It was a significant surprise — given his stature among the Japanese business community — when Toyota Motor Corp. Chairman Akio Toyoda indicated on 29^th July 2024 that he may not be able to continue to lead the company if shareholder support for him continues to dissipate at the same rate as it has the last two years. “At this rate, I won’t be able to remain on the board next year,” Toyoda admitted to the Toyota Times.

Shareholder support for Toyoda fell to just under 72% at the annual Toyota general meeting in June, compared with 85% in 2023 and 96% in 2022. The 2024 vote was the lowest level of support in Toyota history, the chairman himself said.

Toyoda’s support from foreign institutional investors was particularly weak at 34%, but just as remarkable, support from Japanese domestic institutional investors dropped to around 55%, compared with 70% in 2023. Good governance and a long-term corporate strategy are crucial measures investors consider when asked to vote on corporate leadership. In this case, that consideration clearly led to votes against Toyoda.

Toyota’s strategy under scrutiny

Toyota has been scrutinised for being cautious about going ‘all-in’ on electric vehicles, instead capitalising on hybrid technology with increasing sales of its hybrid vehicles and being rewarded with a 17% rise in operating profit in the first quarter. On the face of it, Toyota’s strategy looks well placed, for now.

A good litmus test for the financial and market opportunity of a technology is the arrival of new entrants. The last 20 years has seen an influx of EV companies including Tesla, Rivian and more than 100 others, most of which hail from China. It is quite likely that only a handful of these startups will survive, but the message is clear ― the opportunity is large enough for startups to enter the market. Are hybrids the future? The number of purely hybrid EV startup automakers amounts to zero. Hybrids are a transition bridge to nowhere.

Demand for vehicles with a combustion engine, including hybrids, peaked in 2017. Global hybrid sales are expected to plateau at around 20 million vehicles per year out to 2035. Meanwhile, new EV sales could expand with a compound annual growth rate of 13% from 2024 to 2035. Investors should ask why a leading company is not chasing the growth area of their market.

Shareholder proxy advisers struck a critical posture on Toyoda prior to the annual general meeting regarding the decades of Toyota’s safety certification cheating. Environmental organizations have criticized Toyota’s lack of commitment to building affordable EVs that consumers want. Public Citizen and other consumer groups internationally have filed complaints with governmental oversight agencies regarding the deceptive marketing practices of Toyota. All of these criticisms have culminated in the eroding support for Toyota’s board chairman.

Now is the time

Toyota has the perfect opportunity to overhaul its strategy, much as Volkswagen Group did following its 2015 diesel emissions scandal. Toyota has historically dominated the volume car segment globally and it now is in a perfect brand position to dominate affordable EVs going forward, and to take market share from Chinese EVs.

Failure to do that will likely destroy Toyota’s own market share in the medium and long term. That is, in part, what its institutional investors are trying to tell the automaker: Reform and address the scandals at Toyota, end deceptive marketing practices around hybrid vehicles and embrace a long-term strategy to become the global leader in production of EVs, especially affordable ones, that consumers are demanding, now and in the future.

Toyota’s leadership, including Toyoda and CEO Koji Sato, can seize the opportunity to rebuild investor and consumer trust by rapidly catching up to other automakers on EVs. If they fail to do that, as Toyoda himself has indicated, the company and its shareholders may have to rely on those reforms coming from new leadership.

[This blog is an edited version of an article submitted to Automotive News which was published on 24^th October 2024]

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