Toyota vs. Tesla
A classic title like Ford vs. Ferrari, but a story more about competing business plans than machines.
There is a storyline around Fuel Cell and Battery Electric Vehicles that presumes the contest is over and batteries have won: “Toyota should have known years ago; we’ve been telling them for decades.” This storyline makes us feel smarter than that big international company but is the reality here as clear as we’d like to believe? Last year the story was “Why didn’t they switch a decade ago they are hopelessly behind!” and this year “Why didn’t they switch a decade ago, look their whole future roadmap is electric!” and lost over that passage of time is the bit where they were not that far behind at all. In a year they’ve got a solid-state battery technology to talk about and whole portfolio of electric cars. Toyota is also adopting hard to copy part-consolidation in manufacturing, a notable Tesla innovation that is significantly easier in a vertically integrated manufacturing chain. Toyota’s investments in hydrogen fuel cells seems to have not delayed their efforts as much as the US Big 3’s persistence with pickups, SUVs, and gimmick vehicles intended to directly harvest subsidy.
What else do we believe to be easy to see from the outside and still not quite the story? The number one candidate here is the opening of the super-charging network to outside brands. Why would Tesla be opening their super charger network, a significant barrier for EV upstarts to overcome, if the dominance of battery electric vehicles was assured? Wouldn’t Tesla be duty bound to maximize their share of that dominance via the competitive advantage of their charging network? The conventional wisdom here is that Tesla is harvesting free money, government subsidy to build out their charging network. Sure, $3.5B would be a lot of free money for new charger infrastructure, but to put that into perspective it represents 2 weeks of revenue for Tesla’s current business. Over on the cost of that capital side, Tesla is sacrificing 10+ years of strategic moat and acquisition advantage in order to break into jail. When you become everyone’s charging infrastructure you win all of their customer challenges, while your rivals free-ride on your stronger offering and reputation. That’s a wildly lop-sided deal, and not in Tesla’s favor. That suggests we’ve missed something because the story doesn’t fit together that cleanly; Tesla must not be playing a zero-sum game with an easy winner that any outside observer could have called a decade ago. Let’s dig in to see why that is.
The story so far
The story of Fuel Cells and Battery based electric vehicles is part technology and part business, and neither side is as clearcut as folks who Monday morning quarterback this kind of stuff would like. This has implications for policy and investment, as well as for understanding this particular market and technology stack, because not knowing why something has happened is a sure way to arrive at the wrong rule for the right time. The problem with a spurious correlation isn’t that it fails to look useful when we’re reviewing past data; it is that we never know when it’ll stop working as we look towards the future.
What is the theory of dominance here? Why is this a foregone conclusion that Toyota was doing something so obviously counter to their own interests? Surely, they were playing for something other than last place?
Leading lights back in 2017, when Toyota and Tesla finished cutting co-development ties.
The Tesla (Battery) vs. Toyota (Fuel Cell) story isn’t just a technology story, the bigger part is the business contest. Indeed, sprinkling colorful hydrogen into your fossil fuel supply isn’t even the same story or line of research as the fuel cell efforts of Toyota. In 2000 we had a $1.3B hydrogen initiative that was captured by O&G and conventional interests and there is a real worry that we’ll see a repeat in today’s markets. But that’s not a Toyota story and it is unhelpful to conflate them. It was US and European O&G and Auto Manufacturers who captured the last hydrogen initiative and are pursing the current one fiercely (Ford with a recent hydrogen combustion engine patent is clearly, in a thermodynamic sense, on the wrong track). Neither Toyota nor Tesla are playing that particular game. We should all be able to accept that we’re looking at two different well-informed bets on the future of electric vehicles being pursued by two companies determined to set the terms of their respective futures.
The argument that Toyota should have swapped from Fuel Cell vehicles a decade ago isn’t really a fair critique. On the one hand, Toyota has had a long, but irregular, hedging position in battery electrics, first with Telsa directly then with their own announced battery electric program from… a decade ago. See, they already did the thing! Their fuel cell operations have just been better at hitting their technical milestones over the last decade; unsurprising as they’ve been working in fuel cells since the 90s, have a lot of experience there, and in-service reliability of fuel cell powered vehicles is very good. Like battery electrics, the drivetrain is electric and the source of electrons is electrochemical in nature. So, Toyota has a technologically viable solution to work with. On the Tesla side, we’re seeing even today that Tesla isn’t comfortable with the growth of the market and is willing to convert a personal advantage (their super charger network) into a class advantage available to all rivals in the EV category.
