by Anjani Trivedi
Henry Ford’s Model T revolutionized mobility, assembly lines and society in the early 20th century. Since then, though, it’s difficult to say whether automakers have ever truly transformed themselves and the economy, or have just continued to evolve.
Toyota Motor Corp. has been trying to prove it can revamp itself. After a slew of statements in recent weeks, the Japanese car giant announced Thursday a shakeup of its board and top executive positions, to show that it can “transcend practices of the past” and survive in what it called an era of profound transformation. That came a day after Toyota’s splashy $1 billion investment in Singapore’s Grab Holdings Inc., the biggest-ever bet by an automaker on ride hailing.
In keeping with the theme, Toyota had already declared this year its intention to become a mobility company – a provider of futuristic devices and services that goes beyond merely making cars. Over the past few years, it’s pumped out a steady stream of press releases on subjects ranging from motors that are less dependent on rare-earth materials, to clean-energy batteries like hydrogen-based fuel cell stacks, to efforts toward “mobility as a service” and connected cars. There’s also its $2.8 billion research institute, a ride-sharing partnership with Uber Technologies Inc. and a pilot program with Getaround.
|Toyota unveiled its e-Palette Concept Vehicle last January at the Consumer Electronics Show to push forward its new company persona as a mobility company.|
Investors have cheered these actions and lofty ambitions. But commercialization of these projects remains years off, as does scalability. Toyota’s filings still state that the company doesn't consider any of its intellectual property “to be so important that their expiration or termination would materially affect” its business.
Carmakers have been steering toward the services model for a couple of years, so neither the Grab investment nor the mobility proclamation is groundbreaking. Toyota announced a strategic partnership with Uber in 2016 to create leasing options, with no disclosed financial amount. General Motors Co., meanwhile, has been on an aggressive foray since 2016 when it made a $500 million investment in Lyft Inc., acquired Sidecar Technologies Inc. and set up Maven, its own car-sharing unit. BMW AG has DriveNow and Daimler AG has Car2Go (which they are combining).
How does all of this look on Toyota’s financial statements? These projects obviously cost money. The company typically uses cash generated from operations to fund capital spending and research and development. Toyota invested about 3.1 trillion yen ($28 billion) in R&D between fiscal years 2015 and 2017. Those expenses are forecast to stay flat for the next fiscal year at around 920 billion yen. It’s unclear how the Japanese automaker splits investments between its various endeavors, and difficult to determine what results the outlays have produced so far.
That’s not the case for all carmakers. A look at GM’s earnings, for instance, shows spending on testing and trialing advanced technologies is treated as a sunk cost until they become viable. The annual run rate of losses due to investments is upward of $500 million for the likes of GM and Ford Motor Co., Bloomberg New Energy Finance analysts have found. Costs also show up in the form of goodwill charges on acquisitions of smaller technology companies – GM said that acquiring self-driving car unit Cruise Automation resulted in $490 million of goodwill.
Toyota could be collecting data and running research projects on small samples until it lays out the motor or battery of the future. But the ground is shifting, as Toyota itself says, and companies need to stay firmly focused on survival mode. In Toyota’s case, this means for instance strategies focused on maintaining the advantages of its Prius in the global hybrid car market, where it has lost share. The company remains behind in China, too – a key market for all automakers in the next few years.
A constant for car companies is grappling with thin margins. To sustain the spending needed to keep pace with industry change, they can either cut more costs or produce more efficiently. While Toyota has heralded its cost-reduction efforts, its most recent earnings announcements show that it’s keeping expenses at 70 to 80 percent of sales, broadly in line with global auto peers.
Investors should wonder when spending will be converted into returns. The array of technologies and new businesses that Japanese automakers are investing in “may not produce an appropriate return for a while, if ever,” according to Moody’s Investors Service. McKinsey & Co., on the other hand, estimates that artificial intelligence could help boost carmakers’ productivity by around 1 percent a year by 2025.
Revolution or evolution, it’s clear that only the fittest will survive. Toyota has yet to demonstrate it will be among the winners.