FREE NEWSLETTER
I’VE OFTEN COMPARED the stock market to a Rorschach test. Depending on your perspective, what’s happening can look very different. But even in a market full of Rorschach tests, one company’s stock stands out: Tesla. Some people see it as a world-class company that’s changing the world. Others see it as a company led by an erratic genius that one day will inevitably fade—like MySpace or Polaroid.
Recently, a blogger named Alex Voigt wrote that Tesla’s head start in electric vehicles “will soon make Toyota look like what it is—a loser.” He then added for emphasis: “Dead man walking.”
Is Voigt right or wrong? As the world’s largest car maker, Toyota today is hardly a dead man walking. But the future is an open question. As an investor, how might you think about this debate? While I don’t get involved in picking individual stocks, there are useful lessons here for investors.
To an outside observer, Toyota might seem hopelessly out of step. While Tesla now produces more than a million electric vehicles (EVs) a year, and is growing at 40% annually, Toyota produces barely any. That seeming reluctance comes from the top. As recently as December, Toyota’s CEO, Akio Toyoda, reiterated his longstanding skepticism of EVs. He said a “silent majority” aren’t ready for fully electric vehicles. That stands in contrast not only to Tesla, but also to many of Toyota’s other competitors, including Volkswagen, Ford and GM, which are aggressively pursuing an electric future.
Is it possible that Toyota is, in fact, so out of step—or is there another way to understand this? Steven Spear is an operations expert at MIT who spent years in Japan and wrote his dissertation on Toyota. In Spear’s view, the debate shouldn’t be framed simply as a competition between Tesla and Toyota, or even as a battle between electric vehicles and conventional or hybrid cars. While in theory all car companies are in competition with one another, the reality is that they have different missions.
“Toyota’s brand,” Spear says, “has been affordable reliability for mid-market customers… for a reasonable price, you get your pick of formats suited to your needs that’ll run forever if you take reasonable care of them.”
That explains why Toyota has appeared lukewarm on EVs so far. “EVs are not yet a mid-market product,” Spear says, “not until charging is more convenient by speed and accessibility.” Instead, EVs “are primarily a premium product” for high-income consumers with the resources and flexibility to manage around an EV’s limitations, including long charge times.
In other words, it’s not that Toyota is behaving like an ostrich with its head in the ground. The company knows what it’s doing, and it’s simply doing something different. For that reason, it’s wrong to view the car market simplistically as a zero-sum game between Toyota and Tesla, or between any two companies or technologies. Toyota doesn’t have to fail for Tesla to succeed.
First lesson for investors: Be careful of simple stories. Things are rarely binary, so it’s important not to go too far out on a limb with any investment viewpoint.
Another lens through which to view this question: the innovator’s dilemma framework. Developed by the late Harvard professor Clayton Christensen, this theory explains why great companies sometimes fail. When innovative companies become overly wedded to the products that drove their initial success, they sometimes stop innovating. When that happens, they become vulnerable to upstart competitors.
BlackBerry offers a recent example. It dominated the smartphone market for a time, but its CEO underestimated the iPhone, confident that users wouldn’t want to type on touch screens. Result? BlackBerry’s market share fell to zero.
On the surface, Toyota might look like it’s making the same mistake. In the late 1990s, Toyota invented hybrid technology and, since then, has sold tens of millions of hybrid cars and trucks. Maybe Toyota is in denial of electric vehicles because it has—and continues to—enjoy so much success with hybrids.
This sounds logical, and Christensen’s theory might support it. But there are two problems with this conclusion. First, as articulated by Steven Spear, it may be that there’s room for more than one technology in the car market. In addition, it may be that Toyota has its own playbook and its own timeline. Of note: A few weeks back, Toyota made the surprise announcement that Akio Toyoda, the EV skeptic, would be retiring. In his place will be Koji Sato, an engineer who currently leads the company’s Lexus division. Not coincidentally, Lexus has developed one of the company’s only EVs.
In making the announcement, Akio Toyoda acknowledged that he may be out of step with his posture toward EVs. He referred to himself as “old fashioned” and said he had reached his “limits” leading the company his family founded.
