ITEM 4. INFORMATION ON THE COMPANY

4.A HISTORY AND DEVELOPMENT OF THE COMPANY

Toyota Motor Corporation is a limited liability, joint-stock company incorporated under the Commercial Code of Japan and continues to exist under the Companies Act. Toyota commenced operations in 1933 as the automobile division of Toyota Industries Corporation (formerly, Toyoda Automatic Loom Works, Ltd.). Toyota became a separate company in August 1937. In 1982, the Toyota Motor Company and Toyota Motor Sales merged into one company, the Toyota Motor Corporation of today. As of March 31, 2019, Toyota operated through 608 consolidated subsidiaries (including variable interest entities) and 201 affiliated companies, of which 63 companies were accounted for through the equity method.

See “— Business Overview — Capital Expenditures and Divestitures” for a description of Toyota’s principal capital expenditures and divestitures between April 1, 2016 and March 31, 2019 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota’s principal executive offices are located at 1 Toyota-cho, Toyota City, Aichi Prefecture 471-8571, Japan. Toyota’s telephone number in Japan is +81-565-28-2121.

The SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Toyota also maintains a website (https://global.toyota/en/) through which its annual reports on Form 20-F and certain of its other SEC filings may be accessed. Information contained on or accessible through Toyota’s website is not part of this annual report on Form 20-F.

4.B BUSINESS OVERVIEW

Toyota primarily conducts business in the automotive industry. Toyota also conducts business in finance and other industries. Toyota sold 8,977 thousand vehicles in fiscal 2019 on a consolidated basis. Toyota had net revenues of ¥30,225.6 billion and net income attributable to Toyota Motor Corporation of ¥1,882.8 billion in fiscal 2019.

Toyota’s business segments are automotive operations, financial services operations and all other operations. The following table sets forth Toyota’s sales to external customers in each of its business segments for each of the past three fiscal years.

Toyota’s automotive operations include the design, manufacture, assembly and sale of passenger vehicles, minivans and commercial vehicles such as trucks and related parts and accessories. Toyota’s financial services business consists primarily of providing financing to dealers and their customers for the purchase or lease of Toyota vehicles. Toyota’s financial services business also provides mainly retail installment credit and leasing through the purchase of installment and lease contracts originated by Toyota dealers. Related to Toyota’s automotive operations, Toyota is working towards having all of its vehicles become connected vehicles, creating new value and reforming businesses by utilizing big data obtained from those connected vehicles, and establishing new mobility services. Toyota’s all other operations business segment includes the design and manufacture of prefabricated housing and information technology related businesses including a web portal for automobile information called GAZOO.com, etc. Please see “— Automotive Operations — Realizing a Smart Mobility Society that expands through connected car technologies — Connected with people (COMFORT) — Connected Service” for details on GAZOO.com.

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Toyota sells its vehicles in approximately 190 countries and regions. Toyota’s primary markets for its automobiles are Japan, North America, Europe and Asia. The following table sets forth Toyota’s sales to external customers in each of its geographical markets for each of the past three fiscal years.

During fiscal 2019, 24.8% of Toyota’s automobile unit sales on a consolidated basis were in Japan, 30.6% were in North America, 11.1% were in Europe and 18.7% were in Asia. The remaining 14.8% of consolidated unit sales were in other markets.

The Worldwide Automotive Market

Toyota estimates that annual worldwide vehicle sales totaled approximately 97 million units in 2018.

Automobile sales are affected by a number of factors including:

These factors can cause consumer demand to vary substantially from year to year in different geographic markets and in individual categories of automobiles.

In fiscal 2019, the U.S. saw steady employment growth which supported consumer spending, economies in Europe remained solid under monetary easing measures, and Japan continued to experience a favorable employment environment supporting consumption. On the other hand, China slowed down due to credit contraction triggered by interest-rate hikes in the U.S., and emerging countries in Asia and other regions also saw a slowdown in consumption owing to a concern over a possible recession.

