Toyota’s Dominance Threatened by Rise of Electric Vehicles

Rachel Culin considered herself a Toyota loyalist, one of millions of people who appreciated the company’s reliable and fuel-efficient hybrids. But she recently bought an electric Chevrolet Bolt to replace her Toyota Prius because the Japanese automaker had been too slow when it came to selling electric vehicles.

“Where are the options for those people who love Toyota?” Ms. Culin, a resident of Mesa, Ariz., said. “It’s really sad.”

Once the leading brand for environmentally conscious car owners, Toyota has failed to keep up with changing consumer preferences and a push by governments around the world to greatly reduce the burning of fossil fuels, the main cause of climate change.

The company and the Japanese auto industry are facing the biggest business challenge they have confronted since becoming global giants in the 1980s. How they respond could determine whether they remain at the top of the auto industry or become afterthoughts.

Toyota, the world’s largest automaker, is the nucleus of power for the country’s large auto industry. It has alliances with smaller automakers like Subaru and Mazda and wields enormous influence over government officials and industry groups. The company is also a major employer in the United States, with nearly 30,000 workers in Kentucky, Indiana, Texas and other states.

Its business decisions can have far-reaching economic and environmental implications. Toyota arguably did more to improve fuel efficiency and cut emissions than any other established automaker by pioneering hybrid cars that augment a gasoline engine with a battery and an electric motor. But having staked so much on hybrids, it has moved slowly to cars that produce no tailpipe emissions.

That has opened room for Tesla and BYD, a Chinese automaker, to challenge Toyota’s dominance by offering appealing and affordable battery electric cars. Toyota has lost market share in the United States, and its sales in China have fallen.

Japanese carmakers have been here before. But last time they were the insurgents.

In the 1970s, with fuel prices soaring, Americans began replacing gas-guzzling cars with small, fuel-efficient Japanese models, challenging the dominance of General Motors, Ford Motor and Chrysler.

Toyota’s manufacturing methods became synonymous with manufacturing efficiency, and many factories adopted what became known as the “Toyota way” or “Toyota method.”

Today, Toyota is the one learning from rivals. The company is adopting techniques from Tesla. In China, it has teamed up with BYD in the hope of absorbing its electric motor and battery technology.

“The stage of the battle has changed,” said Sanshiro Fukao, a senior research fellow at the Itochu Research Institute, and “the Japanese auto industry in particular has been very slow to act.”

Toyota may no longer be able to take its time.

During the pandemic, the global automotive market passed a milestone that caught the world’s major automakers flat-footed. In 2022, sales of electric vehicles surged nearly 70 percent to 7.7 million, surpassing those of hybrid-electric vehicles for the first time as demand skyrocketed in China, according to IDTechEx, a market research consultancy.

Toyota remains highly profitable, earning $8.9 billion in the quarter that ended on June 30. Last year, it sold 10.5 million vehicles, eight times as many as Tesla. But fewer than 1 percent of the cars it sold were fully electric vehicles.

The absence of electric vehicles has been especially costly in China, the world’s largest car market. In July, Toyota’s sales in China were down over 15 percent from a year earlier.

In the United States, Toyota’s sales have increased, but less than other automakers. From June to August, the company’s share of the passenger car market slipped to 13.8 percent from 15.1 percent a year earlier, according to the market research firm Cox Automotive.

The story is much the same for other Japanese automakers like Honda, Mazda and Subaru. Even Nissan, which began selling the Leaf electric car in 2010, has fallen behind, failing to produce a car that could rival Tesla’s Model 3 in range, performance or design. Nissan accounted for less than 2 percent of the electric car market in the United States in the first half of the year. In China, it expects sales could drop by almost a quarter in the current fiscal year.

In May the International Council on Clean Transportation, a nonprofit organization, rated the 20 largest automakers on their progress toward zero emissions. Five of the six companies with the lowest scores were Japanese: Toyota, Honda, Nissan, Mazda and Suzuki.

Foreign automakers in China produced electric models designed to placate regulators rather than appeal to consumers, said Christopher Richter, senior research analyst at CLSA, an investment firm.

“They didn’t make them as great as they could, and they were behind the learning curve,” he said.

Toyota has tacitly acknowledged that it has fallen far behind Tesla and BYD. The decision in January by the Toyota scion Akio Toyoda to step down as chief executive was widely seen as a recognition that the company needed new leadership to navigate the transformation of the auto industry.

The sense of urgency was compounded by the Shanghai auto show in April, said Tatsuya Otani, a journalist who has spent decades reporting on the Japanese auto industry.

Chinese vehicles at the show featured onboard controls and entertainment options that made them look more like iPhones on wheels than traditional cars. Japanese executives were stunned to see how much progress their Chinese rivals had made, Mr. Otani said.

Toyota declined to make executives available for interviews.

The only all-electric Toyota sold in the United States is the bZ4X, a sport utility vehicle that the company recalled last year because faulty bolts could cause the wheels to fall off — an embarrassing misstep. In China, the company also offers an electric sedan, the BZ3. (Toyota’s Lexus division sells one fully electric model in the United States and two in some countries.)

