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Toyota joins competitors in strategic commitment to battery EVs

21 January 2022 Kevin Adler

Toyota announced a plan to invest $35 billion from 2022 through 2030 in the development of battery electric vehicles (BEVs), the latest major announcement by a global automaker about a new strategic direction.

The Japanese firm intends to invest $70 billion globally this decade in all forms of electrified vehicles including hybrids, plug-in hybrids, and fuel cell vehicles, as well as BEVs.

Toyota's commitment places it in between Nissan's $17.7 billion and Volkswagen's $100 billion pledges, both also made last year. It matches those of General Motors and Stellantis for their EV development programs for 2020-2025, and is comfortably above Ford's figure of $11.4 billion.

"It's been a step-change in the last couple of years," said Mark Boyadjis, associate director, advisory services, RL Polk (which is owned by IHS Markit). "Number one, everyone in the auto industry has [become focused on] climate change, and they see ways that Wall Street will reward you for investing properly. Number two, the Chinese market called their bluff. China is where a lot of rare earth minerals for batteries is available, and they set some [high] targets for EVs, so anyone who is in that market or around that market needs to catch up fast."

China's Office of the State Council issued a "New Energy Vehicle Industry Development Plan (2021-2035)" in October 2020 that set a goal of 20% of new vehicles being EVs and hybrids in 2025. The China Association of Automobile Manufacturers issued an estimate that 3.5 million electrified cars were sold in China in 2021, more than doubling in a year and representing nearly 13.5% of the country's vehicle sales of 27 million last year.

Different strategies, similar goals

Each automaker's strategy is different, of course, but they share a few priorities, said Stephanie Brinley, IHS Markit principal automotive analyst. The companies are expanding their EV offerings to more of their product lineup by transitioning their popular models to a hybrid or BEV format. They also are developing entirely new models. And they are still producing internal combustion engine (ICE) cars, which are their current profit centers and will fund the transition to EVs.

In announcing Toyota's plan, Akio Toyoda, global president, said the company is aiming for sales of 3.5 million BEVs per year by 2030. At current volumes of about 9.5 million vehicles, this would represent nearly 40% of its annual sales. Toyota will offer 30 BEV models across the Toyota and Lexus brands by 2030.

"I wasn't interested in Toyota's EVs until now. But now I'm interested in future EVs," Toyoda said in a press conference on 14 December.

Other automakers had come to the same conclusion earlier, and with more aggressive ambitions. For example, General Motors said that all of its cars and light-duty trucks would be electric by 2035, and Stellantis said 98% of its new vehicles will be electric by 2035, across 14 brands. Volkswagen has pledged half of its new car sales will be electric by 2030.

But to reach their lofty goals for EV production, the companies must redesign their vehicles, create a reliable battery supply chain, and deal with the shortage of computer chips caused by production interruptions due to COVID-19.

Strategic shift

From Toyota, the $35-billion plan is a significant strategic shift, though not necessarily a commitment to additional spending, said Mike Ramsey, vice president and analyst, automotive and smart mobility for Gartner.

"Toyota over that period [2022-2030] is likely to have spent … a very similar amount of money on plants, engines, transmissions, exhaust systems, and new platforms for gasoline, diesel, and hybrids," he said. "But now it's saying, we're going to take the money we would have spent on those things, and we will spend it on EVs."

The cost of building a new vehicle assembly plant varies based on factors such as anticipated volume and location, but Toyota's most recent North America assembly plant was a $2.3-billion facility in Huntsville, Alabama, which began production in September 2021 (a joint venture with Mazda).

Toyota has said it will establish EV and battery manufacturing plants, motor production, and all the other elements of the EV supply chain. This will require a new way of operating and a great deal of money, Ramsey said. A battery cell production facility could cost $2 billion or 2.5 billion.

"Battery plants are largely not going to be put in existing auto facilities. They are more like pharmaceutical plants" in the precision and cleanliness that's needed for production, Ramsey said. "And it will be a massive task to support millions of EVs."

Given that EVs are an emerging technology, it wouldn't be surprising if facility costs come in higher than those for conventional auto plants. That might be indicated by the $5 billion price tag on US EV company Rivian's announcement in December of an electric truck plant in Georgia. Rivian is financing the factory on the back of a 100,000-unit order from Amazon for its Prime delivery service.

An established automaker has advantages and disadvantages in the EV business, said Boyadjis.

"A startup OEM [original equipment manufacturer] like Rivian or Lucid Motors has to make investments in the billions of dollars, even to produce startup volumes of thousands or tens of thousands," he explained.

Toyota doesn't have to acquire auto design and engineering capability, real estate for factories, or manufacturing expertise. And it can spread the costs it does incur across production of hundreds of thousands or millions of vehicles.

On the other hand, the scale of operation of Toyota or GM brings other challenges. "For Toyota to transition its entire lineup, it can't just do one model at 10,000 units," Boyadjis said. "They've done that before, with the RAV4 EV in a couple of markets as a trial, and it died. GM did the same with the EV1…. When you want to … take five, six, eight lines from ICE to electrification, it takes tens of billions of dollars."

And thus, the spending announcements made last year by the legacy automakers— even as they outline different ways they will spend their money.