In the automotive industry during 2018, with respect to developed countries, the automotive market remained unchanged from the previous year in the United States mainly due to the effect of interest-rate hikes, while it also remained flat in Europe as the U.K. market shrank. In Japan, demand expanded due primarily to the introduction of new models. The automotive market in China shrank for the first time in 20 years, and as a result, even though India and other emerging countries saw their markets expand, the automotive markets as a whole remained unchanged from the previous year.

In the medium- to long-term, Toyota expects the automotive market to continue growing driven principally by growth in China and other emerging markets. Global competition is expected to be severe, as competition in compact and low-price vehicles intensifies, and the pace of technological advancement and development of new products quickens, including in response to a heightened global awareness of the environment and more stringent fuel economy standards.

In 2018, China, North America, Europe and Asia were the world’s largest automotive markets. The share of each market across the globe, which Toyota estimates based on the available automobile sales data in each

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country and region information, was 29% for China, 22% for North America (21% excluding Mexico and Puerto Rico), 22% for Europe and 11% for Asia. In China, new vehicle sales decreased to approximately 28.2 million units. In North America, new vehicle sales were approximately 21.2 million units, largely unchanged from the previous year. In Europe, new vehicle sales also remained largely flat at approximately 21.3 million units. In Asia (including India but excluding Japan and China), new vehicle unit sales increased from the previous year to approximately 10.7 million units.

The worldwide automotive industry is affected significantly by government regulations aimed at reducing harmful effects on the environment, enhancing vehicle safety and improving fuel economy. These regulations have added to the cost of manufacturing vehicles. Many governments also mandate local procurement of parts and components and impose tariffs and other trade barriers, as well as price or exchange controls as a means of creating jobs, protecting domestic producers or influencing their balance of payments. Changes in regulatory requirements and other government-imposed restrictions can limit or otherwise burden an automaker’s operations. Government laws and regulations can also make it difficult to repatriate profits to an automaker’s home country.

The development of the worldwide automotive market includes the continuing globalization of automotive operations. Manufacturers seek to achieve globalization by localizing the design and manufacture of automobiles and their parts and components in the markets in which they are sold. By expanding production capabilities beyond their home markets, automotive manufacturers are able to reduce their exposure to fluctuations in foreign exchange rates as well as to trade restrictions and tariffs.

Over the years, there have been many global business alliances and investments entered into between manufacturers in the global automotive industry. There are various reasons behind these transactions including the need to address excessive global capacity in the production of automobiles, and the need to reduce costs and improve efficiency by increasing the number of automobiles produced using common vehicle platforms and by sharing research and development expenses for environmental and other technology, the desire to expand a company’s global presence through increased size and the desire to expand into particular segments or geographic markets.

Toyota believes that its research and development initiatives, particularly the development of environmentally friendly new vehicle technologies, vehicle safety and information technology, provide it with a strategic advantage.

Toyota’s ability to compete in the global automotive industry will depend in part on Toyota’s successful implementation of its business strategy. This is subject to a number of factors, some of which are not in Toyota’s control. These factors are discussed in “Operating and Financial Review and Prospects” and elsewhere in this annual report.

Toyota Global Vision

In March 2011, Toyota unveiled its “Toyota Global Vision” corporate outline for the future, which serves not only to give direction to Toyota employees around the world, but also to convey such direction to customers and to the public at large. Toyota will work to achieve sustained growth through the realization of the following ideals which are parts of the Vision:

Toyota Global Vision

Toyota will lead the way to the future of mobility, enriching lives around the world with the safest and most responsible ways of moving people.

Through our commitment to quality, constant innovation and respect for the planet, we aim to exceed expectations and be rewarded with a smile.

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We will meet challenging goals by engaging the talent and passion of people, who believe there is always a better way.

