The New and The Old
When we think about cars, we often have images of what we see every day on the road, a mix of new vehicles amongst many more used vehicles, with the average age of cars globally being over 10 years old. Vehicle manufacturers derive some income from parts involved in servicing, though the large majority of their income is earned from the sale of new vehicles. For this reason, it is important to correct our perception of the vehicle market and make a very clear distinction between new vehicle sales and all other vehicle sales. As it is the sale of new vehicles that TM's business is overwhelmingly concerned with.
The reason for the emphasis on distinguishing between new vehicle sales and all other types of vehicle sales is to help us understand what drives growth in the amount of vehicle sold by TM. This growth is driven by the competitiveness of new TM vehicles on two fronts; against new vehicles from other vehicle manufacturers, as well as against used vehicles that include all used competitor vehicles and TM used vehicles.
With the cost of used vehicles being significantly lower there is only one viable way in which vehicle manufacturers can combat competition on both fronts, and that is through the introduction of refreshed, facelifted, and redesigned models. According to Autotrader these three categories of new vehicle are describes as follows:
"While minor updates with each passing model year are normal, a refresh combines those updates with some small revisions to a car’s exterior styling and possibly small changes to its interior. A face-lift adds more new features and usually offers a substantial stylistic update, both inside and out. Finally, a redesign is a full, ground-up rework of the car, usually accompanied by a totally new look, many new features, a new interior and a new powertrain."
A Fully Electrified Model Line Up
TM has stated that "By around 2025, every model in the Toyota and Lexus line-up around the world will be available as either a dedicated electrified model or have an electrified option". This information is both available and known to the market, with the announcement being made in 2019. Whilst known by the market it appears that the consensus view is that TM is playing catch up with Tesla and the incumbent automakers, with the company only just releasing its first battery electric vehicle (BEV) in Europe during 2020, the Lexus UX 300e.
What I find most interesting about this announcement is not the commitment by the company to pursue more environmentally friendly and energy efficient vehicles, but the sheer scale of new models that this initiative will require. Although many TM models already fall under this electrified definition, such as the Camry, Corolla and RAV4, many of TM's category leading models still do not. These include the Tundra, Hilux, Landcruiser, IS, 4 Runner and Yaris, as the primary examples.
Combined with the scheduled redesigns of TM's model lign-up, we should see a heightened level of new vehicle introductions from the company. By my estimates, citing reliable leaks picked up by the automotive press, in conjunction with historical model redesign schedules, TM will be introducing upwards of 25 new models globally over the next 18 months, with at least 14 of these new models being in the US market alone.
Unlike standard model refreshes, facelifts and redesigns, the new iterations of the mentioned leading models will include an electrified version for the first time. Whilst TM has introduced new degrees of electrification to models as part of a refresh, the introduction of new powertrain options, in this case electrified options, is often reserved for more intensive model redesigns. As with other product categories, the more significant the addition of new features are, the more likely they are to drive model upgrades by prospective customers.
This translates to what I believe will be TM, the producer and seller of new vehicles, converting more would-be buyers, who would otherwise purchase a used vehicle, to opt for a new Toyota with the additional features an electrified power train brings.
Comparing the New Model Pipeline with Previous Refresh Cycles
Below is a selection of data relating to units shipped from 2011 to 2020, fiscal year ending March 31st.
This date range is relevant because it was in 2012 and 2013 that TM upped the tempo in regard to the introduction of new models. Evidently, within the U.S. in particular, this led to a significant increase in sales.
The models introduced during this period are below:
Fiscal 2012 New Vehicles
Japan New: Prius Alpha, Avensis, Prius PHV Aqua, 86, Pixis Space, Pixis Van/Truck
Japan Redesigned: Dyna/Toyoace, Camry, Corolla Axio/Fielder, GS
Outside Japan New: Prius PHV, Prius C, Prius V, Scion FR-S, Scion iQ, Yaris HV
Outside Japan Remodelled: GS, Camry, Yaris HB
Fiscal 2013 New Vehicles
Japan New: Pixis Epoch, Spade
Japan Redesigned: Corolla Axio/Fielder, IS, Porte Auris, Crown
Outside Japan New: ES300h, Avalon HV, FR-S
Outside Japan Redesigned: ES, IS, Avalon, RAV 4
In total roughly 31 completely new models, refreshes or redesigns were introduced over the 24-month period, leading to what was an increase in total car volumes of 21%.
The Bottom Line
The introduction of a larger amount of vehicle models, with the addition of significant features related to the simultaneous introduction of electrified power trains, should see healthy growth in TM’s bottom line. As depicted below, TM enjoys a healthy, and stable, level of profitability per vehicle sold.
Whilst other manufacturers will also be introducing electrified vehicles it should be taken in conjunction with the increased level of profitability TM enjoys per vehicle in comparison with other vehicle manufacturers of the same size and price point. For context VW, whom I would consider TM’s most relevant competitor in the new vehicle market, enjoys about half the level of profitability per vehicle sold.
So, whilst the electrification of an entire model line-up is a driver of new car sales relative to used car sales, the return enjoyed by TM compared to its new car manufacturer peers should be significantly more attractive.
Hopefully in time this thesis will be proven correct, however, given the current Covid-19 pandemic the introduction of new models may be postponed. Even with the pandemic I am confident we will see more vehicle introductions over the long run from TM, though it may take further unveilings surrounding the now 2021 Tokyo Olympics for the market to pay attention. Even so, given the company’s track record I can sleep easily until whenever that occurs.