The massive expenses automakers must pour into research and development to survive fierce competition in the industry are putting the squeeze on their profits — but they may need to spend even more on developing new technologies in the years ahead.
On Wednesday, Toyota Motor Corp. and Honda Motor Co. announced their financial results for the fiscal year that ended in March. Their figures clearly demonstrated that the burden of developing autonomous driving technologies and electric vehicles is weighing heavily on automakers’ bottom line.
This comes amid a flurry of new entrants to the auto market, including some from other industries such as U.S. information technology giants Google and Apple, and the reality that companies will be unlikely to survive unless they constantly churn out new technologies.
At a press conference Wednesday, Toyota President Akio Toyoda touched on some of the challenges facing his company.
“Due to technological innovations … the very concept of the automobile is on the verge of changing,” Toyoda said. “There is the possibility that the conventional business model of the automobile industry, itself, will fall to pieces.”
The race to develop technologies for next-generation vehicles is relentlessly hounding the auto industry. These technologies are collectively known by the English acronym CASE (connectivity, autonomous, shared & services, electric). CASE-related expenditures soaked up nearly 40 percent of the ¥1.049 trillion (about $9.56 billion) Toyota logged for R&D expenses, according to the financial results. Toyota Executive Vice President Koji Kobayashi said this percentage will rise “to about 50 percent before long.”
Toyota is treading carefully when it comes to making huge increases to its R&D expenses.
“The more we spend, the more pressure goes on our profits,” Kobayashi explained. Even so, in the business year ending March 2020, Toyota expects to bump up its R&D expenses by about ¥50 billion to a record-high ¥1.1 trillion.
Honda, which poured ¥820 billion into R&D, according to the financial results, will inject another about ¥40 billion in the business year ending March 2020.
At a press conference Wednesday, Honda President Takahiro Hachigo mentioned a plan to cut production costs by 10 percent by 2025 and reallocate the money saved to developing new technologies.
Nissan Motor Co. spends about ¥500 billion annually on R&D.
Overseas rivals spend more
These three Japanese automakers toss huge sums of money at R&D. However, these outlays are eclipsed by the amounts rivals from around the world spend.
German automaker Volkswagen AG, which is competing with Toyota for the top spot in the global market, spent €13.64 billion (about ¥1.7 trillion) in 2018 as it pushed ahead with development of electric vehicles and other technologies. Alphabet Inc., the parent company of Google, is developing self-driving vehicles and spent $21.4 billion (about ¥2.4 trillion) on R&D — more than double Toyota’s expenditures.
The competition to develop new technologies has become a test of strength, as the auto industry is no longer solely the domain of existing carmakers.
The practical application of electric and self-driving vehicles has paved the way for the entry of companies from information technology and other industries, with the best-known being Alphabet and Apple. Each of these companies is gripped by a sense of urgency that if it does not spend on R&D to stay ahead with its technologies, it will not survive.
Parts makers are also feeling the heat.
“If R&D investment is reduced, we’ll go bust,” said Tetsuo Agata, president of Toyota Group company JTEKT Corp.
Changes of direction
A spate of realignments and alliances also has reshaped the industry.
Toyota is prepared to share its development burden by forming a Toyota-led alliance featuring subsidiaries Daihatsu Motor Co. and Hino Motors, Ltd., along with Subaru Corp. and Mazda Motor Corp., with which it has a capital tie-up.
Toyota had the lead in hybrid vehicle technology, but because it shut off access to patents for this area of expertise, a string of companies did not enter the field. This narrowed the market. Stung by this lesson, Toyota is giving royalty-free access to its patents related to hybrid and fuel cell vehicles.
Honda has teamed up with U.S. automaker General Motors Co. on autonomous driving technology and battery development for electric vehicles. Honda also decided to invest in an autonomous vehicle service venture jointly set up by Toyota and SoftBank Corp.
Volkswagen and U.S. automaker Ford Motor Co. have started talks on the joint development of self-driving technologies.