That said, he seems to be warming to EVs. A video shows Toyoda riding in a prototype Lexus EV with Sato. At the beginning, Toyoda looks a little unhappy and makes some critical comments. But when he hits the accelerator and the car takes off, he lets out a hoot. In that moment, it seems, Toyoda became an EV convert. “I’m seeing a whole new side of this car now,” he says.
Second lesson for investors: The innovator’s dilemma is a real phenomenon, but it’s not an inevitability. Smart leaders like Akio Toyoda can change—and change quickly.
Another reality for investors is that business competition is often more nuanced than it appears. So far, I’ve focused only on the most well-known players. But there’s a much broader universe than Toyota, Tesla and the other names we know. Last week, for example, Berkshire Hathaway’s Charlie Munger described the success of BYD, a Chinese EV maker in which Berkshire’s a shareholder: “BYD is so much ahead of Tesla in China… it’s almost ridiculous.”
Third lesson for investors: Beware of what psychologists refer to as “availability bias.” In drawing investment conclusions, be sure to look beyond the data that’s most readily available. Today, BYD cars might not be on our radar in the U.S., but that could change.
Back in the 1990s, political scientist Francis Fukuyama coined the term “the end of history.” His argument: In the post-Cold War era, the evolution of political systems would reach a sort of end point, with no further evolution beyond that. In the years since, the world has witnessed further evolution, and Fukuyama has backed off from his theory. There’s no such thing as an end point, and that also applies to investing.
Fourth lesson for investors: All investments will ebb and flow. Depending on the time period chosen, one investment or another might be outperforming. But that can all change tomorrow. Whether it’s because of a new CEO or a new technology or a change in corporate culture, companies—and their stocks—often move in ways that are impossible to predict.
The Toyota vs. Tesla debate is a microcosm that illustrates this reality. It helps reinforce why investors’ best bet, in my view, is to sidestep these questions entirely by simply owning both Tesla and Toyota—and all of their competitors—via a diversified portfolio of index funds.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Maybe Toyota won’t out-compete Tesla, but here’s an article suggesting that Ford will.
A good analysis and a fair way to look at it, but for the exact reasons you mention, nothing is more obvious to me than that both Toyota and the VW Group will shrink in the future to a fraction of their current size.
Yep, and that’s why I own BYD and XPENG in my IRAs despite geopolitical risks. Heck, investing is risk taking. If you don’t like risk, then just buy CDs or annuities. EV battery technology is where it’s at and BYD has one of the best LFP batteries in the World and even TESLA uses them in their Shanghai Gigafactory for the Chinese market. And, lastly, BYD is the World’s largest integrated vehicle manufacturer. Just research the company on YouTube and you will see!
PS- I will only buy Lexus or Toyota cars for the reasons stated in this article and elsewhere. The most reliable cars in the World.
https://www.toyotaofmurfreesboro.com/blogs/580/top-10-reasons-buy-toyota/
Alex Voigt says Toyota is a dead man walking because he has spent thousands of hours looking into the tiny details and understands the big story.
If you think Toyota has any shot against Tesla, you may want to answer the following objective questions:
1.How much time does it take Tesla to manufacture a car vs Toyota (hint, it is more than a factor of 2 *less*. Yes, that’s correct. In the auto industry, when shaving off minutes in manufacturing time is a significant achievement, Tesla has shaved off 10’s of hours.
2.What is the role of the gigacasting machine. Hint, it saves 260 robots, significant manufacturing space, simplifies logistics lines, allows a 30% weight savings in the frame, less material, lower cost, faster to manufacture, and stronger
3.If you want to travel more than 300 miles, which is the only company with a supercharging network across the entire US and Europe that offers a seamless experience?
4.Which network allows you to charge your battery 50% in 15 minutes with bathrooms and restaurants nearby. Hint, it’s not Toyoya.
5.Which company offers a car which actually updates and improves it features for free after you’ve purchased it via over-the-air updates that occur seamlessly? Hint, it’s not Toyota.
5.Which company invented the octovalve? What are the implications for range and efficiency with the octovalve?
