In our latest EasyResearch feature, we have the awesome Chuck Saletta (contributor to Motley Fool) sharing some fantastic insights on Toyota. The brand looks like it’s trying to address range anxiety and raw material usage before jumping all-in to completely electric vehicles.
When it launched the Prius, Toyota (NYSE: TM) was an early pioneer in the world of delivering commercially successful hybrid cars. Combining high fuel efficiency with reasonable performance and an affordable price tag, the Prius made it clear that it was possible to have a useful personal vehicle with a lighter environmental footprint.
Yet despite that early lead in greener transportation, Toyota hasn’t exactly dominated the industry when it comes to completely electric-driven cars. Indeed, its somewhat awkwardly named bZ4X, its only Toyota-branded fully-electric car in the American market, isn’t exactly off to a great start. For instance, it was forced to recall the vehicle because faulty bolts could cause the wheels to fall off, which isn’t exactly a good look for a car company focused on quality and reliability.
A key driver behind Toyota’s slower approach to electric cars
Earlier this year, a document leaked from Toyota outlining what it calls the 1:6:90 rule. Basically, it’s arguing that if you look at the raw materials that go into a single all-electric car, the company could instead make six plug-in hybrids or 90 traditional hybrid cars. If you also consider typical driving patterns, Toyota argues that those 90 traditional hybrids would save 37 times more in total lifecycle emissions than the fully electric one.
Building on that engineering and lifecycle perspective, consumer demand currently heavily favors hybrids as well. According to the Kelley Blue Book Brand Watch Report, only about 25% of car shoppers are looking for any sort of electrified vehicle. In addition, of those that are, consumers are about twice as likely to shop for a hybrid instead of a fully electric vehicle.
For the moment at least, that approach seems to be working. Among American car shoppers looking for electrified transportation, Toyota shows up strong, with four of the top ten most considered vehicles. Importantly, of those top ten cars, only three are fully-electric, with only one of those three among the top seven.
What’s so tough about going all-electric?
A key concern that consumers express when it comes to driving all-electric cars is something known as range anxiety. In essence, they’re worried that the combination of relatively short ranges, long recharging times, and lackluster charging infrastructure will make it tough to use an all-electric car on road trips.
This concern was reinforced this summer when US Energy Secretary Jennifer Granholm tried to go on an all-electric road trip in the southeast United States. Her trip made headlines when a gas-powered advance car in her entourage blocked an EV charger to attempt to reserve it for her, blocking out a family from being able to recharge.
On top of that infrastructure problem, electric range is very weather dependent. In the winter, drivers running the heat can easily lose more than 40% of their range. As if that weren’t enough of a range challenge, batteries that are fully charged and discharged tend to wear out in fewer charging cycles than those kept somewhere in the middle of their capacities. That leads many drivers to adopt the “80/20 rule”.
In essence, the 80/20 rule says that for daily driving, an EV owner should keep their battery’s state of charge between 80% full and 20% full. That also knocks off around 40% of the vehicle’s perceived available range, although it’s one that drivers can get back for the occasional road trip if needed.
Between range lost to the weather, range lost to battery aging, and lackluster available charging infrastructure, range anxiety is a very real concern holding back adoption of all-electric vehicles. In addition to its 1:6:90 rule, it’s a key reason why Toyota’s strategy of slower adoption of all-electric vehicles looks like a solid one at the moment.
And what about the longer term?
Of course, the engineering powerhouse that it is, Toyota is planning to launch more all-electric vehicles, thanks to next-generation battery technology. It believes that it can have a 600 mile (965.6 km) range car available by 2026 and a 900 mile (1448.4 km) range one around 2028 or so.
That type of range will go a long way towards alleviating consumers’ range anxiety, for a lot of reasons. First, it means that many more trips can be covered without having to recharge at all. It also helps folks deal with the range losses due to battery aging and the weather. In addition, it makes it easier to deal with less-than-ideal charging infrastructure, hopefully minimizing future incidents like the one caused by Secretary Granholm’s team.
Perhaps more importantly, with ranges like that, focusing on destination charging becomes a much more viable option. Destination chargers are much cheaper, and thus much more feasible to install, than high-speed ones. They are slower, though, so the typical use case would be to plug in, go to sleep, and then wake up the next morning with a whole bunch of range restored.
It is rare for people to drive more than 900 miles (1448.4 km) in a single day, even on road trips. That makes those overnight, destination-type chargers much more appealing for road trips.
What about Toyota’s stock?
For investors who appreciate Toyota’s more principled approach towards all-electric vehicles, its shares are available at around 12 times trailing earnings and less than 11 times its anticipated earnings. It also pays a solid dividend with around a 2.8% yield. That yield appears well-covered, consuming about 26% of the company’s trailing earnings.
Of course, potential investors should be aware that car manufacturing is a notoriously cyclical industry. After all, new car purchases can often be postponed through repairing existing vehicles, buying used ones instead, or by relying more heavily on public transportation. As a result, any investor in any car company would be well served by having enough patience to consider holding through a cyclical downturn should one arise.
Still, for patient investors who want exposure to the industry, Toyota’s approach of waiting until battery technology enables those longer ranges before going all-electric may ultimately pay off well for them. That makes it worth a look.
Just to keep you in the loop, at the time of publication, Chuck Saletta did not own shares of Toyota. He does own a Plug-In Hybrid car, however, and is willing to consider going all-electric once affordable electric vehicles top 500 miles (804.7 km) in range.
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