Despite challenges, Toyota Europe boss confident in setting new sales targets

Matthew Harrison was named president and CEO of Toyota Europe in March, succeeding Johan van Zyl, who died unexpectedly after a short illness on July 30. He took charge of the automaker's business in the region after a year marked by COVID-19 restrictions, and amid a semiconductor shortage that hampered production. Despite those challenges, sales of Toyota's hybrid-dominated lineup remained strong. With new models in the pipeline, Harrison says he feels confident enough to increase sales targets for 2021 and 2025. Harrison, a former 2020 Automotive News Europe Eurostar, spoke to ANE Associate Publisher and Editor Luca Ciferri and News Editor Peter Sigal about why Toyota Europe will not only survive, but thrive, in a time of transformational change.

Toyota had a strong start in the first half in its Europe region, which includes Russia, Turkey, Israel and Central Asian markets. Is it time to revise upward your full-year target of 1.1 million sales? 

Our original target for the year was just under 1.1 million sales, but when we set that target, we couldn’t foresee the semiconductor supply challenges that were coming, and we were a little bit optimistic that the COVID-19 restrictions would disappear more quickly starting in the second quarter. Clearly, both of those situations have turned out to be worse than we thought. Despite that, with 600,000 sales in the first half, we are 30,000 sales ahead of our original plan and we have a record market share of 6.6 percent for Toyota and Lexus. We have the highest first-half sales since 2007, before the start of the Great Recession. We had our highest order bank ever at the end of June, above 200,000. Demand is strong and we are in a much more favorable position than I could have dreamed of at the start of the year or at the end of the first quarter. So, we have updated our sales forecast and we're now projecting 1.2 million sales. 

Where do Toyota and Lexus stand in the race to stop sales of combustion engines in Europe by a certain date? 

We don’t see it as a race to stop selling internal combustion engines or to sell 100 percent zero-emissions vehicles. In our mind the race is toward carbon neutrality. We have picked a path that we believe is the most effective one, which is to try to get as many people into lower-emissions vehicles as possible and to keep as many technologies open to help that process. We have given some indications as to where we expect to be by 2030 in terms of powertrain mixes. Assuming a 50 percent reduction in CO2 we would be at about 50 percent [conventional] hybrids, with the residual 50 percent being plug-in hybrids and full-electric vehicles [both battery and fuel cell electric]. 

If the EU confirms a 55 percent reduction in CO2 emissions by 2030, will that change the mix you just mentioned, because taking out another four or five grams of CO2 per km is an uphill race at that level?

Yes. Certainly, beyond 2025, we have to plan with flexibility in mind between the various powertrain solutions for the potential acceleration in consumer demand. But again, it's really not just about the powertrain technologies themselves. There are other enablers that need to be there for full-electric technology to be the right solution for a broader range of customers. We still see quite some reluctance from customers to move into battery-electric vehicles because of their own driving habits or the distances they want to cover, even if it's not frequent. There is reluctance around range anxiety, around recharging times, around the reliability of infrastructure -- maybe not in key metro areas -- but the moment you move outside of those, there are problems. Customers need to see that the road maps to support such a high zero-emissions vehicle mix are progressing. 

This year, the EU’s CO2 targets will be calculated based on WLTP rules instead of NEDC values, according to a complicated formula. How much do you need to reduce emissions compared with last year? 

We have envisaged about a 10 percent reduction for us compared with 2019. We have a live simulation tool, as I can imagine every manufacturer has, so that every time we revise our sales plan or if we have to revise our mix, whether it's country mix, product mix or powertrain mix, we can understand the implications. What I can say is that we were safely compliant in 2020, so much so that we were pooling with other brands [to help them meet their targets]. We think that compliance margin in 2021 will be even healthier for us and will enable further pooling opportunities.

What is the hybrid sales mix for the new Yaris compared with the previous generation? 

We expect to reach more than 80 percent.

What is the hybrid mix that you expect from the Yaris Cross? When will it come to market? 

In many of the western European markets it will be 100 percent. Production is starting now, so it will be on sale in September. 

