• Freedom
  • Innovation
  • Growth

Stock Alert: Toyota Considers a Money-Losing Electric Vehicle Strategy

If you have Toyota stock, you may want to consider other options.*
Reuters reports, “Toyota Motor Corp. aims to get half of its global sales from electrified vehicles (EVs) by 2025, five years ahead of schedule …”
Let’s just say that’s an ambitious goal. 

About 1.26 million electric passenger cars were sold in 2018. That number was a big increase over the previous year, but it’s still only a small fraction of the 86 million vehicles sold worldwide. 

While carmakers are excited—or at least claim to be—about expanding their EV offerings, they face two huge problems. First, they lose money on them. That’s not a downside for Democratic presidential candidate Bernie Sanders, who never saw a profit he liked (except for the sale of his own book). But it’s a big problem for companies that want to stay in business.
McKinsey & Co. reported last March: “[M]ost OEMs [original equipment manufacturers] do not make a profit from the sale of EVs. In fact, these vehicles often cost $12,000 more to produce than comparable vehicles powered by internal-combustion engines (ICEs). …  The result: apart from a few premium models [read Tesla], OEMs stand to lose money on almost every EV sold.”
Green New Dealers probably think the companies can just make it up on volume.
Toyota apparently recognizes the profitability challenges. Reuters quotes Toyota Executive Vice President Shigeki Terashi as saying, “while demand for EVs grows, profits will be slower in coming, given the economies of scale.”
The left will cheer shrinking profits, but shareholders may have a different idea.
The other problem is related to the first: EVs have also been a money loser for taxpayers.
Many countries subsidize the sale of EVs to encourage consumers to buy them. But in two of the largest EV markets, China and the U.S., those subsidies are declining or going away.  Will consumer demand—small as it is—shrink even further if taxpayers aren’t subsidizing as much of the bill?
Of course, there’s nothing wrong with auto manufacturers gradually shifting to EVs—if that’s what consumers are demanding.
We know governments and environmentalists want us to buy EVs, and are willing to put our money where their mouth is.
But it’s hard to know what consumers really want when the market is a tangle of tax breaks, subsidies, political agendas and carmakers willing to lose money.
* IPI is a think tank and is neither licensed nor qualified to provide investment advice. We do, however, point out potentially negative consequences from bad policy decisions.