How the global auto industry is overwhelmed by a surge in demand for EVs

The shocks of the pandemic, two years of supply chain chaos and a possible recession are colliding with a shift of the industry's fundamental technology

A Toyota LQ concept EV. The Japanese company is being eclipsed by Tesla. EPA

The surprise leadership shuffle on Thursday at Toyota Motor, renewed urgency at Renault and Nissan Motor to restructure their alliance and Elon Musk's declaration that Tesla will be the world's No. 1 car maker by a wide margin have one thing in common: what once defined the global auto industry's centre is no longer holding.

The announcement that Akio Toyoda will step down as chief executive of the world's top-selling car maker on April 1 came only hours after Mr Musk used a quarterly earnings call to declare that Tesla was now the industry leader in profitability and manufacturing efficiency — the crown Toyota held for three decades.

Toyota's incoming chief executive, Koji Sato, faces a daunting task. He must accelerate the Japanese car maker's efforts to develop more competitive electric vehicles. But he will get little breathing room from Tesla or the Chinese EV manufacturers who are using their leads in technology and production costs to slash prices.

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Tesla already earns roughly seven times as much per vehicle as Toyota. Its 17 per cent pre-tax margins are roughly double the average for the rest of the industry. And after a rough 2022 for the company's shares, the stock has gained 28 per cent to open up 2023.

Mr Musk hinted again on Wednesday that Tesla was working on a new vehicle that could sell profitably for under $30,000 — which would compete head-on with mass market models from Toyota, Volkswagen, Ford Motor and General Motors.

Mr Musk has in the past teased products that took far longer to deliver than he initially promised, such as the long-delayed Cybertruck.

But the Tesla chief's ambitions are clear: to reorder the auto industry hierarchy that for decades had Toyota at the top.

"I don't think you could see a second place with a telescope, at least we can't," Mr Musk said when asked how the auto industry could look in five years.

Global car makers are experienced with periods of feast and famine that come on roughly seven to 10 year cycles. What is happening now is different.

The shocks of the pandemic, two years of supply chain chaos and a possible recession this year are colliding with a once-in-a-century shift of the industry's fundamental technology.

As combustion vehicles give way to electric vehicles with high-powered computer chips for brains, many of the advantages of incumbency that Toyota enjoyed are withering away.

The shift to electric, computerised and software-driven vehicles has opened the door for Tesla and other start-ups, particularly in China, to reset the ground rules for competition. Tesla's price war could be only the start.

"We question whether competitors can keep up in this EV race," Morgan Stanley auto analyst Adam Jonas wrote in a note this week.

Incumbent car makers can no longer count on refinement of mature vehicle technology to stay competitive. Established car makers are investing heavily in EVs — some faster and with more success than others.

South Korea's Hyundai Motor on Thursday reported better-than-expected results powered in part by strong sales of its new EV lineup. Hyundai forecast its EV sales would grow by 54 per cent this year — a faster pace than Tesla had forecast.

Chinese manufacturers pouring EVs into Europe have as much as a €10,000 ($10,866) cost advantage, Patrick Koller, chief executive of auto supplier Forvia, said this month.

The intensifying competition puts pressure on Renault and Nissan to resolve negotiations to restructure their alliance. The companies are now aiming to announce a deal — including an investment by Nissan in Renault's EV unit — by February 6, sources told Reuters.

Renault and Nissan once argued that their alliance gave them significant advantages in economies of scale. That potential still exists. But first they will have to fight to stay at their current size as Tesla and Chinese manufacturers try to strip away their sales.

"Even though the market is shrinking, we're growing and EVs have doubled almost year-over-year," Tesla vice president Lars Moravy told analysts on Wednesday.

"We always look at it as how much of the total vehicle space do we have, and we're just going to keep growing in that space. There's 95 per cent for us to go get."