Toyota’s hybrid electric vehicle bet pays off despite tariffs eating into profits

Toyota has long been criticized for its cautious approach to electric vehicles. But with demand slowing and tariffs and tax incentives phasing out, the world’s largest automaker’s thoughtful approach increasingly looks like a smart hedge.

The Japanese carmaker reported yesterday (November 5) that its global sales in the April-September period were 4.78 million vehicles, up 12% from the same period last year. Among them, there were 2.27 million hybrid vehicles, a record high. Still, U.S. tariffs have taken their toll: Operating income for the fiscal year fell $3.3 billion from a year earlier to $12.5 billion.

Despite these geopolitical headwinds, demand for Toyota’s reliable passenger vehicles remains strong. Chief Financial Officer Kenta Kon told investors the company was struggling to keep up with demand, saying it was “almost impossible to keep up with.” According to Kelley Blue Book, dealers typically aim to keep approximately 60 days of inventory on their lots. By comparison, Toyota’s U.S. inventory hovers around 30 days.

Toyota has long been hesitant to fully commit to all-electric vehicles, but the company is a leader in hybrid vehicles, touting its more conservative, balanced approach to electrification as the right path forward. BEVs make up only a small part of Toyota’s global product portfolio (only 1.4% of total sales by 2024). Of course, the long-term risk is that markets such as Europe and China that are moving toward an all-electric future could leave Toyota behind.

The company’s best-selling model, the RAV4, will only be available in hybrid or plug-in hybrid form starting in 2026. Factory modifications for new powertrains will require temporary shutdowns, which could further tighten supply. Reduced dealer inventories could also push up vehicle prices for U.S. consumers in early 2026.

Toyota takes a small step toward software-driven cars

The next-generation RAV4 also marks another turning point: It will be Toyota’s first software-defined vehicle (SDV). While startups like Tesla and Rivian have been building cars around software from the beginning, Toyota’s move represents a major step into that space. The new RAV4 will feature Arene, Toyota’s Woven software platform that supports over-the-air (OTA) updates — an early sign of Toyota’s digital ambitions and a reminder of how far it still has to go.

In typical Toyota fashion, rollout is discreet. The 2026 RAV4 will debut features that competitors have offered for years, such as a smartphone-like cockpit interface, conversational voice commands and OTA updates. But these updates will be limited to ADAS systems and cockpit displays, rather than the deeper vehicle features that Tesla, Lucid and others regularly tweak via software. The strategy underscores Toyota’s efforts to catch up with rivals, especially Chinese rivals, that have made software a core part of their vehicles.

Toyota now finds itself straddling two eras in the auto industry: one built on mechanical excellence, the other driven by software, connectivity and climate regulations. Its hybrid-first strategy has cushioned profits as global electric vehicle momentum slows and tariffs rise. But time is passing. If Toyota can extend its hybrid strategy into the era of software-defined electrification hinted at by the new RAV4, it might retain its crown. If not, the conservative approach that once protected it may soon become its greatest burden.