Why Toyota Is Betting on Hybrid Technology

Wharton’s John Paul MacDuffie and Michael Lenox from the University of Virginia discuss Toyota’s move to offer free patents on hybrid technology to other automakers.

Toyota Motor Corp. could score on several fronts with its move earlier this month to offer free licenses to its patents on vehicle electrification, especially hybrid vehicles.

Toyota’s announcement had two parts. One was that it will grant royalty-free licenses on nearly 24,000 patents it holds for vehicle electrification-related technologies. Second, it will offer fee-based technical support to other manufacturers developing and selling electrified vehicles when they use Toyota’s motors, batteries, PCUs, control ECUs, and other vehicle electrification system technologies as part of their powertrain systems.

Toyota hopes to advance the use of hybrid vehicles around the world. Its Prius was the first mass-produced hybrid car and contributed to the 13 million hybrids the company has sold over the years. However, Toyota has been slow to embrace all-electric vehicles, and has over the years emphasized that hybrid technology will be more effective than electric vehicles. It said in its press statement that it wants to promote the widespread use of electrified vehicles, “and in so doing, help governments, automakers, and society at large accomplish goals related to climate change.”

The company’s game plan may be to position itself in the right places to extract the maximum gains possible from its technology and to also secure its place as new technologies emerge. Michael Lenox, business professor, associate dean and chief strategy officer at the University of Virginia’s Darden School of Business, framed Toyota’s strategy against the backdrop of a secular transition to all-electric vehicles. “Toyota might be making this play in part to leverage the assets they already have in hybrids as that technology shifts.” It may also want to sell excess capacity in that hybrid vehicle technology to others, especially in China, he added.

A transition to all-electric vehicles would occur in the battery-powered electric and fuel-cell platforms. Toyota has publicly stated that it is betting on fuel cells, Lenox noted. The company has already offered 5,680 patents related to its fuel cell electric vehicles since January 2015. Its latest move “might be in part to try to win a standards battle as we move forward with 100% electric vehicles,” he said.

As automakers like Tesla and BYD (Build Your Dreams) are taking the lead in battery-powered vehicles, Toyota’s move “may be an attempt to try to bring fuel cells more into play than they currently are,” Lenox said. In May 2015, Toyota and 10 other companies set up Japan H2 Mobility, a joint effort to set up hydrogen stations throughout Japan.

“I’m pretty confident that Toyota’s knowledge of this technology is deep enough that they can bring electric vehicles to market as quickly as they want to.”–John Paul MacDuffie

John Paul MacDuffie, management professor at Wharton and director of the Program on Vehicle and Mobility Innovation at the Mack Institute for Innovation Management, read Toyota’s free-licensing of hybrid technology as a way to also monetize it as much as it could. “They are leveraging something that they’ve already got in the bag, which is undisputed dominance in hybrids,” he said. “And why not see if they can get some more leverage out of that by selling the components, selling some consulting services, et cetera?”

MacDuffie agreed that alongside, the company is also securing its place in fuel cells. “Toyota thinks fuel cells are the more promising future technology, and hybrids are the transitional technology,” he said. “There’s no other automaker I can think of that’s as bullish on fuel cells as Toyota, but certainly others are looking at it as well.”

Lenox and MacDuffie discussed the business strategies behind Toyota’s free licensing of hybrid vehicle technology on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

Toyota has been bullish also on hybrid vehicles, but it is not taking chances with how the market seems to be shaping up for all-electric vehicles. “Toyota has had a genuine belief that hybrids are a better transitional technology from internal combustion to whatever their future is,” said MacDuffie. “They went on record for a while, fairly boldly, to say that they thought fully electric, battery-powered vehicles were not ready for prime time – that there just were too many ways in which they weren’t going to provide everything that customers wanted.” Jim Lentz, CEO of Toyota North America, had told the Automotive World News Congress in Detroit this past January, “I think we’ve overstated our belief EVs will take over the world,” according to The Detroit News.

However, the company has since modified its stance on full battery electric vehicles, and is partnering with Subaru Corp. to put a battery electric car on the market by 2021. Plans include a Europe launch of electric SUVs and vans, according to a report in Automotive News. MacDuffie attributed that apparent change of heart to “the surge of interest and competitor action” in that space. He thought Toyota was well prepared for the electric vehicle market. “I’m pretty confident that Toyota’s knowledge of this technology is deep enough that they can bring electric vehicles to market as quickly as they want to.”

