The rise of hybrid vehicles among Japanese automakers is increasing the EV push

Timing is important. When it comes to the timing of the transition to electric vehicles, several Japanese automakers may have it just about right, even if they initially appear to be late to the game.

Rather than rushing headlong into electric vehicles, Toyota, Honda and Mazda have focused on hybrid vehicles as a more practical transition – to great success. They’ve all enjoyed rising sales of hybrids, which has helped them achieve record or near-record profits. That has positioned them financially well to invest in electric vehicles today, with an eye on entering the fray seriously in the second half of this decade.

Meanwhile, electric vehicle sales growth, while still strong, has slowed recently, prompting Ford and GM to scale back their production plans. This is partly because a first wave of EV enthusiasts have already purchased their cars, and everyday car buyers are more likely to be put off by higher prices, range anxiety and poor resale value, among other things.

Tesla warned in a call with investors last month of “significantly lower” sales growth this year after a disappointing fourth quarter. CEO Elon Musk said his EV maker is “between two big waves of growth” as it aims to start producing a more affordable new model late next year. One difference with that second wave of growth for Tesla is that, unlike the first, it will face stiff competition from Japanese automakers, whose EV pushes have been helped by rising hybrid profits, putting them on stronger financial footing.

Hybrids more than ‘a phase’

In 2022, Musk dismissed hybrids as a phase, saying it’s “time to move on.” In the long run, he could be right, especially as regulators around the world push harder for electric vehicle adoption to meet climate goals. In California and New York, zero-emission mandates loom over the automotive landscape. Both states will require all new passenger cars sold to be zero-emission by 2035.

But for now, many consumers are opting for hybrids, which use less fuel than traditional vehicles – better for the environment and their wallets – even if they have to go to the gas station every now and then.

Currently, car buyers are concerned about the downsides of electric cars, says Mazda CFO Jeffrey Guyton, as reported by Automotive News. “Our strategy is to follow the regulations, yes, but also to pay close attention to what actual customers want,” he said.

Thanks in large part to strong hybrid sales, Mazda reported record profits in the fiscal third quarter ending December 31, 2023 – and is nearing the same for the full year ending March 31.

Guyton said hybrids are gaining additional attention among U.S. consumers, thanks in part to growing interest in electric vehicles.

“I think hybrid is benefiting a bit from the hype around EV,” says Guyton. “There is now a leveling off of the EV market. And I think the people who used to shout EV and promote EV have decided: if we can’t get people to go pure electric, hybrid is a good alternative.”

Although electric cars accounted for less than 1% of Mazda’s global sales until September last year, the automaker expects this to rise to 40% by 2030. By then, the company hopes to have sold seven or eight electric models. It recently established a standalone division to build electric vehicles on a new scalable platform, with the first models expected to be launched in the 2025-2027 period.

Honda has similarly enjoyed rising sales and profits, thanks in no small part to hybrids. Two hybrid models accounted for a quarter of Honda’s total US sales in 2023. But the company also aims to introduce 30 new EV models globally by 2030, by which time it plans for EVs to account for 40% of sales North America will matter.

Get ready for electric vehicles – really

Toyota, the world’s largest car manufacturer for four years in a row, feels vindicated after it was widely criticized for not jumping on the EV bandwagon early enough. It didn’t launch its first electric car, the bZ4X, until 2022. (Ford, by contrast, launched its first electric car, the Ford Focus Electric, in 2011.) But this month, Toyota said it expects to post record operating profit for the fiscal year. ending March 31, resulting in increased sales of hybrid vehicles in all its major markets.

“We believe the market is now reconsidering the potential of hybrid products, which are a strength of Toyota,” Goldman Sachs analysts wrote in a recent research note.

But while Toyota is raking in the hybrid wins, it also has big plans for electric vehicles. In November 2023, the company pledged to make 3.5 million electric cars annually by 2030, with dozens of different models under the Toyota and Lexus brands. To put that in perspective, Tesla sold 1.8 million electric vehicles last year. And as soon as 2027, Toyota plans to introduce new solid-state batteries that will allow longer range and faster charging times than current lithium-ion batteries.

In October 2022, then-Toyota CEO Akio Toyoda said that EVs will “simply last longer than the media wants us to believe,” thanks in part to inadequate charging infrastructure. Meanwhile, he stressed the importance of hybrids and emphasized that Toyota would continue to offer a wide variety of powertrains and let consumers decide for themselves.

Last month he predicted that electric vehicles would capture only 30% of the market, sharing the road with hybrid, traditional and hydrogen vehicles.

But that doesn’t mean Toyota won’t push hard in the EV space. Last year, Toyoda – whose grandfather founded the Japanese auto giant – resigned as CEO and became chairman, making way for a new leadership team better positioned to transition to electric vehicles.

“I am an old-fashioned person when it comes to digitalization, electric vehicles and connected cars,” Toyoda said. “I can’t go beyond being a car guy, and that’s my limitation. The new team can do what I can’t do.”

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