Battery electric vehicle dominance isn’t a done deal, we’ll get there in a second. Let’s back up a bit and fill this fuel cell story out, there is a lot to unpack.
The Toyota EU website still claims their long lineage of R&D in Fuel Cells, probably because circular economy and hydrogen fuels are even bigger there than in the US or Japan (all useful and relevant markets).
Toyota Fuel Cell Program
Toyota was in Fuel Cells in the early 90s and as a grad student in 2000 it wasn’t clear yet that batteries were going to get to viability faster than fuel cells (both were seeing initial deployments and fuel cells were already commercially deployed in busses). Ballard Power’s Fuel Cell busses boast industry leading durability and reliability, while the Proterra battery electric busses in King County are suffering reliability and range issues — a difference in engineering system maturity visible today. The first fuel cell was created in 1842 and the first battery in 1749, by contrast internal combustion engines are the youngsters showing up in 1860. We’re seeing engineering discipline rather than theoretic constraints in the service characteristics of the alternatives here. Hydrogen packs 140x the energy density per kg of a Lithium-ion battery, which is why it is appealing as an energy storage mechanism, but tends to escape if left alone. It turns out that hydrogen is really small and makes many containers brittle as it works its way right through the walls and joints. Lithium batteries got a reputation for starting car fires, but to be fair some luxury brands have similar reputations (looking at you Ferrari). Hydrogen has the Hindenburg in its past, so each technology has its own advantages and challenges, constraints, and advantages. No technology sufficiently popular escapes incidents and legacy.
With early deployments, establishment backing, and a Hydrogen Fuel Initiative coming out of the US Gov’t (nearly the same size in 2000 dollars as the recently announced Hydrogen Hubs)… fuel cells looked to be on the way to inevitable in the early 2000s.
Things played out differently, but “Why didn’t they set aside a 30-year program in a viable technology?” is not the same question and not the no-brainer it looks like in hindsight.
By 2005 things had already moved significantly and batteries demanded at least a hedge position from Toyota — why they stepped back from their Tesla partnership and erratically supported their own internal investigations is a promising line of inquiry. I think just being committed for decades to an alternative solution is enough of an answer to that question — and we could also go find a compelling argument in supply chain dependencies for battery materials if we were so inclined. These considerations and the observation that apart from the source of the electrons there isn’t much difference between a battery electric and a fuel cell electric vehicle, suggest that Toyota’s course of action wasn’t really that far from what hindsight would deem viable all along. It becomes a fight over poor investment optimization and a missed play at market dominance rather than a conversation about missing the last boat to safety. That last boat to safety argument is a lot more fun to have than a carefully parsed contrast between a pair of intertwined and viable paths to success.
Hydrogen Fuel Cells were what the staff and organization built at Toyota were good at, understood, and had collectively bet on. They may have missed the boat on manufacturing disruption, but by and large Tesla was trying to copy the Toyota way and hadn’t started radically reducing the number of parts per assembly yet (Toyota with a network of suppliers would be hard pressed to adopt that innovation without partner protest — though there are early signs that they are indeed bringing some of the Tesla manufacturing innovations back into their own manufacturing processes).
It looks like the leadership at Toyota just hoped and planned to get the fuel cells story sorted out before the market shifted dramatically. Then the economic crash of 2008 bought them some time (and increased their anchoring) and by the time we’re into the last decade where folks are starting to wonder if the dream is dead, no one at the very large company is ready or able to take action on the growing realization. Showing leadership in an enterprise is hard, there are many examples of failed calls to change and even the successful efforts often look like failures. Toyota engineers had a product that worked, was reliable, and just wasn’t seeing much adoption in all the markets they’d like it to succeed in. There wasn’t a technology failure to point at and they had a steady stream of government generated demand and support for continuing this line of investigation. Why would you change that?