On returning from Shanghai, Toyota executives ordered employees to rush out a presentation on the company’s plans for its electric vehicle production. Toyota shared the plan less than two weeks before the company’s annual meeting, where shareholders, angered by the slow progress on battery-powered cars, proposed a resolution pushing the company to disclose its climate change lobbying.

The measure did not pass, but the rare expression of dissent was an indication of how Toyota, once praised as a paragon of clean tech, had fallen out of favor.

“They just are not moving quickly enough to E.V.s at a time when that is where the market and the planet are going,” said Brad Lander, the comptroller of New York City, which owns more than $100 million in Toyota stock through its pension funds and backed the resolution.

The company has disputed that characterization, arguing that hybrid cars can help reduce carbon dioxide emissions more and faster than battery electric vehicles, which remain too expensive for many buyers.

Factoring in a cleaner manufacturing process for hybrid cars and the limited availability of critical battery materials, such as lithium, hybrids are a safer short-term bet, Toyota executives have said in recent public statements.

In Washington, the company has called for less stringent auto emission limits, saying in July that a proposed new standard “underestimates key challenges including the scarcity of minerals to make batteries, the fact that these minerals are not mined or refined in the U.S., the inadequate infrastructure and the high cost” of electric vehicles.

“When they do math, the effect on the environment is far greater for hybrids,” said Jeffrey Liker, a professor emeritus at the University of Michigan and the author of several books on Toyota. “In addition to that, they make a whole lot more money.”

Sales of all-electric vehicles are growing faster than hybrids. But some analysts predict that hybrid sales will surge as would-be electric vehicle buyers worry that the public charging network is inadequate and unreliable. If that happens, Toyota’s strategy could be vindicated.

Anita Rajan, general director of the Japan Automobile Manufacturers Association in the United States, said Japanese automakers were biding their time until they could make electric cars that were as reliable and affordable as the gasoline vehicles.

“I don’t know if there’s a benefit in being first to market with these vehicles,” Ms. Rajan said. “I think it’s how you’re entering the market and the thoughtfulness that you show for your customers.”

In Toyota’s home market, consumers have shown little appetite for battery electric cars, and the government has been reluctant to aggressively push for change in a profitable industry.

That could be a problem for Japanese carmakers, which have traditionally honed their technology at home before marketing it abroad, said Kazutoshi Tominaga, a managing director at Boston Consulting Group, which has worked with Japan’s trade ministry to shape national electric vehicle policy.

“If Japan, as a market, doesn’t shift to electrification, we don’t have a place to test the product,” he said.

Yet BYD has opened 10 dealerships in Japan and plans to have 100 by the end of 2025. The company went so far as to release a video in August calling on Chinese automakers to “demolish the old legends,” widely interpreted as a reference to Japanese and Western automakers.

On a recent Sunday, prospective buyers waited patiently to take a BYD S.U.V. for a spin around the Tokyo neighborhood Ikebukuro. Salespeople were quick to point out the car’s eligibility for thousands of dollars in subsidies from Japan’s trade ministry, which has allocated $90 billion to promote battery electric cars.

Two nearby Toyota showrooms were largely empty.

Customers are “satisfied” with the current options, said Masaki Nagasawa, the deputy manager of a Toyota dealership in Tokyo. “For people who are wavering, subsidies are an incentive to buy,” but most customers are anxious about electric cars’ range and prefer hybrids, he said.

Toyota has said it is working on new production techniques and innovative battery technology that would increase its cars’ range and reduce the time it takes to charge them. The company has said that its lineup will include 10 new all-electric vehicles by 2026 and that it will aim to sell 3.5 million of them annually by 2030.

Speaking on Wednesday in Tokyo after the unveiling of a new luxury plug-in hybrid vehicle, Simon Humphries, who is in charge of branding and design and is a director on Toyota’s board, said the company was releasing new electric options “month by month, year by year.”

But, he added, while there is an “urgency” to introduce new battery-powered cars, “there’s urgency in every segment.”

Electric vehicle companies are moving fast.

Tesla is on track to sell nearly two million electric cars this year and is building a factory in Mexico, where it is expected to make a car that sells for around $25,000. In the United States, the company’s Model 3 sedan already sells for about as much as a comparably equipped Toyota Camry after federal and state incentives are taken into account.

BYD is rapidly expanding outside China, including in Europe, Latin America and Southeast Asia. Its extensive electric lineup includes models that are cheaper than Toyota’s most affordable sedans and a mammoth luxury S.U.V. that sells for around $150,000.

Just as Apple, Google and Samsung quickly displaced Nokia and BlackBerry in the mobile phone business, some analysts say, Tesla and BYD could be so far ahead in making electric cars by 2026 that Toyota might struggle to catch up.

But Japanese officials are more sanguine.

People own cars longer, so the transition will not be as fast as with cellphones, said Naoki Kobayashi, a deputy director of the trade ministry’s automobile division.

He acknowledges that Toyota faces a big challenge, but, he added, “unlike with smartphones, we’ve still got time.”

Hisako Ueno contributed reporting.