“The safest and most responsible ways of moving people”

“Enriching lives around the world”

“Lead the way to the future of mobility”

“Our commitment to quality, constant innovation”

“Respect for the planet”

“Exceed expectations and be rewarded with a smile”

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“There is always a better way”

“Meet challenging goals by engaging the talent and passion of people”

Based on these initiatives, the Toyota group will contribute to “enriching lives of communities” by providing “ever-better cars.” This is expected to encourage more customers to purchase Toyota cars and thereby lead to the establishment of a stable business base. The automotive industry is facing a time of profound transformation that could happen only once in a hundred years in response to significant technological innovation such as electrification, connected vehicles and automated driving. Toyota is committed to realizing a mobility society of the future that enables everyone to enjoy freedom of movement beyond the conventional concept of vehicles.

Toyota Environmental Challenge 2050

Positioning responding to environmental issues as one of the most prioritized challenges for management, Toyota has tackled head-on activities such as the development and promotion of next-generation vehicles including hybrid vehicles (“HVs”) and fuel cell vehicles (“FCVs”), efficient production that puts less of a burden on the environment, the recycling of end-of-life vehicles and hybrid vehicle batteries, planting trees for the coexistence of humans and nature in harmony, and conservation of ecosystems.

However, in recent years, the seriousness and reach of environmental issues has increased, as evidenced by global warming, water shortages, resource depletion, and degradation of biodiversity. In response to the situation, Toyota believes it is necessary to take on new challenges that consider the world 20 or 30 years in the future, in order to remain closely aligned with the global environment. Accordingly, Toyota announced Toyota Environmental Challenge 2050 in October 2015.

In order to contribute to the realization of a sustainable society, the Toyota Environmental Challenge 2050 has set forth the following six challenges for Toyota to address. Those challenges are to reduce CO2 emissions from driving and producing, as well as throughout the lifecycle of, vehicles, and to ensure a net positive impact on the Earth and society toward 2050.

Further strengthening collaboration with the Toyota group and all other stakeholders, Toyota will consolidate new ideas, dynamism and technology to tackle together the realization of a truly sustainable society from a long-term perspective.

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Automotive Operations

Toyota’s revenues from its automotive operations were ¥27,079.0 billion in fiscal 2019, ¥26,397.9 billion in fiscal 2018 and ¥25,081.8 billion in fiscal 2017.

Toyota produces and sells passenger vehicles, minivans and commercial vehicles such as trucks. Toyota Motor Corporation’s subsidiary, Daihatsu Motor Co., Ltd. (“Daihatsu”), produces and sells mini-vehicles and compact cars. Hino Motors, Ltd. (“Hino”), also a subsidiary of Toyota Motor Corporation, produces and sells commercial vehicles such as trucks and buses. Toyota also manufactures automotive parts, components and accessories for its own use and for sale to others.

Vehicle Models

Toyota’s vehicles (produced by Toyota, Daihatsu and Hino) can be classified into three categories: HVs, conventional engine vehicles, and FCVs. Toyota’s product line-up includes subcompact and compact cars, mini-vehicles, mid-size, luxury, sports and specialty cars, recreational and sport-utility vehicles, pickup trucks, minivans, trucks and buses.

Toyota has set, as a milestone to strive towards in seeking to realize a low-carbon, sustainable society, a target of “annual global sales of more than 5.5 million electrified vehicles by 2030.”

Hybrid Vehicles

The world’s first mass-produced hybrid car was Toyota’s Prius. It runs on an efficient combination of a gasoline engine and motor. This system allows the Prius to travel more efficiently than conventional engine vehicles of comparable size and performance. The hybrid design of the Prius also results in the output of 75% less emission than the maximum amount allowed by Japanese environmental regulations. Toyota views the Prius as the cornerstone of its emphasis on designing and producing eco-friendly automobiles.

