Insight: Toyota doubles down on its hybrid bet in India

Aisin

22/08/2022 02:00

* Toyota teams up with Suzuki to crack Indian hybrid market
    * First new model is compact SUV, people-carrier to follow
    * Toyota aims to lower costs by making components in India 

    By Aditi Shah and Norihiko Shirouzu
    BIDADI, India, Aug 22 (Reuters) - Toyota is rebooting its
strategy for India, doubling down on a bet that emerging markets
will learn to love its hybrids, as long as the price is right.
    Renowned for its pioneering Prius, the Japanese carmaker has
struggled to sell large numbers of its hybrid Camry sedan since
its Indian debut in 2013, partly due to a sticker price of more
than eight times the annual income of a middle-class family.
    This time, Toyota is determined to do it differently with
lower-cost hybrids, said four company and industry executives
and suppliers who provided previously unreported details about
the carmaker's sourcing, production and pricing strategy.
    Central to the strategy is a drive to cut the cost of full
hybrid powertrains by making them in India, where the
automaker's factories are running well below capacity, and to
source key materials within the country. 
    Toyota Motor  7203.T  is also leveraging its cooperation
with partner Suzuki Motor  7269.T , majority owner of India's
biggest carmaker Maruti  MRTI.NS , to benefit from its low-cost
engineering know-how and mild hybrid technology.
    "The hybrid bet is a turning point. It will be a litmus test
for Toyota's future and success in India," one person with
direct knowledge of Toyota's plans told Reuters.
    A full hybrid can be driven for stretches on electric power
whereas mild hybrid technology only supplements the combustion
engine to help cut emissions. However, mild hybrids have smaller
batteries and cost far less. 
    Toyota's Indian strategy is at odds with global rivals
Volkswagen  VOWG_p.DE , General Motors  GM.N  and India's Tata
Motors  TAMO.NS , which are rushing to roll out pure electric
vehicles (EVs), and comes in the face of criticism from
investors for sticking with fossil-fuel hybrids.
    Hybrids are generally cheaper than EVs as they typically
have smaller batteries and are not reliant on charging stations,
important factors in markets such as India where customers are
price sensitive and charging infrastructure can be patchy.
    Toyota declined to share details about cost savings, future
product launches, car pricing strategies or production plans for
full or mild hybrid models in India.
    The world's biggest automaker told Reuters it wanted more
first-time buyers in India to own full hybrids as a first step
towards mass electrification, and that it would continue to
increase local sourcing and production to be competitive.
    
