Toyota enters 'sprint on steroids' to future-proof its legacy and robust growth

Editor's note:

This is the second of a two-part series discussing reports that Toyota will open a wholly owned factory in Shanghai for the independent production of electric Lexus vehicles.

Toyota's reported plans to establish a wholly owned factory in China come as the company's business is being buffeted by economic uncertainties and market headwinds.

In 2024, Toyota's sales in China slid 6.9 percent year-on-year to 1.8 million units, following a decrease of 1.7 percent in 2023 and a 0.2 percent dip in 2022.

Once a consistent performer in China's auto market, achieving robust growth for over a decade, Toyota now finds its future hanging in the balance.

Pundits are questioning whether the Japanese automaker has hit a rough patch, amid some speculation about potential plant closures or capacity reductions in its Chinese operations.

Establishing a wholly owned factory now in China would help to dispel those concerns and reaffirm the importance of the Chinese market within Toyota's overall strategy.

During an earnings call following the release of its 2024 half-year financial report, Toyota executives emphasized to the media that future performance in production and sales would heavily depend on developments in the Chinese market.

Given the intense competition in China, the company is actively exploring various ways to transform itself.

Reuters previously cited insiders as saying that Toyota's next objective is to integrate sales and production operations between its two Chinese joint ventures – FAW Toyota and GAC Toyota – to boost efficiency.

Deeper localization efforts

At its core, this drive reflects a deeper commitment to localizing its operations and production.

Toyota is also reportedly planning to delegate greater autonomy to its Chinese research and development teams, encouraging greater involvement from local employees in the design and development of new models.

Sources indicate that the company has come to value the insight of its Chinese staff, who possess a sharper understanding of the local market and consumer preferences, particularly in electric vehicles and connected technology.

Given this context, it's clear why Toyota has appointed Li Hui, former executive vice president of Lexus China, as the first non-Japanese general manager of Toyota China, effective January 21.

Toyota is under mounting pressure from Chinese automakers, which are swiftly rolling out affordable, technologically advanced electric vehicles.

Meanwhile, several joint-venture carmakers have already been overtaken by domestic competitors and even ousted from the Chinese market.

This tectonic shift has been a long time coming. For years, Sino-foreign joint ventures reaped easy profits in China. As they rested on their laurels, domestic brands rose rapidly, with some now sitting in the driver's seat.

For many joint-venture automakers, their slow adaptation has left them struggling to compete, risking eventual exclusion if they fail to keep up.

A gym or a sprint on steroids?

Ahead of the 2024 Shanghai Auto Show, Volkswagen Group CEO Oliver Blume quipped during an event in Beijing that "China's market is like a gym; if you're not pushing yourself hard enough, you'll fall behind."

In my view, "gym" is an understated analogy. China's ruthlessly competitive auto market has turned into a sprint on steroids.

In a market caught up in a relentless race to the bottom, survival is not necessarily about being the fittest; it's about being the fastest.

Simply put, if foreign automakers want to undergo "grueling training" to excel in the electric car sector and survive brutal competition, China is the place to be.

Toyota, arguably among the slowest heavyweights to react to these rude awakenings, has now finally come around to the necessity of overhauling its formula for success in China – and doing it fast.

In the foreseeable future, Toyota will likely try to shake off the stereotype as a sluggish and conservative giant, becoming more aggressive, agile and responsive in the market.

Too early to write off Toyota

Although Toyota has long been criticized for its slow-paced transformation – especially in the realm of electrification – the company remains one with a strong vision for innovation.

Toyota was an early investor in the Chinese robotaxi startup Pony.ai, and it registered numerous solid-state battery patents and began development long before battery titan CATL did.

Additionally, it produced the fuel cell vehicle Mirai – though it was a total flop – and is now set to invest US$500 million across two tranches in Joby Aviation, a leader in electric vertical take-off and landing aircraft technology. Across multiple mobility sectors, Toyota's strategic influence is clear. All these investments are made to future-proof the company.

For Toyota, its goal of becoming a forward-thinking mobility powerhouse has always been part of its corporate DNA.

After a misstep with hydrogen energy, the company has taken a step back in the past two years and redirected its focus toward electrification. Whether its Lexus factory in China can become the cornerstone of a successful comeback remains to be seen. But it is apparently one of the most high-stakes ventures in the firm's history.

It would be unwise to prematurely write off Toyota. While many observers forecast electrification as the inevitable future, I still believe we will see a dual world where gasoline-powered and electric vehicles can coexist.

In many scenarios, gasoline vehicles remain irreplaceable. They are standardized products, and the range of specific models is largely unaffected by environmental factors. In contrast, electric vehicles often face issues with exaggerated range claims due to current electrolyte challenges.

Whether driving on Germany's autobahns at 200 kilometers per hour or facing the harsh winter of northeastern China with an electric vehicle's range halved, it becomes evident that some places in this world are not yet suited for the widespread adoption of electric cars.

Other factors like surging electricity costs, inadequate charging infrastructure, trade barriers and geopolitical tensions also combine to hinder the broader penetration of electric cars.

As such, Toyota's experience with its fuel-efficient hybrid technology continues to offer immense market potential. Gasoline cars aren't running into a dead-end yet.

Alas, the success of electric vehicles in China has led some to triumphantly claim that foreign brands have lost their advantage.

Looking at the global picture, it's clear that the proliferation of electric vehicles is far from a tipping point and may never dominate the entire world as some have boldly predicted.

Calculated cannibalism

Toyota's tortuous approach to electrification reflects a balancing act between preserving its legacy and embracing innovation. It is committed to making better cars, regardless of whether they run on gasoline, electricity, hydrogen or even insane future technologies like controlled nuclear fusion.

In July 2018, when China green-lighted Tesla's bid to build the country's first wholly owned foreign car factory, the intention was to play the card of "calculated cannibalism" – using the American electric-car pioneer to stimulate competition and drive excellence at home.

This strategy paid off handsomely. With Shanghai's complete industrial ecosystem, logistics advantages, talent pool and the "Shanghai speed" of turnkey delivery, the city has become an attractive destination for international carmakers.

Toyota's decision to build a wholly owned factory will only further enhance Shanghai's magnetic appeal.

(The author, a former Shanghai Daily opinion writer, now works as a business analyst and communication strategist. He has no conflict of interests to declare.)