In the last three years, Toyota has strengthened its hybrid lineup by introducing Auris HV in April 2016, Prius PHV and the new model C-HR HV in October 2016, the new model LC HV in March 2017, the fully remodeled Camry HV in June 2017, the fully remodeled LS HV in October 2017 and JPN TAXI, which employs a newly developed LPG HV, in October 2017, as well as adding the fully remodeled Avalon HV in April 2018, the fully remodeled Corolla Sport in May 2018, the fully remodeled Crown HV and Century HV in June 2018, the new model ES HV in October 2018, the new model UX HV in November 2018, the fully remodeled RAV4 HV in December 2018 and the fully remodeled Corolla SD and WG HV in February 2019. In the area of HVs, where strong growth is seen, Toyota aims to continue its efforts to offer a diverse line-up of HVs, enhance engine power while improving fuel economy and otherwise work towards increasing the sales of HVs.

Fuel Cell Vehicles

Toyota began limited sales of a fuel cell vehicle in Japan and the United States in December 2002. Since then, Toyota has made advances by solving technological issues such as the above and worked towards the practical use of such solutions, culminating in the general sale of the world’s first mass produced fuel cell vehicle MIRAI in Japan beginning in December 2014, in the United States beginning in June 2015 and in Europe beginning in September 2015. Toyota also launched “SORA,” the first production model fuel cell bus to receive vehicle type certification in Japan, in March 2018.

Conventional Engine Vehicles

Subcompact and Compact

Toyota’s subcompact and compact cars include the four-door Corolla sedan, which is one of Toyota’s bestselling models. The Yaris, marketed as the Vitz in Japan, is a subcompact car designed to perform better and

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offer greater comfort than other compact cars available in the market with low emissions that are particularly attractive to European consumers. In Europe, Toyota introduced the fully remodeled Corolla in January 2019. In Japan, Toyota introduced, in addition to the Corolla Sport and Yaris (named Vitz in Japan) which was introduced in May 2018, the Prius C (named Aqua in Japan), as well as Passo, Roomy and Tank, which three vehicles are OEM vehicles supplied by Daihatsu. In India, Asia, China and other markets, Toyota introduced the Etios and Vios, as well as the AGYA and Rush, which are designed and manufactured by Daihatsu, and Yaris iA, which is designed and manufactured by Mazda Motor Corporation (“Mazda”).

Mini-Vehicles

Mini-vehicles are manufactured and sold by Daihatsu. Daihatsu manufactures mini-vehicles, passenger vehicles, commercial vehicles and auto parts. Mini-vehicles are passenger vehicles, vans or trucks with engine displacements of 660 cubic centimeters or less. Daihatsu sold approximately 577 thousand mini-vehicles and 242 thousand automobiles on a consolidated basis during fiscal 2019. Daihatsu’s largest market is Japan, which accounted for approximately 80% of Daihatsu’s unit sales during fiscal 2019. From 2011, Toyota began to sell some mini-vehicles manufactured by Daihatsu under the Toyota brand.

Mid-Size

Toyota’s mid-size models include the Camry, which has been the bestselling passenger car in the United States for 21 of the past 22 calendar years (from 1997 to present) and also for the last 17 consecutive years. The Camry was fully remodeled in June 2017. Camry sales in the United States for 2018 were approximately 343 thousand units (including Camry hybrids). In addition, Toyota’s other mid-size models include the REIZ for the Chinese market.

Luxury and Large

In North America, Europe, Japan and other regions, Toyota’s luxury lineup consists primarily of vehicles sold under the Lexus brand name. Lexus passenger car models include the LS, the GS, the ES, the IS, the CT, the LC and the RC. Lexus models also include the LX, the GX, the RX, the NX and the UX sold as luxury sport-utility vehicles. Toyota commenced sales of its luxury automobiles in Japan under the Lexus brand in August 2005. As of March 31, 2019, the Lexus brand lineup in Japan includes the LS, the GS, the ES, the IS, the CT, the LX, the RX, the NX, the UX, the LC and the RC. The Toyota brand’s full-size luxury car, the Avalon, was remodeled in April 2018, and the Crown was fully remodeled in June 2018. The Lexus brand’s passenger vehicle ES was fully remodeled in October 2018. Toyota also fully remodeled the Century limousine in Japan in June 2018.

