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Toyota and Honda take separate paths toward carbon neutrality

Analysts split over feasibility of hybrids versus EVs amid global electric push

While Toyota will continue to focus on hybrid and plug-in hybrid vehicles, Honda says it will only launch EVs and fuel-cell vehicles in 2040 -- becoming the first Japanese automobile company to announce the phaseout of gasoline-powered cars. (Source photos by Konosuke Urata and Getty Images)

TOKYO -- Recent earnings conferences and announcements from big Japanese automakers have unveiled sharp divergences in their expected roads to electrification, with differing emphases on hybrid technology amid tightening global regulations that mostly prioritize electric vehicles.

Toyota Motor aims to sell 8 million electrified vehicles in 2030, with three-quarters of them hybrid or plug-in hybrid vehicles and the rest relying on batteries or fuel cells. The Japanese auto giant argues that hybrids will continue to contribute to decarbonization given challenges to EVs ranging from high cost to a lack of charging stations.

Honda Motor, meanwhile, said in April that it will sell only EVs and fuel-cell vehicles by 2040 -- becoming the first Japanese automobile company to announce the phaseout of gasoline-powered cars, putting itself in line with rivals abroad.

Analysts are divided on which approach is more realistic and feasible, although the two companies are both aiming for carbon neutrality by 2050, a goal the Japanese government previously announced.

Toyota expects an operating income of 2.5 trillion yen ($22.9 billion) for this fiscal year through March 2022, up 13.8% on the year, mostly unaffected by the chip shortages that weigh as a threat to the industry. Honda, which believes it will offset the negative impact of the chip crunch by the second half of the year, forecasts an operating profit of 660 billion yen, unchanged year-on-year, helped by a series of cost reduction efforts.

As for which decarbonization effort to invest in, "Toyota is building up a foundation of various technologies as an automaker and keeping its mind flexible," Koichi Sugimoto, senior analyst at Mitsubishi UFJ Morgan Stanley Securities, told Nikkei Asia. "It is a question of how to respond to waves of volatility in the car industry, as trends in technology and public opinion in the future remain unknown."

Indeed, Toyota stressed it is not limiting its ways to achieve net zero emissions. "What we aim for is not electrification, but carbon neutrality by 2050. ... At this stage, the most important thing is not to limit technology, but to attempt various options," said Jun Nagata, Toyota's chief communication officer, on May 12 at its earnings conference.

The company, which is known for opening the market for hybrid vehicles in 1997 with its Prius, says it has been focusing on providing cars equipped with various powertrains -- hybrid, plug-in hybrid, fuel-cell and electric. Toyota and its domestic peers have made Japan the world's top market for electrified vehicles, in the broadest sense of the term. The company said in 2019 it would sell over 5.5 million such vehicles by 2025, pushed mainly by hybrids.

Besides this full lineup of electrified cars, Toyota is also investing in carbon-free engines that burn hydrogen instead of gasoline. In April, the automaker announced it will enter a vehicle in motor racing powered by a hydrogen engine.

Toyota's expansion of technologies for carbon neutrality could be explained by its skepticism on solely relying on electric vehicles. Beijing was forced to extend subsidies on new-energy vehicles such as EVs after sales slid in 2019 following a lowering of subsidies. The European Union witnessed a rise in EV sales in 2020, but many believe this is mostly because of government subsidies and regulations limiting carbon emissions.

"Toyota remains cautious of a scenario in which EVs sell like hotcakes," said Sugimoto, noting that the automaker has reiterated that it is customers who choose what technology they want. The car industry has faced ups and downs with many technological breakthroughs -- including diesel engines, whose buzz disappeared after Volkswagen's emissions scandal -- and Toyota is poised to work on EVs if customer demand shifts to this technology, Sugimoto said.

But Sanshiro Fukao, senior fellow at Itochu Research Institute, believes Honda is more realistic in its green approach and in tune with the times, as decarbonization through EVs is becoming a premise of current international moves toward reducing emissions.

Honda CEO Toshihiro Mibe has come up with a strategy for carbon neutrality that is more radical than Toyota's. (Photo by Tetsuya Kitayama)

"It is a question of whether or not carmakers can deal with overseas political regulations," argued Fukao, pointing out that the European Union is set to approve an assessment of the total carbon dioxide emissions of battery manufacturing processes. The bloc is also preparing to introduce a so-called carbon border adjustment mechanism that would raise the cost of imports from countries considered to be doing too little to reduce emissions. The U.S. is considering following suit.

Honda is moving ahead to mitigate this burden -- which could eventually affect export from Japan. Aiming for zero environmental impact at the entire product lifecycle basis, the automaker is committed to material recycling including batteries, CEO Toshihiro Mibe said at his inaugural news conference on April 23. Its strategic alliance partner CATL in China, for example, is constructing a plant in Germany which is likely be able to deal with the lifecycle assessment production regulated by the E.U.

Although Fukao says it is obvious that hybrid cars will make a profit in the coming five years, Toyota President Akio Toyoda's argument to not rush EV sales could be "out of line with global standards."

Toyoda, the chairman of the Japan Automobile Manufacturers Association, stressed in April that an outright ban on gasoline-powered cars would only limit the range of options and that the goal is "to be carbon-neutral, not to promote the use of EVs and FCVs. ... We should not make mistakes with such orders."

He also requested the government to shift its energy mix to renewables so cars will be made and charged with "clean" energy, as Japan counts on fossil fuels for 75% of its domestic power, excluding nuclear energy.

Honda CEO Mibe said at the news conference that the automaker will start aiming for vehicles that are carbon-free in their operations, whatever the government's energy mix for generating electricity may be.

"In order to become carbon-neutral in 2050, carbon emissions from new cars sold in 2040 must be reduced to zero, if we assume that new cars are owned for a decade," he said. "Currently, EVs and FCVs can achieve zero emissions," argued Mibe, adding that more options might come up if new technology is developed.

But this goal still seems far away. Honda launched its first mass-produced EV, a model called the Honda e, last year in Japan and Europe but plans to sell only 10,000 units in Europe and 1,000 in Japan a year -- a tiny fraction of the company's unit sales of around 5 million expected this fiscal year.

Fukao also said that, considering the usual automobile ownership cycle, drivers will eventually have to replace their hybrid or other cars with EVs, as "there will be no resale price [for anything other than EVs]. ... Automakers are under pressure from foreign governments so much that it's as if they have to stop doing business if they don't sell EVs," he argued.

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