6.Which municipalities around the world have legislated *no* ICE vehicles sales as of 2035? Which as of 2030? Which have interim mandates by 2026 and 2030? 2026 is 3 years away, 2035 is 12 years away. Even Toyota’s own PR says at a *maximum* they will make 200,000 EV’s in the US in 2026. This year Tesla will make 1.8M (globally)
7.Who has the highest profit per vehicle and by how much? For Toyota, please calculate their profit per EV because their ICE profits will no longer matter.
8.Whose in-house insurance program has a growth rate of 50% per quarter, yes quarter.
9.Whose superchargers can be installed at 1/5 the cost of the competition yet charge cars >5x as fast?
10.Which OEM invented its own batteries (4680’s), electrodes, manufacturing process, and is actually making its own highly efficient batteries *today*? Those other makers may claim they are making their own batteries, however the factories won’t be functional for years and they are JV’s with their partner actually doing the work.
There are over 500 more of these questions to go if you want to understand how Toyota is *objectively* and measurably hopelessly behind. By this time, we know that legacy makers cannot simply flip and switch and start making EV In scale. It just doesn’t work that way and if you’ve watched the path of every single legacy maker, that becomes clear. There are completely different competencies required to make EV’s, source battery materials, tweak battery management software to maximize range, and keep costs down as the batteries are the most expensive cost of the car.
Sure, the Chinese makers will have a large part of the EV market but the total addressable market is blowing up to replace 100% of ICE sales by 2035.
Finally – and most importantly – the customer experience.
If you have any doubt of the future, please do yourself a favor and rent a Tesla at Hertz, or rent one through Turo. Spend a good 3 days (or more) understanding the experience of having a Tesla. Compare it to other EV’s on the market *first hand*.
Why is it worth your effort, because in ten years, you will look back and have an Apple/iPhone moment and wish you had. Do the research. Get the experience. Decide for yourself if the people with Tesla’s are crazy cult members, or if maybe, just maybe there is a reason that Tesla’s annual growth is 50% while almost every legacy maker is shrinking.
Please don’t listen to this author – or to me. Read quarterly statements, looks at revenue, profit, cash flows. Looks at the trends. Go to goodcarbadcar to see what Toyota’s sales have been doing the past six years vs Tesla’s sales. Drive the cars. Talk to new buyers.
Do your own research. If you still have no idea of the future, buy index funds. But it just may become clear to you what the futures brings after you do proper research.
You cite numerous reasons why Tesla is enjoying a head start in the EV business. As an early entrant, Tesla is picking the low-hanging fruit and is doing well. Like you, I congratulate them.
But its early advantages will diminish as competition increases. No doubt, potential competitors are studying Tesla’s manufacturing methods and disassembling Tesla EVs to understand how they work. It’s not likely that Tesla will remain king-of-the-hill indefinitely.
While Tesla may be the only company with a nationwide charging network today, that may not be a significant advantage if the government funds the development of a national charging network that can handle all EVs. Also, the extent of Tesla’s charging network may be overstated. I have driven on several different highways in the U.S. Southwest for many years and I have yet to see a Tesla charging station on long stretches of road between towns and cities. From my perspective, they are either non-existent or a well-kept secret.
You fail to mention that most EV buyers today are rather affluent. I haven’t heard of significant numbers of EV purchases among working class people. I’m also skeptical of the durability of government mandates to outlaw sales of new gasoline-powered vehicles by 2035. If these laws are allowed to stand, I’ll predict that sales of used, late model gasoline-powered cars will explode in the years leading up to 2035. People will resist being forced to purchase EVs they either can’t afford or don’t trust for long distance driving.
So, yes, Toyota has a lot of catching up to do in the EV market; and, yes, Tesla has a significant lead. But don’t think that Tesla’s profitability (and its stock price) won’t be challenged in the years ahead.
1.The argument you use that others catch up has been made for years. Objectively, Tesla’s lead continues to grow. It is innovating the fastest of any OEM. If you speak with people in the industry, their culture is of 5-year cycles of car design. Tesla makes design changes daily.
2.EV buyer affluence is another argument people have been making for years. ANY new technology starts in the upper strata of income and moves downwards as Wright’s law takes hold.