    LEARNING TO LOVE MILD
    Toyota's first new hybrid to hit India's roads will be the
Urban Cruiser Hyryder, a compact sports-utility vehicle (SUV)
which two people with knowledge of the plan said is likely to be
priced around $25,000 - less than half the price of the Camry. 
    That would pit it against popular midsize combustion-engine
SUVs made by Hyundai Motor  005380.KS  and Kia Motor  000270.KS 
in a fast-growing segment that makes up 18% of car sales in
India, the world's fourth-biggest auto market.
    The full hybrid Hyryder, however, will be 31% more fuel
efficient than the Hyundai and Kia diesel models, offering an
economy of 28 km per litre (65 miles per gallon), a key metric
for Indian buyers.
    To bring down the cost of the Hyryder, which will be sold by
Toyota and Suzuki, it will use a hybrid system originally
developed for subcompact cars, or one size smaller, according to
a Toyota engineer familiar with hybrid technology.
    By combining the hybrid system with a low-cost chassis and
some upper body parts from Suzuki, the end result is an SUV on a
par with or slightly cheaper than the Prius sedan, which starts
at $25,000 in the United States.
    "The high-cost complexity of hybrids is hard to overcome,
but it's a good start," the Toyota source, who was not involved
in the Hyryder's development, said.
    Savings have also come from working with Suzuki on designing
and developing the SUV, as well as leveraging the scale and
pricing power with suppliers of Maruti, which produced eight of
the 10 best-selling models in India in 2021.
    Even so, there is a cost differential of $3,400 between
Toyota's full hybrid and its comparable gasoline car in India,
said another source, higher than the typical differential of
about $2,000 for Toyota in most countries.
    To boost sales in India's price-sensitive market, Toyota
will also sell Hyryders with a mild hybrid powertrain supplied
by Suzuki, a significant departure for Toyota which has long
championed full hybrids.
    The shift is a recognition that Toyota has been unable to
bring down the cost of full hybrids to the point where they can
always compete on price in markets such as India, the people
familiar with Toyota's planning said. 
    It also shows how Toyota is altering its strategy for
different markets, depending on what buyers want and are willing
to pay.
    "As we come down the price points ... we hope to increase
our numbers as well as our market share," Vikram Kirloskar, vice
chairman of Toyota Kirloskar Motor, the Japanese company's
Indian unit, told Reuters. 
    Toyota's next hybrid for India will be a multi-purpose
vehicle, or people-carrier, expected later this year or early in
2023, two sources said.
    BUILDING IN BIDADI
    Another factor affecting the Hyryder's price is taxation.
India levies taxes of 43% on hybrids - on a par with gasoline or
diesel SUVs and far higher than the 5% tax on EVs. 
    Toyota is lobbying to get the taxes reduced, sources said.
The company said it wants New Delhi to provide support,
including taxation, to all green technologies that help India
achieve its goal of reducing fossil fuel and carbon emissions.
    So far, the government has not shown any interest in
extending its fiscal support beyond EVs.
    Making hybrid powertrains in India aligns Toyota with Prime
Minister Narendra Modi's drive to boost local manufacturing,
especially at a time when major car companies such as Ford Motor
 F.N  have left the country.  urn:newsml:reuters.com:*:nL1N2QJ0DX
    It also comes as India tightens fuel efficiency and emission
targets for carmakers. Selling hybrids will help Toyota meet its
regulatory requirements as credits they earn will go towards
offsetting the production of fossil-fuel vehicles.
    At the Toyota Kirloskar Auto Parts factory in Bidadi, an
industrial town near Bengaluru in southern India, the Japanese
automaker's new Indian strategy is already in motion. 
    A joint venture between Toyota, its parts affiliate Aisin
Seiki Co  7259.T  and India's Kirloskar Systems, the plant is
manufacturing E-Drives for the Toyota Hybrid System.
    The E-Drive ensures seamless switching between the engine
and electric motor, and shifting the manufacture of one of the
hybrid system's four key components to India is a major move.
    Toyota sees the Bidadi factory as a starting point for
building a local supply chain for the EVs it will eventually
bring to India.
    "We now have the core technology, whether it's an electric
vehicle or a hybrid," Kirloskar said.
    
    'IT'S A HUGE BET'      
    The plant can make 135,000 E-Drives a year on one assembly
line and could raise that to over 400,000 by adding two more.
    About 55% of raw materials by value for the E-Drives come
from India, two sources said. Capital equipment, such as tools
and dies, are also made there, though rare earth magnets for the
motors and some other components are imported.
    The cost savings on the made-in-India E-Drives are expected
to be in the "double-digits" in percentage terms compared with
imported systems, one source said.
    Toyota will also export them back to Japan for hybrid cars
built there, as well as to countries in Southeast Asia.
    "India is one of the lowest cost bases for these parts. We
are competitive on this," Kirloskar said, adding that he
expected about 40% to 50% to be exported, though that could
change depending on local demand.
    Of the three other main hybrid components, Toyota already
makes engines in India but the 1.8 kilowatt-hour (kWh)
lithium-ion batteries and power control units will be imported
for now. 
    Toyota is making the Hyryder at its under-used and revamped
plant in Bidadi, which has an annual capacity of 200,000 cars.
    More than 50% of Hyryder pre-orders are for the full hybrid,
though people aware of Toyota's production plans say this could
settle at 30% to 40% with the cheaper, mild hybrid becoming more
popular in India - where most cars sell for under $15,000.
    "Once numbers pick up, the cost will come to a point where
hybrids will become mainstream. This will lay the ground for an
eventual switch to fully electric or fuel cell vehicles," said
one person familiar with Toyota's plans. 
    "It's a huge bet but we know electrification is the future."

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GRAPHIC-Toyota's market share of Indian car sales     https://tmsnrt.rs/3aP96y7
GRAPHIC-Toyota's market share of Indian car sales     https://tmsnrt.rs/3yRyA5I
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 (Reporting by Aditi Shah in Bidadi, India, and Norihiko
Shirouzu in Beijing; Editing by David Clarke)
 ((aditi.shah@tr.com; +91-11-4954 8023, +91-11-3015 8023;
Reuters Messaging: twitter: @aditishahsays))