After the Bell: The big Ts of the car world circle each other uneasily

Two important events have taken place in the car industry recently: one really dramatic and one seemingly routine.

The dramatic one was the decision by Toyota CEO Akio Toyoda to stand down. Toyoda, a descendant of the founding family, is 66 and has led the company for 14 years, taking over just after the company became the world’s biggest carmaker and keeping it there. And yet, as he resigns, a faint atmosphere of concern surrounds the future of this company, which has consistently achieved one of the world’s most remarkable industrial feats.

The problem is the other piece of car industry news: Tesla’s fourth-quarter results. Quarterly results are such a standard event in the lives of corporations that it is sometimes hard to see the significance that lies behind them. But Tesla has lost about $675-billion in market valuation and its share price has fallen 65% over the past year, which is just mind-boggling.

That decline — just the decline — is equivalent to three times the value of Toyota. But the results were spectacular, beating analysts’ estimates in both profit and turnover.

So which of these two companies is in more trouble? The answer is both and neither. Let’s start with Toyota.

All Star company

Outsiders tend to think of Toyota as the pinnacle of Japanese business orthodoxy. But Toyota has always thought of itself as the outsider. It is based in Nagoya, the country’s third-largest city, which is regarded as a bit of a country-bumpkin kind of place. Its main tourist attractions are three — count them, three — separate Toyota museums. Hold me back.

The company has not moved its headquarters to Tokyo like Honda and slightly relishes its comparatively rural, penny-pinching, hard-working, backwoods culture.

The company is run by a group of very old Japanese men who earn very little compared with other motor company execs. The founding family has enormous influence, although it only holds about 2% of the company’s shares.

Most business analysis of Toyota finds the company enormously contradictory; it performs fabulously in some areas, and is bewilderingly wasteful in others.

Yet, Toyota has been a huge part of Japanese global success. It’s the world’s largest manufacturing company and accounts for one in 10 cars sold around the world. It sells about eight million cars a year, around the same as its biggest rival, Volkswagen, and around three times the third largest US producer, General Motors.

Toyota also offers, at least in Japan, a huge number of models. At one point, it was building 90 different models, three times as many as its main Japanese rivals, although that has been cut back recently. It has 370,000 employees and operates in 70 countries.

On the other hand…

If you had to look for an almost-precise opposite in the car industry, it would be Tesla. Almost everything is different: Tesla has a small five-car range; it manufactures in only three countries, and, of course, it builds only electric cars.

Toyota has been extraordinarily resistant to the idea of electric cars, despite being a forerunner in the industry with the dual-motor Prius. We have never seen a standoff so stark in almost any industry.

To most financial analysts, it is astounding that Tesla, which sold 1.2 million cars last year can be worth $500-billion, and Toyota, which sold eight million cars last year, can be worth $200-billion. But is it as crazy as it seems? There are three reasons it is not.

• First, Toyota, as noted above, has sold around eight million cars each year for the past 15 years.  The number of cars it sold last year was almost exactly the same number it sold in 2007. The company is exemplary, huge, enormously profitable — and kinda moribund. Tesla’s stated goal is to increase production by 50% a year, which it has more or less achieved.


• Second, Tesla might sell fewer cars, but its profitability is disproportionate. Toyota earns about $30-billion a year at an Ebit level off a turnover of about $250-billion. Tesla earns about $17-billion in Ebit profit off a turnover of $80-billion. And this heightened level of profitability is not unusual in the industry. Tesla earns almost as much as the biggest of the luxury car producers Mercedes-Benz, on half the turnover.

Why is this possible? There are lots of reasons, but the main one is that there are just fewer parts to an electric car. It is simpler and cheaper to make. And this is going to hurt legacy producers for years, because it means Tesla can drop its prices, which it has done, to the extent that demand is now twice production.

• And, third, the fact that Tesla’s model range is small suggests a promising future, because it means the company is competing in relatively few segments. That will likely increase, notably with the much-delayed Tesla truck coming out next year. But in a model-to-model battle, Tesla is generally winning, so if you assume this is replicable in other segments, the valuation differential doesn’t seem so bad.

The battle, however, is not yet lost or won. Tesla is arguably hamstrung by its mercurial CEO Elon Musk, whereas Toyota has a huge back-bench from which to draw talent.

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Toyota is arguably hamstrung by its huge global footprint, which means that it actually can’t produce only electric cars in all areas. Tesla has been growing like blazes, but each successive increase makes the next one less likely.

And Toyota has a fabulous history of fast changes and imaginative engineering. In the South African context, it is great to see Toyota SA CEO Andrew Kirby openly talking about making Toyota EVs in South Africa in the near future, which is crucial for its future as an exporter to the EU, which will only allow electric cars in a decade or so.

Lots needs to happen within South Africa’s Trade, Industry and Competition Department for that to be put into operation. Please God, let’s hope it is on it. BM/DM

• Market values of Toyota and Tesla corrected. Apologies for the error.