Toyota Europe boss takes aim at tougher profitability target

More than half of Toyota's European sales are hybrids and their success is contributing to the automaker's sustained profitability in the region and putting it in a position to achieve the EU's tougher CO2 emissions reduction target that will come into force next year. Toyota will find it difficult to increase profits because the EU plans even tougher CO2 targets, which will push the company to add expensive full-electric vehicles and more plug-in hybrids in Europe. South African Johan van Zyl, who has led Toyota Europe since 2015, discussed this and more with Automotive News Europe Correspondent Nick Gibbs.

Toyota Europe finished the first half of its financial year with a 4.2 percent profit margin. Where would you like to be?

We always strive to be at around 8 percent, but Europe is a really tough market. I am quite satisfied with where we are at in our plan, which is about growing margin on a sustained basis. It's no use having one year at 8 percent and nothing the next year. I would like a steady increase in profitability. We will achieve sales and margin targets set in the 2015 five-year-plan one year early. That plan was ACE1000. The next phase is ACE2000, which goes to 2025.

Does the new plan have an 8 percent margin target?

I can't say what it's going to be, but it's not as high as that. If we achieve that it would be a miracle.

Is this because of the cost of electrification?

That is one thing. As our president, Akio Toyoda, said: The industry is going through huge change.

What is your capacity utilization in Europe?

It's well above 90 percent, including Russia. We are running three shifts in Turkey and France and two shifts in Russia, the UK and the Czech Republic.

In 2021 Toyota takes ownership of a joint-venture Czech Republic plant currently shared with PSA Group. The factory can build 300,000 cars annually. What will you do with it?

I can't tell you now, but we will utilize the full capacity in future.

You build the Aygo minicar there. Can you stay in that segment as CO2 targets get tougher?

We will definitely stay in that segment of the market. It's been a very good product for us. It brings young people to our brand. At some stage we will replace it [the Aygo].

Will you need to electrify it?
We have to think about the future and ask: How will we ensure that we have an electrified version of an A-segment (minicar) or sub A-segment car that we will be able to utilize for cities?

The Lexus UX is doing well and sits on your global TNGA platform. Could you also build the car in Europe?

I think it would be very difficult to localize. You would need to do a proper localization of componentry, not just assembly. Otherwise, you just transfer parts from one country to another. The volumes are not sufficient to justify it.

What volume is needed to localize?

In my opinion, 100,000 units.

When will Toyota sell more plug-in hybrids and EVs than traditional hybrids in Europe?

Even by 2030, our hybrids will still be a core technology and part of our core product mix. They will be enriched by plug-in hybrids and battery-electric cars. Fuel cell vehicles will also form part of the zero-emissions mix in future.

Toyota was one of the first automakers to offer a plug-in hybrid with Prius, but that car hasn't gained much traction with buyers. Why?

From a style point of view, from a car point of view, the Prius plug-in will not get strong traction with European buyers. But we are looking at other plug-in hybrids, for example, some of our SUVs. Next year, we will launch some plug-in hybrids. [Toyota launched a plug-in hybrid RAV4 at the Los Angeles auto show in November.]

With so many threats to achieving sustainable margins, what do automakers need to do to stay profitable in the future?

My personal view is that in a few years people are not going to buy cars they will just lease them. That doesn't necessarily mean sharing with somebody else. It just means you get exclusive use of it, but you lease instead of buy.

What are the consequences of making the shift to leasing?

To share in that profit stream you must be able to finance it. So, you will need a very strong balance sheet in the future to be able to cover this. That is the same with future mobility models such as car-sharing. Those cars are not sold. You need to finance those costs until you have recovered your money. The cash-to-cash cycle just gets longer and longer.

The most recent Toyota annual report talked about reduced expenses. What reductions have you made?

In the ACE1000 plan that launched in 2015 we identified 11 areas we could change to create a much more sustainable business. It's not just cost cutting. Cost cutting is not a strategy. It's also about how we can improve our revenue stream and the value that we give our customers.

Which of the changes that you made had the biggest impact?

First you need to look at the product itself, starting with the manufacturing side. How can we reduce in-house costs? How can we make efficient utilization of human resources. Outsourcing parts made a big contribution. We also looked at all areas of marketing. How do you get a good return on marketing investment and keep growing the brand? That goal isn't to cut marketing expenses, but to make sure you spend where you get a good return.

When it comes to Brexit, how big an issue are the rules of origin for Toyota. Will you be able to reach the percentage of local content needed to satisfy free trade agreements?

Rules of origin are very important. That is not just between the EU and the UK but between the members of the European customs union, such as Turkey. The UK will have to create the relationships with those countries so that we can still import parts tariff free and that those parts should qualify for rules of origin.

Which is the percentage of locally supplied parts for the UK-built Corolla?
It is 30 percent.

Toyota launched the new-generation Mirai fuel cell car at the Tokyo auto show. What is your European sales goal for the new car?

The infrastructure is not developed sufficiently enough for us to be able to sell thousands of them. We are, however, definitely going to sell many more than the first one [614 units]. Our idea is to sell 30,000 globally.

What is the future of hydrogen as a fuel in Europe?

As an energy carrier it has the potential to play a very important role in our future energy mix. Hydrogen is very suitable for trucks and buses so that is what we will focus on in Europe from a product point of view. We have already launched our first bus, which we have developed in conjunction with CaetanoBus in Portugal.