PLANO, Texas — Toyota Motor North America Inc. CEO Jim Lentz has mapped out a strategy for the automaker's regional operations that will keep the Toyota and Lexus brands active in sedans as the company focuses on spreading fuel-saving hybrid technology across its lineup.
The strategy means that Toyota is taking a decidedly on-brand wait-and-see approach to full battery-electric vehicles, even as it settles into its new corporate home here.
Meanwhile, Lentz says growing trade issues present the biggest threat to the North American auto market. He said the overall market remains healthy, if in a slight decline, but trade issues could quickly spiral and hurt consumers and dealers combined.
Lentz, 63, spoke to Staff Reporter Larry P. Vellequette and several Automotive News editors in March. Here are edited excerpts.
Q: Toyota has settled into Texas now, and this seems like a very challenging place to sell battery-electric vehicles. What does it take to successfully sell EVs in a market like this?
A: Provided that you can charge in 20 minutes, and you can go 400 miles on a charge, it might work. But I think that's the way it's going to be for the general population anyway; people want vehicles with range of 350 or 400 miles, and they want to be able to refuel — whether it's hydrogen or gasoline or electricity — in a relatively short period of time. And once technology can do that, without a big premium paid, I think you'll see people even go electric here.
Given the lower maintenance requirements, will dealers market EVs with the same zeal that they do internal combustion vehicles?
I think dealers steer vehicles to what customers want to buy. So if customers want to buy EVs, dealers would sell EVs. The interesting thing about the revenue stream of EVs is, I'm not convinced that EVs don't have a revenue stream from a service standpoint. They need tires; they need windshield wipers; they need shocks — there is maintenance required over time. They may not need oil changes, but if consumers want them, they're going to buy them. I just don't believe that there are dealers that believe in selling fossil fuel vehicles and, philosophically, that creates the inability to sell an electric vehicle. I just don't buy that. Dealers would sell horses if that's what people wanted. That's what dealers do. They make a market for used cars. We believe in the franchised dealer model.
How does Toyota's hybrid strategy play out as the industry moves more steadily toward EVs?
Part of it is, hybrids in the past have always been associated with Prius. It's always been about economy. As that changes, as with the new hybrid RAV4, where the hybrid powertrain is fun to drive; the new Corolla, where the hybrid powertrain is fun to drive — I mean, today the industry is roughly 3 percent hybrid, and we are roughly 9 percent. That 9 percent for us is going to move to 15 percent by 2020, because vehicles like RAV4 are going to be 25 percent hybrid. Corolla will be a larger percentage hybrid; Camry is already a larger percent hybrid; RX, Highlander, right on down the line. We think that hybrids are going to be really our mainstay because it's a way for those that want performance to get performance and for those that want to get much better fuel economy to get much better fuel economy without making that step to a pure EV that is quite a bit more costly, and you have range anxiety and other issues to go with it.
Toyota has offered battery-electric vehicles before and withdrawn them. Will Toyota have a full EV to retail in the future?
At some point in time. I think, to be frank, the EV company that we have, their efforts are really geared more towards China and Europe. As Europe moves further away from diesel and to electrics, and China is already moving toward electrics, I think you'll see our first EVs come to those markets. Eventually, when we think there's a business for EVs, we'll have EVs. The good news is, they will have been developed for other markets, so we'll be able to adapt them rather quickly for the U.S. But right now, the tough part about EVs is, there's just not much of a business for EVs.
That seems to indicate a huge collision is coming.
As technology improves, and new batteries come out — solid-state batteries, whatever that innovation may be — at some point, when EVs and ICEs are in parity in terms of price, that's when things change. But until that point, if people are paying thousands of dollars in premium for EV, and fuel prices are still $2.50 a gallon? I think it's a tough sell.
Do you have a guess on when that will occur?
I don't, because I think it's going to take multiple generations of new batteries to come out, provided fuel doesn't spike. If fuel was $6 a gallon? This is a totally different story.
What's your assessment of the market as we emerge from our fourth-straight year of 17 million sales, with clouds allegedly on the horizon?
We think the market is going to be 16.6 to 16.8 [million in 2019], although you're talking to someone who predicted 2018 was going to be down 400,000, and it was actually up 100,000, so my crystal ball isn't as good as it used to be. But I think we're toward the end of this run of 17 million-plus, and that's not a bad thing, necessarily. We would take a mid-16s market any day of the week, and we don't see a big drop coming in the marketplace. We think it's going to be in the mid-16s range for some time. We're not seeing a big drop-off back into the 13s or 14s. The market's driven by interest rates and consumer confidence. And right now, consumer confidence is pretty good. The economics are pretty good, and if interest rates stay low, I think that bodes very well for a good industry. We have to see what happens with trade; trade can derail that if we're not careful. Affordability can be driven by vehicle costs going up, either through vehicle inflation, regulation or other things. So, if all of a sudden, the average price of a car goes up $1,000 or $2,000, my forecast changes rapidly.
Let's talk about trade. Where would a potential Section 232 tariff action most affect Toyota's lineup?
Lexus. Luxury gets hit pretty hard. But even something like Camry, which is one of the most American-made cars, goes up about $1,800. Tundra? I think it's $2,800. Sienna? About $3,000, assuming a 25 percent tariff. Cooler heads will prevail, but we've got to get there.
In the end, people look at the importance of the auto industry, and I don't think anyone wants to take action that's going to reduce vehicle sales by 2 million units, and the impact that would have on employment. I believe, in the end, rational decisions will be made.
A couple years ago, you sounded fairly convinced that no one in their right mind would touch NAFTA. Now, you're hoping the United States-Mexico-Canada Agreement doesn't fall through, but obviously, that's going to cause some pain, too. What happens with USMCA?
In a perfect world, we like the way NAFTA was. USMCA is viewed by many as an improvement to NAFTA, but it's something we can live with. It's just getting hung up in politics now. You've got Congress, that doesn't want to give the president a win, and the president is likely going to be unwilling to budge and change it. We'll see, probably about midsummer, when tension gets ratcheted up for movement, what happens. That's going to be the interesting thing. We'll see how tempers run this summer.
In terms of product strategy, you've repeated that you're staying with sedans for the foreseeable future. But would you rather be selling the RAV4 instead of the Camry?
Part of it is that there is still demand for sedans. If we get to the point where our customers say that we don't want to buy sedans anymore, obviously, we'd have to look at that again. But I'm a firm believer in the strategy of garage-mates. So, if I can get a Camry into a garage next to a competitor's SUV because that competitor walked out of the sedan business, I've now got a chance to sell them an SUV next. So it's pretty important for me, if consumers still have some demand for passenger cars — and we think that the demand is 5 million — I'd rather be there to get my chances to be able to sell them an SUV down the road.
Is the U.S. a viable export base for Toyota?
It can be, but you can't just turn export on and off. We have to compete for our export business. I have to make sure that I'm competitive in terms of my cost if I'm going to ship to New Zealand or Australia. If, all of a sudden, my costs start ratcheting up for whatever reason, eventually, New Zealand is going to say, "I'd rather buy mine from China." The quality is going to be the exact same. That's one reason that we're making this $13 billion investment.
It's really about making sure that we are competitive with any plant in the world, so that we could possibly export more in the future. We're exporting to about 30 countries today, and in time, we'll continue to export to more. But I don't want to have that as my lone escape valve if I become overcapacitized here.
