Toyota and Honda’s EV push improves their outlook

The credit profiles of Toyota Motor Corporation (A+/Stable) and Honda’s Motor Co., Ltd (A/Stable) are supported by the acceleration in their EV strategies, which will further enhance their competitiveness, says Fitch Ratings.

“Pressure on earnings and cash flows from increased spending on electrification is mitigated by their superior financial flexibility compared to peers, which could enable the Japanese carmakers to move to the front in the race for leadership in EVs,” Fitch says.

“Risks to their competitiveness could arise from delays in their electrification through a fall-back to a ‘wait and see’ strategy, which could allow existing rivals and new entrants in the EV space to outpace them.”

Honda’s new chief executive Toshihiro Mibe has announced that by 2030, the ratio of battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs) of its unit sales in major markets would be 40%.

The company plans to increase the ratio to 80% by 2035 and to 100% globally by 2040.

Toyota signalled its intent to position itself in the growing EV market with its April announcement on the introduction of 15 EV models and expansion of the total number of electrified models, including EV and hybrid models, to 70 by 2025.

Fitch sees Toyota’s and Honda’s EV strategy as slightly less aggressive than those of some Western rivals despite the recent announcements.

Volkswagen AG (BBB+/Stable), for instance, aims to generate 50% of its sales in China and the US from fully electric models by 2030, and 70% in Europe.

The Japanese carmakers’ more conservative EV targets are consistent with their more cautious approach to capital allocation, Fitch adds.

“Spreading risks by maintaining competitiveness in hybrids to bridge the transition to full electrification makes strategic sense, in our view, given challenges such as the low profitability of pure EVs and uncertainty related to the lack of charging infrastructure.

“We believe the risk of Toyota and Honda falling behind Western rivals is limited as both have laid the groundwork to further accelerate their EV strategies through consistently high investment, including throughout the COVID-19 pandemic,” Fitch explains.

“Ample financial resources and strong technological capabilities provide sufficient flexibility for both to capture growing demand without risking deterioration in their financial profiles.

“For instance, e-TGNA, Toyota’s platform for full EVs, is on a par with Volkswagen’s MEB platform and can support a more aggressive roll-out of EV models than currently envisaged by the company, if necessary.”

Fitch considers it unlikely there will be any delay in the implementation of both companies’ EV strategies.

“We see the greater threat from growing competition.

“Apart from traditional carmakers, new entrants are pushing aggressively into the EV space to capture growing demand amid increasingly strict environmental regulation and growing consumer awareness.”

Fitch says it is paying particular attention to Chinese EV companies “as we believe that China will evolve as the most dynamic market for EVs, where future winners and losers in the EV space will be determined”.