Toyota Prius Prime Plug-in Hybrid Electric Vehicle Angel Di Bilio

Toyota Prius Prime Plug-in Hybrid Electric Vehicle

As several large global automakers race to convert their entire model portfolios to the battery-electric (BEV) format and phase out internal combustion engines - ICE, Toyota Motor Corp. (NYSE:TM ) is pursuing a different, more incremental course.

Toyota will introduce BEVs slowly and more gradually than its rivals, citing what it believes to be limited, slowly growing consumer demand. Toyota's BZ4X, its first BEV in the U.S., has debuted and will be followed by the Lexus BZ later in the year, based on the same BEV architecture, with luxury materials and appointments. Both models will be manufactured in Japan and imported to the U.S. in relatively small numbers.

(The BZ4X was recalled and sales halted shortly after the sale of only 258 vehicles, due to a problem that could cause the wheels to fall off. Toyota has offered to buy back the affected vehicles. A spokesperson said the company is endeavoring to resolve the mechanical problem.)

Production of future Toyota BEV models is likely to start in the U.S. - and in greater numbers - in about three years, as soon as Toyota completes a battery line at an 1,800-acre site near Greensboro, North Carolina. Earlier this year, the automaker had announced a $1.2 billion investment to build batteries at the site, though the batteries were of a type used for gas-electric hybrids only.

Site of Toyota battery plant in N.C. (Toyota)

Site of Toyota battery plant in N.C. (Toyota)

In 2021, Toyota said it intended to invest $70 billion on future electrification efforts.

The latest $5.6 billion of battery investment announced Wednesday will cover an additional $2.5 billion for capacity to build BEV batteries in N.C., probably using lithium-ion chemistry - presumably for BZ4X and perhaps other BEV models.

In Japan, Toyota said it will invest about 400 billion yen (about $3.1 billion) in the Himeji Plant of its affiliate, Prime Planet Energy & Solutions Co., Ltd. (PPES), for batteries and in Toyota plants and property.

If consumer demand justifies requires more battery production for BEV models, Toyota is prepared to accelerate its investments, executives have said.

A Toyota executive acknowledged in Automotive News that the company had originally intended to expand gas-electric hybrid battery production in North Carolina and lately has pivoted to add BEV batteries instead.

North American production of BEVs is critical because the newly-passed Inflation Reduction Act provides incentives while stipulating local production of the vehicles, including the batteries. Other requirements of the new law are complex as well and may require some rethinking about which minerals are used in the batteries and where they are mined.

Having pioneered the fuel efficient gas-electric hybrid power train, first introduced on the Prius, Toyota has expanded hybrids and plug-in hybrids across its model lineup. The Lexus NX plug-in and plug-in versions of the Prius and RAV4 have proven popular because they offer gas-electric operation as well as all-electric operation - albeit for relatively short distances. The Lexus NX, for example, can travel 37 miles on all-electric power.

Toyota said it "believes that there is more than one option for achieving carbon neutrality. It also believes that the means of reducing CO2 emissions as much as possible and as quickly as possible while protecting the livelihoods of its customers vary greatly depending on the country and region. With such in mind, Toyota will continue to make every effort to flexibly meet the needs of its various customers in all countries and regions by offering multiple powertrains and providing as many options as possible."

Hybrids have proven to deliver superior fuel economy. They also can be tuned to increase torque and power for models that are designed specifically for customers oriented toward performance driving rather than reducing carbon emissions. As such Toyota's models prove extremely popular in less developed countries where the electricity grid is weak and where BEVs are unlikely to attract customers for some time.

In the U.S., hybrids sidestep the range anxiety that some customers harbor toward BEVs, as well as any need to find charging stations, which remain scarce, especially outside of California.

Environmental activists and left-leaning media outlets have been outspoken in their criticism of Toyota, arguing that the automaker is worsening climate change by failing to move more swiftly toward emission-free power trains, such as BEVs. Toyota rebuts the charges with data illustrating the amount of carbon saved by gas-electric hybrids - which are more accessible to mainstream motorists because they are available today and at prices lower than those charged for most BEV models.

The latest announcements covering battery investments could blunt some of the disapproval; the company said that investments of this kind are years in the making and aren't undertaken in response to critics.

Toyota's current supply-chain difficulties continue to crimp vehicle production and sales. In July the company said its global production output fell 8.6% year-over-year, due to COVID outbreaks, severe weather and a persistent shortage of semiconductor chips. Accordingly, tight vehicle inventory in the U.S. led to a 9.8% drop in retail deliveries in August. Toyota executives have forecast that supply chain woes inhibiting a satisfactory level of vehicle inventory could last for another eighteen months.

Toyota's latest investment in battery capacity for BEVs adds visibility to the automaker's carbon reduction strategy. It also stands as proof to naysayers that the company isn't opposed to BEVs. The new production lines in North Carolina will permit the flexibility to offer BEVs according to Toyota's own forecast of rising consumer demand for the new technology, while continuing to reduce CO2 via the marketing of gas-electric hybrid vehicles in addition to conventional ICE models.

From a shareholder's perspective, this balanced approach looks most sensible given the uncertainties regarding government policy, which constantly changes; given the uncertainty over how quickly a charging infrastructure will develop - as well as the possibility that new battery technology will emerge, requiring a revamping of manufacturing capacity.

With the deepest financial resources in its industry and impressive tech and manufacturing expertise, Toyota has more options than its competitors to respond to the rapidly changing political and technological environment influencing personal transportation. That's why I continue to recommend the TM American Depositary Receipt (ADR).

In response to a shaky macroeconomic environment due to inflation-fighting actions by the Fed and other central banks, TM shares are down 30% from their all-time high at the beginning of 2022. With earnings under pressure due to supply-chain and production bottlenecks, the stock price could fall further. For the long-term investor, however, the current price certainly looks like an attractive entry point.

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Disclosure: I/we have a beneficial long position in the shares of TM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.