Sports and Specialty

In March 2017, Toyota introduced LC, the new model flagship coupe for Lexus. Furthermore, in May 2019, Toyota introduced a new Supra for the first time in 17 years.

Recreational and Sport-Utility Vehicles and Pickup Trucks

Toyota sells a variety of sport-utility vehicles and pickup trucks. Toyota’s sport-utility vehicles available in North America include the Sequoia, the 4Runner, the RAV4, the Highlander and the Land Cruiser, and pickup trucks available are the Tacoma and Tundra. The Tacoma, the Tundra, the Highlander and the Sequoia are manufactured in the United States. Toyota also offers five types of sport-utility vehicles under the Lexus brand, including the LX, the GX, the RX, the NX and the UX. Toyota also manufactures the RX and RAV4 models in Canada. Toyota’s pickup truck, the Hilux, has been the bestselling model of all Toyota cars sold in Thailand. In May 2015, Toyota introduced the fully remodeled Hilux and in September 2015, it introduced the fully remodeled RX of the Lexus brand. In October 2016, Toyota introduced C-HR, a model with a focus on both design and drive. Toyota introduced the Lexus brand’s new model UX in November 2018 and the fully remodeled RAV4 in January 2019.

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Minivans and Cabwagons

Toyota offers several basic models for the global minivan market. Its largest minivans in Japan, the Alphard and the Vellfire, were remodeled in January 2015. In addition, the Noah/Voxy was remodeled in January 2014 and the new model Esquire was introduced in October 2014 in Japan. The new model Calya, an original equipment manufacturing (“OEM”) vehicle by Daihatsu, was introduced in July 2016 in Indonesia. Toyota’s other minivan models include, in Japan, the Estima and the Sienta, and, in North America, the Sienna.

Trucks and Buses

Toyota’s product lineup includes trucks (including vans) up to a gross vehicle weight of five tons and micro-buses that are sold in Japan and in overseas markets. Toyota launched “SORA,” a production model fuel cell bus, in Japan in March 2018. Trucks and buses are also manufactured and sold by Hino, a subsidiary of Toyota. Hino’s product lineup includes large trucks with a gross vehicle weight of over eleven tons, medium trucks with a gross vehicle weight of between five and eleven tons and small trucks with a gross vehicle weight of up to five tons. Hino’s bus lineup includes medium to large buses used primarily as tour buses and public buses, as well as small buses and micro-buses.

Product Development

New cars introduced in Japan during fiscal 2019 and thereafter include the new Supra. The remodeled car in Japan during fiscal 2019 and thereafter is the RAV4. New cars introduced outside of Japan during fiscal 2019 and thereafter include the Lexus UX. Remodeled cars outside of Japan during fiscal 2019 and thereafter include the Corolla, the RAV4, the Hiace, and the Lexus ES.

In addition, the IMV product lineup based on the IMV project to optimize global manufacturing and supply systems is a lineup of strategic multipurpose vehicles produced from a single platform to meet market demand. The IMV product lineup includes, as of March 31, 2019, the Hilux, Fortuner, and Innova, one or all of which are available in all regions.

Markets, Sales and Competition

Toyota’s primary markets are Japan, North America, Europe and Asia. The following table sets forth Toyota’s consolidated vehicle unit sales by geographic market for the periods shown. The vehicle unit sales below reflect vehicle sales made by Toyota to unconsolidated entities (recognized as sales under Toyota’s revenue recognition policy), including sales to unconsolidated distributors and dealers. Vehicles sold by Daihatsu and Hino are included in the vehicle unit sales figures set forth below.

