Toyota set to benefit from hybrid sales surge as electric vehicle excitement wanes

Toyota Motor is set to unveil its annual earnings report on Wednesday, expected to reflect a significant boost from the rising demand for hybrids. This surge in hybrid sales underscores the continued strength of the world’s leading automaker, especially as enthusiasm for electric vehicles (EVs) appears to be cooling.
Despite the anticipated record-breaking results, supported in part by a favorable exchange rate due to the weak yen, Toyota faces substantial challenges in key markets.In China, it is embroiled in a fierce price war, while in the U.S., consumers are grappling with increased borrowing costs, affecting sales.
Globally, Toyota is facing heightened competition from Chinese rivals, who are rapidly expanding their production of low-cost vehicles. Additionally, a safety test scandal at its Daihatsu compact car unit has impacted sales in Japan, tarnishing the Toyota group’s reputation for quality and safety.
In February, Toyota raised its operating profit forecast for the fiscal year ending March 31 to 4.9 trillion yen ($31.87 billion), marking a record profit and an 80% increase from the previous year. Analysts expect the company to deliver an operating profit of 747 billion yen for the fourth quarter.
As global demand for battery-powered EVs has slowed, Toyota has capitalized on the opportunity by increasing sales of hybrids, which offer relatively higher profit margins than regular gasoline cars. Hybrids, pioneered by Toyota over a quarter of a century ago with the Prius, accounted for more than a third of the 10.3 million cars sold in the just-ended financial year, including those under the Lexus luxury brand.

While Toyota leads in hybrid technology, it lags behind competitors in the EV market, such as Tesla and European and Chinese automakers. Battery EVs represented only 1% of global sales in the past year, well below Toyota’s previously announced target of 202,000 vehicles.
The success of Toyota’s business in China hinges on its EV strategy. Given Chinese consumers’ preference for software-loaded cars, Toyota may face challenges until it releases next-generation models in China. According to Koji Endo, head of equities research at SBI Securities, Toyota’s software capabilities are lagging behind.
To address this gap, Toyota announced a partnership with Chinese tech giant Tencent and unveiled two battery EVs for the Chinese market at the recent Beijing auto show.
In the first quarter of the 2024 calendar year, Toyota’s sales in China declined by 1.6%, outperforming Japanese rivals Nissan and Honda but falling short of the 12.5% rise in passenger vehicle sales sector-wide. In the U.S., Toyota saw a 20% increase in sales to 565,000 vehicles over the same period.
Toyota’s shares have surged 96% in the last year, including dividends, outpacing Tesla’s 7.5% increase in dollar terms over the same period.