The model 3 is now available for $35,500 after federal tax credit while the average new car is the US approaches $50,000. Hertz CEO recently noted that Tesla’s have 50-60% lower maintenance costs (of cars driven hard in their fleet) making total cost of owner significantly less than even a corolla over a 6-year period. Hold the car longer than that and it is even more pronounced.Tesla has the highest profitability in the industry by a large and historic margin. And it is becoming more efficient by the day. This lead will only grow. Yes – it may choose to lower prices costing is a somewhat lower auto gross margin. That will hit other EV makers even harder. See Ford’s recent price drops on the Mach E. How much is Ford making on those cars after the price drop??
3.Range anxiety is an old tired argument. EV’s routinely go over 300 miles. I drove from Texas to NY and back in an X. It was simply not an issue. No more than running out of gas on the side of the road. If you are worried about range, you have not driven a Tesla and EV’s are new to you.
4.If you think all EV charging networks are the same, I urge you to get a Tesla and a Porsche Taycan or a Bolt. You will very quickly understand that they are not.
From your comments, it is clear that you likely have not spent significant time in a Tesla nor compared it first hand to everything else out there. That’s the reason I urged people to gain knowledge first hand. It will wipe out almost all the arguments you made.
If you want to continue to believe that the old legacy companies will prosper as they always have, no one is going to get in your way. If you are actually curious as to why this make not be the case, maybe start asking: Is it possible Tesla has a 3-5-year lead and is actually growing that lead? Could that be happening? Then see where the objective trending data lead.
This was an excellent article with a real nice flow of examples. Nice touch at the end plugging index funds.
Now I am excited to have BYD vehicles available in the US…
A most Humble conclusion!
Christensen is right that EV tech has not supported good mid-market vehicles with an acceptable driving experience for buyers in that segment. That’s changing now as battery tech has matured (cost/kWh, energy density, and longevity). Toyota’s challenge is that the shift to designing and building EVs is unlike any other tech transition they’ve crossed before. As VW learned, you can’t pivot overnight to building world class EVs. The skills and processes needed are very different. Toyota still has a lot going for it so Toyoda’s wise leadership transition may have saved the company. As an owner of broad index funds, I won’t lose sleep over this. As a fond former customer of Toyota’s I hope they succeed.
Good article. I am also not ready to move to an EV, regardless of the manufacturer. I am very interested in the plug-in hybrid option, but my current car is a 2011 Subaru Forester, and I’m nowhere near ready to replace it yet. Maybe in another 3-4 years I’ll be ready to take another automobile plunge, but not today.
Enjoyed the discussion, but am firmly in the index camp so definitely liked the conclusion. WRT EVs, I have been driving a Camry hybrid since 2007, when my much-loved Mazda MX6 was totaled. (Still miss the MX6s.) I need to replace it, but I will almost certainly buy a plug-in hybrid, and not a full EV. (And I wouldn’t buy a Tesla even if it were cheap.)
Good luck trying to find a plug-in-hybrid unless you live on the West coast. They are few and far between and you would have to get on a list to even be considered a customer. I know, I have tried numerous times and will not pay to be on a list. I don’t need a car that bad and pay ridiculous prices for one. Think I’m crazy, try to buy a 2023 RX 500h and see what they say, forgetaboutit! LOL
Don’t know about 2023s, but my local Ford dealership appears to have a bunch of new 2022 Escapes available. And no, I’m not on the west coast – North Carolina.
Another one hit out of the ball park. Bravo, Mr Grossman!
Or Toyota has new blood at the helm.
With a historically customary 3rd generations exit at Toyotas helm it has the international notoriety for a turn around!
https://www.yahoo.com/now/toyota-president-akio-toyoda-become-064737998.html
Additionally, lets not forget Lexus is to Toyota, what Acura is to Honda.
I’ve Toyota’s though.
Every Lexus part I ordered came from Toyota having dealt in autos on the side for decades.
Evan, your points are lost in the typos/jargon/shortcuts. Please proof-read and re-submit; I am interested enough to find what you are trying to say!