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The following table sets forth Toyota’s vehicle unit sales and market share in Japan, North America, Europe and Asia on a retail basis for the periods shown. Each market’s total sales and Toyota’s sales represent new vehicle registrations in the relevant year (except for the Asia market where vehicle registration does not necessarily apply). All information on Japan excludes mini-vehicles. The sales information contained below excludes unit sales by Daihatsu and Hino, each a consolidated subsidiary of Toyota. Vehicle unit sales in Asia do not include sales in China.

Japan

Japan is one of the leading countries with respect to technological advancements and improvements in the automotive industry and will continue to demonstrate such strength. Toyota strives to earn customer satisfaction by introducing products distinctive of Japan’s manufacturing ability such as value-added products including Lexus models, FCVs, plug-in hybrid vehicles (“PHVs”) and HVs, vehicles with 3-seat rows and mini-vehicles. Toyota’s consolidated vehicle sales in Japan in fiscal 2019 was 2,226 thousand units, a decrease of 29 thousand units in comparison with the previous year. Toyota endeavors to secure and maintain its large share of and position atop the Japanese market. Toyota held a domestic market share (excluding mini-vehicles) on a retail basis of 47.8% in fiscal 2017, 46.9% in fiscal 2018 and 45.9% in fiscal 2019.

Although Toyota’s principle is to conduct production in regions where it enjoys true competitiveness, it considers Japan to be the source of its good manufacturing practices. Toyota supports its operations worldwide through measures such as the development of new technologies and products, low-volume vehicles to complement local production, production of global vehicle models which straddle multiple regions and supporting overseas factories. Toyota will continue the implementation of the new platform and the new unit for the Toyota New Global Architecture (“TNGA”) globally, with Japan at the core. In Japan, Toyota is implementing flexible production based on market needs, in order to support its large share of domestic sales. Toyota also plans to close the Higashi Fuji plant of Toyota Motor East Japan, Inc. at the end of December 2020 and consolidate its production in northeastern Japan so that the competitiveness of the Japanese “manufacturing ( monozukuri )” will be further strengthened on a continuing basis.

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Since Toyota formed an alliance with SUBARU CORPORATION (“SUBARU”) in 2005, Toyota and SUBARU have utilized each other’s resources in development and production. In July 2008, SUBARU transferred 61 million SUBARU shares owned by SUBARU to Toyota with the aim to promote smooth collaboration. As a result of this transfer, Toyota owns 16.5% of SUBARU issued shares. While Toyota vehicles had been manufactured at SUBARU’s North American production center, Subaru of Indiana Automotive, Inc. (“SIA”), since 2007, Toyota and SUBARU ceased such production in May 2016, and the collaboration between Toyota and SUBARU shifted to collaboration focusing on products and technology.

In 2011, Toyota and the BMW Group agreed to conduct collaborative research in the field of next-generation lithium-ion battery technologies and for BMW to supply diesel engines to Toyota Motor Europe, Toyota’s European subsidiary. In 2013, as part of their strategic long-term cooperation in the field of sustainable mobility, Toyota and BMW Group entered into agreements for the joint development of a fuel cell system, joint development of architecture and components for sports vehicles and joint research and development of lightweight technologies. The two companies completed collaborative research on lithium-air batteries, a post-lithium-battery solution as planned by conducting the second phase of collaborative research into next-generation lithium-ion battery cells. The supply of diesel engines by BMW from 2014 through 2018 was completed as planned under the agreement. As a result of the joint development of sports vehicles, the production of new Supra commenced in March 2019.

