Toyota Motor Corporation has decided to halt the development of its next-generation electric vehicles (EVs) and will compensate some of its suppliers for their losses. The compensation could amount to hundreds of millions of yen (approximately several hundred million dollars). It is unusual for Toyota to abandon a cutting-edge EV project midway and also offer to cover supplier losses. As the Japanese automotive industry reassesses its electrification strategies, Toyota is shifting its product approach to prioritize profitability over sales expansion.
According to the Nihon Keizai Shimbun (Nikkei), Toyota plans to compensate suppliers affected by the cancellation of the Lexus sedan EV 'LF-ZC.' The decision to halt development was communicated to relevant partners by May 27 and became public on May 29. The LF-ZC was unveiled as a concept car in 2023 and was set to utilize 'gigacasting' technology, which allows for the mass production of large body parts using advanced aluminum casting techniques. This model was seen as a symbolic representation of Toyota's commitment to competing in the next-generation EV market.
The impact of the development halt is being felt by suppliers. Nikkei reports that major Toyota-affiliated parts manufacturers are expected to incur losses in the tens of millions of yen each, with some companies facing losses of up to 10 billion yen (approximately $96 million). If Toyota compensates for these losses, the total payout could reach hundreds of millions of yen.
For the fiscal year 2026 (April 2026 to March 2027), Toyota forecasts a consolidated net profit of 3 trillion yen, a 22% decrease from the previous year. While the compensation costs are expected to have a limited impact on overall performance, they could add pressure during a period of declining profits. Toyota stated regarding the LF-ZC-related losses and compensation, "Each company has different circumstances, so we are communicating individually."
The increased losses for suppliers stem from the LF-ZC's reliance on a manufacturing method that differs significantly from traditional vehicle production. Gigacasting, unlike the conventional method of welding multiple metal parts together to create a body, uses massive casting equipment to form large components in one go. One Toyota supplier executive described it as "making cars like fish-shaped pastries with a big machine."
Gigacasting gained attention as a next-generation manufacturing technology after Tesla began implementing it in its EV production. It offers advantages such as reducing the number of parts and lightening the vehicle body to increase driving range. However, it also presents challenges, including difficulties in mass production and higher defect rates. A supplier executive noted, "Many suppliers have invested heavily to avoid falling behind, believing that next-generation manufacturing methods will become mainstream." Some large parts manufacturers have reportedly gone as far as establishing dedicated facilities and production lines or even building entirely new factories.
The halt of the LF-ZC development aligns with the profitability-focused direction of Toyota's new management team, which was established in April. New President Kenta Goto emphasizes a management metric known as the 'break-even sales volume,' which refers to the minimum number of units needed to achieve profitability. Lowering this threshold to ensure profitability even with reduced sales is a top priority. He mentioned in a May earnings press conference that he would consider reducing the number of vehicle types produced to lower the break-even point. The decision to halt the LF-ZC development is seen as a signal of this shift.
The cancellation of a next-generation model that has been in development for several years has also caused significant internal shock at Toyota. Hiroki Nakajima, Vice President and Chief Technology Officer, stated to Nikkei, "Many engineers involved in the LF-ZC development have shed tears and swallowed their disappointment. We feel sorry about this." However, he added, "The technologies accumulated from the LF-ZC will be applied to future vehicles. We will continue our technological development."
A Toyota representative told Nikkei that it is unprecedented for the company to halt development at a stage where suppliers have already invested in production facilities. The representative noted that in the past, when introducing next-generation vehicles like the hybrid 'Prius' or hydrogen fuel cell vehicle 'Mirai,' Toyota often launched them without initially considering profitability. Nikkei pointed out that this halt indicates a shift in Toyota's product strategy from prioritizing new technologies without regard to profitability to focusing on profitability.
In the Japanese automotive industry, there is a growing trend to slow down the pace of EV development. Honda, for instance, suspended the development and sale of three models, including its flagship EV 'Zero Series,' in March and entered negotiations for supplier compensation. The related compensation costs and asset impairments are expected to result in a 1.2 trillion yen loss for the fiscal year 2025, marking the first deficit since the company went public. For fiscal year 2026, Honda anticipates a loss of 500 billion yen. The parts industry is on alert, anticipating that Toyota's profitability-focused product strategy will continue.
* This article has been translated by AI.
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