The Supercharger Network Changes that.
It turns out Tesla figured something important out about the traditional OEM partnerships and there was a mis-alignment between the new technology (electric vehicles) and the existing filling stations. You probably just read that sentence and said “DUH,” but bear with me here. Filling stations, of some sort, were required for any electric vehicle to be a replacement for the gas car, filling stations were already committed to filling gas cars made by Toyota, filling stations got their products from the O&G industry that was looking forward to continuing the supplier producer relationship with Toyota and Toyota’s customers far into the future. Yet, despite all that alignment of long term interests no gas station had an incentive to make the immediate investments that would upset their current low margin business. For the O&G value and supply chain hydrogen was an ‘eventual’ story rather than an urgent story, so they said “Of course Toyota we will provide for your new fleet what we provide for your current fleet, dear partner,” but they meant at some unspecified point in the future. This was the mis-alignment between parties, misalignment in time and urgency.
Tesla went hard at building out their charging infrastructure; this was the inflection point in the early 2010s. Toyota reacted 2 years later, realizing they needed to build their own hydrogen refueling infrastructure. This was not done at the same scale (because they tried to work with their partners, who dragged their feet while Tesla had no partners and had to own the whole story — and therefore got to set the timeline), Tesla accelerated build outs and started running away from Range Anxiety FUD.
In hindsight, it is pretty clear that Toyota could have built out a refueling network a decade earlier and slammed the door on battery electrics. We’d all be driving fuel cell cars and not thinking about it much. Toyota had partnerships and promises from the existing industry to support their new hydrogen ventures, but those promises didn’t share Tesla’s urgency to followed through. In Japan only 170 of 900 planned stations have been built and there are only 55 hydrogen fueling stations in California (all built in the last 8 years). Tesla rapidly expanded their network and started to run away on range anxiety (there are 14,000 public charging stations and 391 super charging stations in California, with many more charging ports available).
For too long Toyota didn’t see this as their problem, they make cars and have a rich supply and support network around that core competency. Automakers have always had a lot of support from the neighboring industry, policy, and communities around them, from their tradition and partition of responsibility this wasn’t even in their area of responsibility. Customers end up not caring about who provides the service, only if the whole service is provided.
That is where the hydrogen fuel cell vehicle lost, it wasn’t about making a viable car but providing a viable “moving around from place to place” solution and that includes the support infrastructure like roads and refueling (this is also why we don’t have catenary-pantograph electric vehicles — again we see that even better electric technology, for most consumer applications, deployed in busses and trains). It was the in-house drive to build Tesla’s own charging network that highlighted the difference in incentives between Toyota and their mutual support ecosystem. O&G companies wanted to encourage Toyota to continue creating vehicles that burn oil and gas, not force their hands into a more expensive hydrogen build out. Tesla exploited this slowness to act and turned the tide between fuel cells and batteries.
The ubiquity of places where you could use the vehicle that made the difference in the market between battery and fuel cell electric vehicles (also ruling out a silly pantograph proliferation). That’s my description of the (now well known) inflection point in the long-running electric vehicle energy storage contest. It took a while for the sales numbers to move dramatically and for Toyota to realize their interests and the interests of the fuel suppliers and support network of their ICE business were not so fully aligned to their new hydrogen future. We can look at it now and see battery vehicles running away from fuel cell vehicles — but I’d caution that all electrics are still a small portion of the market and a lot can still happen between 5% and 95% market share.
Is that all we can expect from this charger network investment? Can it do more?
We are currently witnessing a big bet around the charging network and it isn’t being made because dominance is assured. The supercharger network is a material moat against other battery electric vendors; why should Tesla give it up now? This is a big puzzle for me. They could be trying to put the hammer down on China. They could be trying to put the hammer down on rivals in the US to take the recharge market entirely for themselves (is that even a good business?). I think it is likely more to do with the core business, Tesla may finally be demand constrained vs. manufacturing capacity constrained and recognize the need to invade the vehicle market broadly (not just win the kooky early adopter EV market).
Ubiquitous charging helps all battery electric vendors and not just Tesla. I view this as an attempt to close the door to rival technologies and approaches, not plug formats or other BEV vendors but Gasoline, Diesel, and Hydrogen energy sources (also, ammonia, methane, compressed air, whatever). This is an attempt to run the table of vehicles and scoop it all into the battery vehicle market.
