven City’ to experiment an inter-connected city powered by AI.
While it is far from certain how all these efforts are going to add up in the future, the market is certainly not dismissing what Akio Toyoda is doing, valuing his company at $200 billion. The 2030s is not such a distant future. It is only 7 years away as of now. The market can easily crush Toyota’s value if it thinks that he fails to soft-land and the legacy businesses weigh heavily on the company. In the meantime, the extraordinary value given to Tesla is deflating, primarily because its rise through a trillion dollars was too frenzied and in part because of Elon Musk’s Twitter folly. The future of the car industry is not set, yet.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.