Ford announced in September it would build two sets of EV facilities in the US. These are entirely new greenfield plants. In Tennessee, Ford will build BlueOval, a $5.6-billion battery factory and adjoining assembly plant for electric F-series pickups. In Kentucky, BlueOvalSK (with partner SK) will consist of two battery factories at a cost of about $5.4 billion, and will supply Ford and Lincoln models produced elsewhere in North America.

General Motors, on the other hand, is retooling existing facilities to produce a growing lineup of EVs.

For example, it announced in November the opening of Factory ZERO in Detroit-Hamtramck to make electric models of the Hummer, Chevrolet Silverado, and Cruise. Speaking at the grand opening of Factory ZERO, GM Executive Vice President, Global Manufacturing and Sustainability Gerald Johnson said the company's goal is that EV assembly will be 20% of GM's North America capacity in 2025 and 50% by 2030. GM believes it can save up to $15 billion by 2030 by repurposing factories and retraining its current workforce, rather than starting anew with greenfield facilities.

GM's move points out the scale advantage that large, established automakers have as they compete with Rivian, Tesla, and other non-legacy EV producers. The automaker introduced in 2020 the Ultium Platform, its battery system for numerous car models that uses its proprietary Ultium battery. "If the cost of developing the Ultium Platform was $1 billion or even more, but you can use it for 35 products, then that can be a cost-effective investment," Brinley said.

To cite one recent example of the expansion of Ultium, the company is investing $2 billion in its existing Spring Hill, Tennessee, manufacturing plant to convert it to production of the electric Cadillac LYRIQ. Thanks to Ultium, CEO Mary Barra said in January that the company has moved up its timetable to produce all-electric heavy-duty pickups to 2035, to match its agenda for light-duty vehicles.

Boyadjis pointed out that GM also is planning to make the Ultium Platform available for non-auto uses, such as for boats, airplanes, and stationary energy storage. In addition to opening up new markets, it will have the benefit of pushing Ultium supply chain innovations more quickly because the company will be supplying higher volumes, he said.

Promising future, but many unknowns

The bottom line is that the financial commitments announced in 2021 show that the world's drivers really will have an array of choices for electrified passenger cars and trucks by the end of the decade.

IHS Markit has continuously raised its EV forecast as automakers have rolled out new plans, Brinley said. A report released in December indicated that about 4.6 million EVs were sold globally in 2021, and IHS Markit projects that this figure could rise to 37 million vehicles.

But many issues remain unresolved or will evolve slowly. For one thing, Brinley and Ramsey observed that the companies are not abandoning ICE in all of their markets. "Toyota is, by far, the largest automaker in certain regions like Southeast Asia," Ramsey said. "Countries such as Indonesia, Thailand, and Vietnam … are unlikely to be transitioning to electrified platforms as quickly as we expect in northern Asia, Europe, and the United States."

At the same time, Ramsey said Toyota earns about half of its annual profit from sales in the US, so it needs to protect that investment as well. "How can it do that? Probably by investing modest amounts in current best-sellers, and maximizing its profitability," he said.

The result is that the ICE trucks being produced by Toyota 10 years from now will be very similar to today's vehicles, Ramsey predicted, especially for the global bestseller—the Hilux truck. "The investment in new engine technology and advanced cylinder heads is going to wither away to nothing. They are going to optimize those systems, use software rather than hardware to make improvements," he said.

But when thinking about EVs, the opposite is possible. EVs do not need a traditional powertrain (engine, alternator, starter, and fuel and exhaust systems), so this opens up new design potential. "I think we will see some interesting vehicles … packaging and design is going to change once you take the engine and transmission out…. I'll be very curious about how designers get to play around," Ramsey said.

Although EVs have the advantage of a different type of motor and not having to install fuel lines, the battery systems require techniques with which they might not have much experience, such as sealing of wires, installation of magnets and bearings, and wiring of converters and inverters. These issues have bedeviled EVs in their decade-plus of development. For example, Tesla has never met its quarterly production forecasts, and GM and partner LG had problems in 2021 with the battery pack on the Bolt catching fire.

Meanwhile, Tesla has a clear technological edge over all the traditional automakers in how it manages its fleet through software. The automakers will use their transition to EVs to try to close this gap, Boyadjis said.

For Tesla, the Model S, introduced in 2012, marked the point of having what Boyadjis called "a well-integrated battery and electronic architecture of the car." Tesla can send software updates on almost any feature of any new car, a capability that he called "aspirational" for traditional automakers.

Batteries are another issue to watch in 2022 and beyond. As their announced investments in battery supply chains indicate, automakers see this as at least equal to the challenges of design and assembly of EVs.

While saying that "the comparison is not perfect today," Ramsey said that 10 years ago when Tesla first began making cars, a laptop computer typically used three batteries that were each about the size of an AA battery. "A Tesla had over 8,000 of those batteries," he said. "Think about that on the scale of the global market for vehicles."

In 2021, automakers' needs for batteries far surpassed the demand from the consumer electronics sector—and that's with EVs at about 6% of the global new car market. As a result, research and development dollars are being pressed into new battery chemistries, even as automakers seek to build their supply chains for the lithium- and cobalt-based batteries they need today. They or other companies will invest in recycling of older EV batteries as well.

"Although massive strides are expected to be made by 2030, there will remain a long way to go in the transition to EVs," Brinley said.

Posted 21 January 2022 by Kevin Adler, Chief Editor

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