This naturally suggests that the door was still open. If Tesla thought the door was still open, why would we disparage Toyota for not abandoning their own viable path forward, one that could lead to market dominance and exclusion of battery-based rivals? They have working vehicles and fuel cell vehicles have a good reliability track record in service. Could they have staged a rally and taken back the initiative? I think so, I think they could have won a decade ago and it was only the division between partners that slowed their ability to react. Toyota is adopting modularity and part consolidation, recent Tesla innovations that break existing distributed value chains — this suggests that Toyota can still move quickly. It also suggests that it can only move quickly when dealing with its business and suppliers, not with the support infrastructure their business depends on. The Toyota way would identify that as a potential bottleneck in need of a deeper feed-in queue, if the engineering departments got to run the business departments for a day.
Why might battery vehicles be vulnerable despite all the wisdom behind their inevitable dominance? It is still early days for the BEV market. While the sales share for battery vehicles has grown from 4 to 14% across the three years from 2020 to 2022; that is the new sales and not the total rolling stock. There is a lot of old stuff out there still working and a lot of opportunity for rivals to move in with a replacement in the future. Ketan Joshi just shared some stats today from Norway where EV sales capture 80% of new vehicle sales, well advanced from the North American story, but account for only 22% of kilometers driven — the bad side of a pareto relationship. It stands as a reminder that rates are nice but levels matter too. We can see that the indicators are strong for a future of BEVs in Norway, but the old king is still stumbling around and potentially dangerous. In any event, let’s hear it for Scandinavian administrative data! Back in North America it should be pretty clear that it is still game on with a lot of work to do for the upstarts like BEVs seeking to displace… displacement.
Not only are battery electrics still a small share of the total global rolling stock, their supply chains are not well established. Or more to the point, there is one nation currently out of favor holding a key position in nearly every key component of those supply chains. We have apparently decided that deep dependency on China isn’t any longer our collective path to prosperity and peace and the former tight integration between friends (associates) has become a liability between rivals. The charging network could be sacrificed here to encourage NA growth in alternative supply chains, to isolate the single point of dependency and widen the Battery EV market to the point that any market share loss to a rival is more than compensated by growth in market penetration for the battery segment into all automobiles. I’m not sure, this is in real time, and a pure ego flex could also explain giving up a position of strength vis a vis rivals. It just feels like this was a well-established advantage and it is being spent with purpose at this moment. The general vibe is that now is the time to claim victory and slam doors to alternatives, but this might be an effort to create that outcome by spending the advantage of the charging network to convert every BEV into a Tesla Car made by whatever brand you happened to purchase. Like Kleenex.
I think this is meant to sweep away alternatives and dramatically accelerate replacement of ICE vehicles with battery electric vehicles. Any other possibilities are just that. The charging network was identified as a key element of the total customer experience 11 years ago, it still is. Now that Tesla is in a position to take advantage of capturing greater demand, they are giving up exclusivity in order to push everyone, including rivals, into adoption of their preferred format to remove the hassle for anyone considering a swap into electrics for the first time. They are going after the current ICE market broadly now and that’s a big enough fight for a big enough pie that they don’t see the value in keeping up this defense enabling a larger share of a smaller pie.
How much time has really passed?
We’ve had a bunch of new battery chemistries come through recently, more will be on the way. Electrons are super easy to transport, while hydrogen is a bit more complicated. Not all fuel cells require pure hydrogen as a feedstock — higher temperature systems are more robust, more efficient, and capable of self-reforming more complicated fuels. That fuel flexibility is super powerful in terms of adoption and transition, now instead of depending just on green hydrogen one could work with other things, like circular origin liquid fuels. That’s really a concern for larger applications, but plausible that forced transition in shipping carries through to personal vehicles.
Think of that whole apparatus of fossil fuel extraction, processing, and distribution brought to bear on maintaining the status quo via the easy doubling of efficiency from moving from combustion to electrochemical power generation. If you thought the Natural Gas as a bridge fuel stuff was annoying this would lead to a rude escalation of that delaying tactic and could conceivably reverse the pull of battery electrics entirely. SUV cruising urban school zones are an unforced error, same with 7,000lb BEVs, why not gasoline fuel cell vehicles too?