Toyota and Mazda have been engaged in collaboration such as the licensing of Toyota’s hybrid technologies to Mazda and the production of compact cars for Toyota at Mazda’s plant in Mexico. In May 2015, towards the goal of making cars with more appeal, Toyota and Mazda entered into an agreement to build a long-term partnership that would create synergies for both companies through such means as leveraging the resources of both companies and complementing each other’s products and technologies. After subsequent discussions, Toyota signed an agreement to enter into a business and capital alliance with Mazda in August 2017. As part of this business and capital alliance, the companies agreed to mutually acquire shares of the other company with the aim of advancing and strengthening their long-term collaboration, as well as to: 1) establish a joint venture that produces vehicles in the United States, 2) jointly develop technologies for electric vehicles (“EVs”), 3) jointly develop connected-car technology, 4) collaborate on advanced safety technologies and 5) expand replenishment of products. Pursuant to this agreement, in October 2017 Toyota and Mazda mutually acquired 50 billion yen worth of shares of each other. Toyota also established EV C.A. Spirit Corporation with Mazda and Denso Corporation (“Denso”) to jointly develop basic structural technologies for EVs. Furthermore, in March 2018, Toyota and Mazda established Mazda Toyota Manufacturing, U.S.A., Inc., a new joint venture company, to produce vehicles in the United States starting in 2021.

In February 2017, Toyota and Suzuki Motor Corporation (“Suzuki”), aiming to contribute jointly to resolution of social issues and achievement of the sound and sustainable development of an automobile-based society, entered into a memorandum of understanding on beginning concrete examination of a business partnership. In November 2017, the two companies agreed to move forward in considering a cooperative structure for introducing EVs in India, and in March 2018, concluded a basic agreement toward the mutual supply of products. In May 2018, Toyota and Suzuki agreed that Toyota will provide Suzuki development support for a compact, ultrahigh-efficiency powertrain, to have Toyota Kirloskar Motor Private Ltd. (“TKM”) produce models developed by Suzuki and to collaborate with respect to African markets. In addition, in March 2019, Toyota and Suzuki began considering the concrete details of collaboration in new areas, such as collaboration in the area of production and promotion of the widespread use of electrified vehicles, by bringing together Toyota’s strength in technologies for electrification and Suzuki’s strength in technologies for compact vehicles.

In December 2017, Toyota and Panasonic entered into an agreement to study the feasibility of a joint automotive prismatic battery business. Having repeatedly held discussions since then on the concrete details of their collaboration to achieve high-capacity and high-output automotive prismatic batteries that lead the industry in terms of both performance and cost as well as to contribute to the popularization of Toyota’s and other

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automakers’ electrified vehicles, in January 2019, Toyota and Panasonic agreed to establish a joint venture related to the automotive prismatic battery business. Specifically, the two companies agreed that the scope of the joint venture’s business operations will cover research, development, manufacturing and others, related to automotive prismatic lithium-ion batteries, solid-state batteries and next-generation batteries and that the joint venture will integrate management and other resources from both companies. Toyota and Panasonic are working to establish the joint venture (pending approval from competition-law authorities in relevant countries and regions) by the end of 2020.

In June 2018, Toyota and Denso agreed to begin to consider consolidating the core electronic component operations of both companies within Denso, and entered into a formal agreement concerning this in April 2019. On April 1, 2020, the production of electronic components at Toyota’s Hirose Plant, as well as the electronic components development functions, will be consolidated within Denso. In doing so, the companies aim to establish a speedy and competitive development and production structure.

In April 2019, as part of the initiative to further promote the widespread use of EVs, Toyota announced that it will grant royalty-free licenses on the patents it holds (including some pending applications) for vehicle electrification-related technologies, such as electric motors, power control units (PCUs), and system controls. Toyota also announced that it will provide technical support to other manufacturers developing and manufacturing electrified vehicles when they utilize Toyota’s power train systems.