Hybrids vs. Full-electric

Lenox felt Toyota should have enough reason to worry about the threat to its hybrid vehicles from electric vehicles. “The value proposition for electric vehicles can be quite strong because [of what] they offer in terms of performance and acceleration that maybe adds value even beyond just the cost,” he said. “It’s not clear to me what the advantages of the hybrid over an electric vehicle are.”

“Toyota might be making this play in part to leverage the assets they already have in hybrids as … technology shifts.”–Michael Lenox

Toyota should be worried also because electric cars are getting cheaper to make. “They are simple machines – they’re basically a battery and an electric motor,” said Lenox. “The cost element is driven by the battery price. As battery prices have come down greatly in the last year or so, there is the potential there that just swamps the hybrid market.”

MacDuffie predicted that it is too early to write off hybrid vehicles, and that they will continue to see demand in the foreseeable future. He went on to evaluate the pros and cons of hybrid vehicles versus battery electric vehicles. Hybrid vehicles involve “a more complicated design,” and that is one reason why many other automakers did not go that route, he noted. Toyota, however, had mastered that technology and figured out how to build it at scale, he added. “They’ve figured out how to take it out of just one branded product – the Prius – and put it in pretty much their whole product line.”

Electric vehicles, on the other hand, haven’t seen sufficient consumer demand as yet, MacDuffie said, and pointed to a bunch of hurdles there. Even as costs have fallen thanks to cheaper batteries, “there’s got to be a convenience factor or some offsetting performance benefit for people who aren’t already enthusiasts about the technology.” Charging battery electric vehicles may not be an issue for those who live in the suburbs and have a garage, “but it’s a big deal in a lot of other situations,” he pointed out.

“So, I’m not quite as optimistic … about seeing a surge in demand for EVs,” MacDuffie concluded. “If you bring them to market and they don’t sell, then it’s going to be tough for these companies to keep on that ambitious timeline. I predict hybrid sales will stick around for a little bit longer – not growing, but providing that transitional product for quite a while.”

Meanwhile, Toyota continues to be bullish about the U.S. market. Last month it raised its planned investment in the U.S. from $10 billion to about $13 billion through 2021. Those investments will go to make new car models and to expand capacity at existing plants.

“Toyota tends to be slow getting going on things. But they can execute very quickly when they decide it’s necessary.”–John Paul MacDuffie

Although those plans include manufacture of its Lexus and RAV4 hybrid vehicles, Lenox said they also underscore the continuing importance of the market for gasoline-powered cars. Clearly, it will be a while before electric vehicles can truly edge gasoline-powered vehicles out of the fast lane. “As optimistic as I am on electric vehicles, this isn’t going to happen tomorrow, right?” Lenox said. “There is going to be a transition phase here that will last years – [even as] we are seeing a decline in hybrid sales.”

Will Toyota’s Strategy Work?

Will Toyota’s hybrid tech offer attract many takers? MacDuffie said it is not clear that the company will see “a rush to buy these components.” However, a potential market could be China, where the government’s high priority on electric vehicles may accommodate hybrid vehicles as well.

Toyota did not have a big success with its 2015 offer of some 5,680 patents related to fuel cell electric vehicles. “My guess would be that since other manufacturers aren’t doing a lot with fuel cell – at least visibly – they haven’t picked up on it in a big way,” said MacDuffie.

Tesla, too, offered to open up the patents for its charging technology a couple of years ago, MacDuffie noted. “It was certainly a bid symbolically to look like a tech company that pursues open standards and wants to advance the future of this technology for everybody. That certainly also looked like an effort to get a jump on the standards for charging in the future. The more the people that would adopt Tesla’s charging technology, the more Tesla would kind of control where that charging standard would go in the future.” However, the impact of that move on “the general technology competition” is not clear.

“As battery prices have come down greatly in the last year or so, there is the potential there that just swamps the hybrid market.”–Michael Lenox

In any event, Toyota has more to gain and little to lose with its latest free tech offer, according to MacDuffie. “If they can in any way increase public willingness to move beyond internal combustion, and if [the public views] hybrid as a first step, that helps Toyota,” he said.

Many of the hybrid tech patents Toyota is offering are old and their usefulness may be limited, MacDuffie suggested. Some of them could be relevant to a purely electric vehicle because some of the components are probably usable in either format, he said. He also doubted if all the roughly 24,000 patents on offer relate to the hybrid feature of the drivetrain, the mechanism that transmits power to the driving wheels in a car.

Overall, MacDuffie said Toyota is well positioned as the market evolves. “Toyota tends to be slow getting going on things. But they can execute very quickly when they decide it’s necessary. So, if battery electric really took off, Toyota could put some models on the market that would be quite competitive. They might stumble for a while, but they would not be out of the game.”