And at the end of the game there will still be niches where the fuel availability and material density concerns favor non-battery solutions. Ships, trains, heavy construction, trucking, and aircraft are all places where battery electrics aren’t necessarily the clearest path forward, and some applications favor oddball technologies that bring a substantially longer duration fuels with them into domains where local resupply is challenging (e.g. deep space or extended undersea deployment). Though we are probably completely beyond fuel cell powered wristwatches and portable consumer electronics with recent battery advances. Batteries have claimed the small scale, liquid fuels still hold sway over the large scale. The personal vehicle is right in the middle and while the growth is currently favoring BEVs the market still runs on liquid fuels. This is where the front is pushing back and forth year by year, technology hasn’t clearly established an insurmountable boundary or preference yet.
Wrapping up
Fuel cells and batteries are both 19th century technologies used in space which means they are not new or particularly cutting-edge science. All this hubbub about Toyota and Tesla, or the contemporary race between battery and fuel cell electric vehicles, is really just a flash in the pan for these technologies despite the material advances over the last few decades. Either road retains several viable pathways to sufficiency from a technology standpoint. I studied thermoelectrics and fuel cells, the battery lab was downstairs, and each has its place given the demands of respective usage scenarios. I want to convert my own vehicle to a battery electric because I do think given this duty profile and ubiquity of re-supply it is the best choice, but I don’t fault Toyota for pushing as long as they have to develop a competitive advantage in a market that has not yet settled. One can run a car on a rubber band, or a compressed air tank, there is a lot of freedom to meet the requirements given the constraints of a personal vehicle. There are loads of viable pathways for vehicle motive power. Tesla is attempting to dramatically expand the EV market, to get off the dessert tray and into the main course as far as the market goes. They need to activate every consumer and not just favorable consumers so they are taking ownership of the BEV End to End scenario for all BEV customers. That ownership experience has to be as drop dead simple as the one it replaces — and from Tesla’s perspective other makes have been dragging down the segment’s growth in a dangerous and market limiting way. They are trying to bring in the tide, trusting that they are best positioned to rise to the top. Toyota might also be able to catch that wave, this isn’t a zero-sum game for the battery vehicles (though Toyota may fear a zero-sum game across their different vehicle modes, Tesla naturally has no such fear but also no alternative if something unexpected happens). When do you concede dominance and take up a strong also-ran position? Are you wrong to continue pursing total victory when your fallback position is also strong? Probably the biggest misconception is that the fuel cell electric vehicle strategy precluded success in battery electric vehicles — many of their development efforts between the paths are strongly aligned.
The recent snap to a battery electric roadmap for Toyota kind of shows they were weren’t wrong to play their own hand out as long as they could — now they’ll get into the battery game at a later technology generation without paying the full learning costs while their “bad” fuel cell bet had (and still has) an extremely asymmetric upside. None of their rivals have eroded their market or established insurmountable leads, indeed Toyota still produced 6x the vehicles that Tesla does. This outcome also was not an inevitable consequence of technology. This was not even a complexity, durability, or reliability play. This was an old-fashioned business outcome, that was only decided in the aftermath of the supercharger rollout. But that raises a super interesting point, if the supercharger rollout was decisive in assuring Battery over Fuel Cell dominance, why would Tesla open the protocol now?
To call this market settled in 2023 is could make Ballmer declaring rival phones dead on arrival in 2007 look like a safe prediction; Windows Mobile at least had 42% of the mobile phone market at that time! Tesla is trying to avoid that kind of hubris and is spending their dominance within segment in order to accelerate the transformation of the whole market. Tesla is less worried about other BEV makes than they are worried about facilitating the transition of the entire personal vehicle market into the BEV market. It is no longer acceptable to just beat the other BEV makers within the niche to maintain growth, they need to beat everyone in every segment . It is this framing that I think most clearly puts the charging moat they’ve developed over the last decade in the way of their strategic objectives, and provides motivation to the decision to sacrifice it now.