What volume are you expecting from both models in 2022, after a full year of Yaris Cross sales? 

For the Yaris Cross, something close to 150,000 sales, and the Yaris will be about 200,000, so the total between the two vehicles will be around 350,000. The vast majority of our growth is coming from the Yaris Cross introduction.

The Yaris was Europe's best-selling car in January, and is third overall in the first half after the VW Golf and Peugeto 208. Were you expecting that? 

We didn't think we would achieve that result so quickly. Powertrain-wise, the timing was great as consumers shifted toward hybrids as a proven, reliable alternative. And perhaps one or two competitors were struggling a little bit with availability in the first quarter. We were running consistently fifth or sixth in the passenger-car ranking in Europe with the Toyota brand, so it was a surprise to see us suddenly up in in the top three positions and then actually surpassing Renault to reach No. 2. 

This year the EU will introduce on-board monitoring of real-world fuel consumption. This is seen by environmental organizations as a way to unmask plug-in hybrids as being less efficient than promised. What is your opinion? 

From our perspective, plug-in hybrids have an important role to play in reducing overall emissions, particularly during this period where the infrastructure needs to further develop and the financial accessibility of full-electric models is still -- certainly without incentives -- difficult for many. I had the pleasure to drive a RAV4 plug-in hybrid for an extended period this year, and I was never out of EV mode. Plug-in hybrids are clearly growing to a significant proportion of sales, but more in the premium sector and more with larger products such as crossovers or SUVs than with smaller or compact products. 

Toyota Europe had a very strong fourth quarter [January to March 2021], with a 4.9 percent margin compared with 3.7 percent in the full fiscal year and 4 percent in the previous fiscal year. Can you maintain a margin of more than 4 percent margin for the entire fiscal year? 

Our ambition is to sustain that level of performance or better. I think a 5 percent operating margin target is realistic for us. The fourth quarter was above the full year because of the COVID-19 restrictions we experienced earlier in the year. We had a very slow start to the fiscal year [that started April 1, 2020] and a progressive improvement quarter by quarter and a strong finish, partly because of the lessening in restrictions, but partly because we also got better and better at understanding how to optimize our business in those conditions and how to communicate with customers in a more effective way. 

What tailwinds are helping Toyota Europe and what headwinds are holding you back at the moment? 

We have some healthy tailwinds. There are some that apply to everybody as the market is recovering, although it's a bit slower than we expected, impacted by semiconductor shortages. But for Toyota, our product power is very strong, and all of our core models are performing extremely well. It’s not just Yaris, but in the compact segment Corolla demand is strong and ahead of plan, and the C-HR is holding its own extremely well, despite the competition in the C-SUV segment. Beyond that, we have put a lot of our focus on cost reduction, not just challenging fixed, variable and travel costs, but also on revenue optimization. In terms of headwinds, raw materials costs remain quite a challenge, for example steel. The semiconductor shortage, while it has not been a reason for us to miss our sales target, has also prevented us being more ambitious with our sales outlook for the year because production is constrained, although some of that is also about our own run-out and ramp-up strategy. We have got three very important SOP [start of production] events this year: the Yaris Cross, the Yaris hatch in the [Kolin plant in the] Czech Republic and then ultimately the switchover from the current Aygo to the new A-segment vehicle [also in Kolin] at the end of the year. The currency exchange rate, particularly the Turkish lira, is a bit of a headwind as well. 

When do you think the semiconductor situation will be back to normal? 

We expect the second half to be maybe easier than the first half, but the situation is still very volatile and the outlook is still uncertain, particularly through September. There are many parts-tracking challenges because you are getting down to Tier 2 or Tier 3 suppliers where visibility isn't as transparent. 

If you were the European Union and you had 20 billion euros to invest in the automotive industry, would you create a semiconductor plant or open four gigafactories to produce battery cells? 

You want to source where it's going to be most competitive and where you are going to have the most sustainable sort of competitiveness. Knowing what we know about the new [EU] Green Deal and a potential carbon border tax, then probably my focus would be much more on investing in the capacity for local battery sourcing and maybe other critical enablers such as renewable energies and recycling capabilities rather than semiconductors. 

