Electrification
Tesla vs. Toyota: The Real Battle for the Future of Mobility
The rivalry no-one seems to want to talk about
Published March 2024
Much has been written and said about the rivalry between Tesla and BYD. BYD overtaking Tesla as the largest BEV maker was reported widely in the media. The Tesla Model Y overtaking the Toyota RAV4 as the best-selling car in the world was less reported on.
Yet, this changing of the guard, from the RAV4 to the Model Y is a major milestone in the rivalry that will define the next few decades in the automotive industry.
As we navigate the transition from Internal Combustion Engine (ICE) technology that we have had for over a century to the new world of Battery Electric Vehicle (BEV), there will be winners and losers in the auto industry. There will be mergers and consolidations. And sadly, there will be bankruptcies too. This is shaping up to be a repeat of the transition from regular cell phones to smartphones. Some old players went bust and new supercorporations were minted.
The Contrasting Titans of ICE and BEV
Toyota's unparalleled stature in the ICE sector is undisputed, with an annual production of circa 10 million vehicles. Its closest rival, the VW group, produces less than a million cars fewer than Toyota, yet Toyota’s diversity of markets and legendary production techniques makes it the undisputed number 1 car manufacturer in the world.
On the BEV side, a similar two-horse race plays out more starkly as Tesla and BYD are heads and shoulders above every other BEV manufacturer. Tesla’s title as the king BEV maker has also been contested strongly by BYD in recent quarters.
But the sheer numbers of cars Tesla sells at much higher prices make it the top BEV producer by our standards. Moreover, this article is focused on the strategic battle between BEV and ICE, so it pays to stick to one leader for each - Tesla vs Toyota.
Divergent Strategies for a Mobility Revolution
Tesla’s strategy for the future of mobility is an unmistakable all-in commitment to BEVs. Although the company started with expensive models like the X and S, it has moved comfortably into the mid-price range with the 3 and the Y, which generates the bulk of its revenues today.
The company plans to move further into the affordable space with its planned sub $25,000 car. Tesla believes the future of mobility is BEV and Musk previously described other technologies like hydrogen fuel cell in somewhat colourful language that is polite enough by his standard.
Toyota’s strategy had been ridiculed for months as it failed to follow the crowd in pivoting fully to BEV like the majority of other ICE vehicle makers have done. The company had always maintained, though, that the future of mobility will not be exclusively BEV. It has spoken extensively and made investments in hydrogen fuel cells and longer-life battery technologies.
It was only in the past weeks when the shrewdness of that strategy started reaching more analysts. Toyota appears to know that EV uptake will slow down enough for them to catch up while continuing to sell ICE vehicles at a profit in the meantime.
Early Wins but Long War
The recent slowdown in the adoption of EV, the politicisation of EV adoption alongside other climate change issues, and the somewhat own goals by Tesla have made Toyota's approach to BEVs more coherent. The company itself believes that ICEs are on their way out, but it just doesn't see it as imminent, and that view has been vindicated in the past few months.
With Hertz all but abandoning its pivot to EV on demand and vehicle depreciation concerns, Toyota seems poised for its "I told you so" moment.
Tesla has also had its wins, and quite a lot of them. The consensus is that BEVs are the future and that bodes well for Tesla. The US Inflation Reduction Act has pumped billions into EVs, as have China and a host of EU nations. Monetary policies to support EV transition and penalties to penalise polluting ICE vehicles are the norm across the world. This also bodes well for Tesla and the BEV manufacturers.
These early wins have buoyed each side, but the war for supremacy is just beginning, and it is going to get ugly with bankruptcies expected on both sides. The Model Y’s win over the RAV4 is particularly symbolic and may portend future gains for BEVs. But the fact that Toyota still can't seem to make enough cars to meet the extreme demands for its cars in places like Australia whilst the demand story and Tesla’s price slashes are a constant in the news is a win Toyota will savour for a time.
Prices and Markets will be Battlegrounds
Tesla’s incessant price drops have not affected Toyota but affected other BEV producers, which in turn hurts the BEV market as a whole. Its release of the sub-$25K car will, however, take the fight directly to Toyota’s doorstep, making EVs almost more affordable than ICE vehicles and leaving consumers with fewer reasons to stick with ICE vehicles.
The battles over the luxury segments have largely been won by BEVs, with so many luxury brands pivoting from ICE to BEV. Toyota’s prowess in that end of the market has been decimated and will wane even further.
Tesla’s sub-$25K car will arrive circa 2026, giving Toyota an incredible opportunity to dig-in in anticipation and maybe even make moves to thwart Tesla’s move with its own price cuts. Its advantage is that it is working with a century old technology and a best-in-class production system. Its pushing of hybrids will also help shield it from the ravages of Tesla’s next move.
As well as price wars, we are likely to see intensified specialisation of market focus. Toyota will gravitate towards the relatively less wealthy markets in Africa and South America, where EV charging networks are underdeveloped.
Tesla, on the other hand, will focus its dominance on the wealthier parts of North America, Asia, and Europe, where electricity infrastructure and environmental laws favour BEVs.
Potential Outcomes
There’s a myriad of potential outcomes to this strategic rivalry. Tesla may come out on top and leave Toyota bankrupt if the adoption of EV accelerates over a shorter period of time. This will render Toyota's strength in waiting a foolish strategy and may collapse its business.
However, if EV adoption truly slowed to the point where new technologies like solid-state batteries and hydrogen fuel cells catch up, Tesla's advantage will be diluted, ushering Toyota a way to gain market share to Tesla’s detriment.
In this case, Tesla will be competing on new tech, not one it has an advantage in, and the playing field will be truly levelled. Toyota's experience in building 10 million cars a year will really shine in this scenario. Tesla will not necessarily be a loser here, just competing on equal footing.
A third scenario where BEV transition stalls completely because it was a bad idea is unlikely. The technology is solid, and it relies on electrification , a science we know so well.
Other scenarios include a completely new player entering the market and distorting it such that Tesla vs Toyota is no longer the focus. Whatever the form such tech takes, it will have to address our need for mobility to gain any traction.
In conclusion, the future of mobility has created its own VHS-Betamax moment or, more aptly, its Nokia-Apple moment. These two behemoths, Tesla and Toyota, will be locked in competition over the next few decades in a battle for our essential need for mobility.
Unless AI creates a world where our need for mobility is replaced with some metaverse-type new world order; or perhaps train journeys are reborn in a way that we don’t need cars any more, we have to resolve the challenges of the future of mobility. And as things stand today, Tesla and Toyota are the biggest players of import for BEV and ICE, respectively.
BYD, Rivian, Nio, and others will surely play a role, bolstering Tesla in this fight as the standard-bearer for BEVs, whilst Mazda, Mitsubishi, and other ICE makers will see Toyota's success as their success too.