Let's move to a core part of your previous business: distribution. Some brands are switching to the agency model, in which the car is invoiced by the automaker to the final customer and the dealer gets a commission for having facilitated that sale. What is your view of the agency model? 

We don't see a fundamental change ahead in the role of the retailer between us and the customer. We think to provide the appropriate customer experience, through the ownership or usership period, we need that strong local relationship and the retailer has a critical role to play in delivering that. But what I would say is that the business model for the retailer is clearly going to change. That could be because of the amount of sales that are transacted online, which has an impact on their ability to retain as much money in the metal as they are used to doing, or electrification and technological changes in the vehicle, which over time are going to have an effect on the maintenance and value chain revenues that they have been used to enjoying. Ultimately we are progressing more and more toward, as we call it, an asset management strategy, where more customers are choosing to lease. I'm not just talking about business customers who want full-service leasing, but more and more private individuals wanting to lease the vehicle. They don't want a complex relationship with multiple parties. They want one payment per month that covers the vehicle, the financing of the vehicle, the insurance of the vehicle, the maintenance of the vehicle. 

So, do you expect that an automaker such as Toyota will own the car and that different customers will have personal leases of the same car during its life cycle?

That’s basically what I mean by moving toward an asset management company, whereby essentially, we will maintain control of the vehicle through its life. And the first usage of that vehicle might be an individual on a traditional two- or three-year lease agreement. The second usage, for example year four to year six, could be a traditional used car type of lease or it could be to utilize the vehicle in a car-sharing fleet. But by managing the vehicle through its various cycles like this, particularly if it's mostly through a lease proposition, we can also retain the vehicle within our franchise network. Today, what happens to the vehicle after the first owner? Certainly once you are out of warranty the franchise network tends to lose sight of the vehicle. They are not really servicing and maintaining that vehicle any longer. It's gone. So, there's a lot of incremental opportunity for us to try to maximize the vehicle lifetime revenue. 

Why did Toyota decide not to attend the IAA in Munich auto show? And as a former marketing boss, what is the future for auto shows?

We took the decision around Munich this time because of a lot of uncertainty that existed, mostly COVID related, and mostly because we were having to make potentially significant investment commitments with the risk of losing a lot of money if we couldn't ultimately gather people together there. But, I'm a fan of automotive shows. I think, particularly for the customers, they offer a unique opportunity to see where so many brands are heading and what exciting future products they are planning to bring to market in one place. So, we haven't made a decision that says we will abandon traditional motor show formats. We have just taken a decision to say we will assess each one on its own merits. 

Fiat scion Gianni Agnelli once said that the Geneva auto show was the best in the world because it was the closest to the airport.

In terms of getting in and out, the Palexpo was super, but you could also realistically get around the show in a couple of hours, as opposed to having to follow your map and spend half a day. I think customers also appreciated that.

We often ask the Automotive News Europe Rising Stars this question: What will be the first thing you do when you become head of your company? So, here you are… 

Here I am. It's a slightly different context for me, because I have worked incredibly closely with [former Toyota Europe President and CEO] Johan van Zyl for the last few years. So, I would like to think I have already had a lot of opportunity to input into our strategy, and I didn’t feel the need to scrap anything and rebuild. My short-term strategy was more about ensuring the seamless transition and continuity. But there were two or three things that I immediately wanted to focus on. The first was to strengthen the team around me for the task ahead, knowing that in Europe, this next decade is going to be a transformational one. Not just the selection of individuals for existing roles, but also to refine the organizational structure to be a little bit more agile, to make decisions faster and to make sure that I am as close as I could be to critical areas. The second was to shift our point of focus away from 2025 to 2030 to make sure that we have a clearer ambition that is shared with a wider group of stakeholders, not just internally but with Toyota Motor in Japan. If there's a third one, it was really to focus on our people, particularly after 18 months under COVID-19 restrictions and remote working conditions. I have really tried to make sure that we improve our communications internally and express gratitude for the way that everybody's working, and also that we fully understand the urgency we still need in decision-making to continue to navigate this crisis.