In Japan, there are five major domestic manufacturers, five specialized domestic manufacturers and a growing volume of imports from major United States and European manufacturers. The prolonged economic slump in the Japanese economy and the recent increases in environmental awareness have also shifted consumer preference towards more affordable automobiles such as compact and subcompact vehicles and towards utility vehicles such as mini-vans. For more than 40 years, Toyota has maintained its position as the largest automobile manufacturer in Japan. Every year since fiscal 1999, Toyota, excluding Daihatsu and Hino, has achieved a market share (excluding mini-vehicles) of over 40%, reflecting in part the success of the introduction of new models for subcompact and compact cars, mini-vans and sedans. In August 2005, Toyota launched the Lexus brand in Japan and achieved a record top market share of 25.6% in the luxury market in 2011. Toyota aims to further distinguish the Lexus brand by continuing to attract new and affluent customers including customers that typically had purchased imported vehicles.

North America

The North American region is one of Toyota’s most significant markets. Toyota has reorganized its production structure and made improvements to its product lineup. In addition, Toyota is actively working to promote increased local operations independence in North America, in accordance with the Toyota Global Vision, announced in 2011.

In the North American region, of which the U.S. is the main market, Toyota has a wide product lineup (excluding large trucks and buses), and sold 2,745 thousand vehicles on a consolidated basis in fiscal 2019. This represents approximately 31% of Toyota’s total unit sales on a consolidated basis. The U.S., in particular, is the largest market in the North American region, which accounts for 86% of the retail sales of Toyota in such region. Sales figures for fiscal 2019 were 97.8% of those in the prior fiscal year.

Toyota commenced sales of the first-generation Prius hybrid model in North America in 2000. The Prius became Toyota’s bestselling model behind the Corolla and Camry, having gained particular support among customers concerned with the environment. Toyota continued further expansion of its environmentally friendly vehicles with the introduction of models such as, the fully remodeled all-new Prius and the all-new fuel cell vehicle MIRAI in 2015, the Prius PHV in 2016, the Camry HV in 2017 and the fully remodeled Avalon HV and RAV4 HV in 2018.

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Since the introduction of the LS and ES models under the premium brand model, Lexus, in the United States in 1989, Toyota has expanded its Lexus sales with models including the GS, IS and RX. Toyota sold 311 thousand units through the introduction of the new NX and RC models in 2014, 344 thousand units through the introduction of the new RX model in 2015, 352 thousand units in 2016, 305 thousand units in 2017 and 298 thousand units in 2018, when the new model UX and the fully remodeled ES were introduced.

Toyota is continuing to revise its vehicle models and North American production capacities in response to changes in market conditions. Through the business alliance with Mazda Motor Corporation, the production of Toyota brand compact cars for sale mainly in North America began at Mazda’s plant in Mexico in June 2015. In addition, Toyota commenced production of the Lexus ES350 at its Kentucky plant for sale in the North America market starting in October 2015. Toyota also launched the all-new Camry with the first TNGA platform in North America at the Kentucky plant in 2017 and redesigned Avalon into an all-new model in 2018. Toyota plans to increase the production capacity of the Tacoma from 100,000 to 160,000 in Baja California, Mexico in 2018 and of the Highlander at its Indiana plant in 2019. Toyota’s Mississippi plant started production of the remodeled new Corolla with the TNGA platform in 2019. In the meantime, consignment production that started at SIA in 2007 ceased in May 2016.

In terms of auto parts, Toyota increased production capacity of engine plants in Kentucky and Alabama in 2013 and 2014, respectively, to meet rising demand, and also increased production capacity of auto parts at its automatic transmission plant in West Virginia in 2014.

In order to further strengthen competitiveness in North America, Toyota will continue the realignment of North American manufacturing operations going forward. As part of this effort, a new plant will be built in Mexico in 2019 to produce the Tacoma. Furthermore, production of the Corolla is planned to commence at a new plant in Alabama that will be established by the joint venture with Mazda around 2021. In addition to the plant in Mississippi, compact cars will also be produced at the new plant in Alabama. Toyota will focus its production of mid-sized vehicles in the plant in Canada, along with the plants in Indiana and Kentucky, by commencing production of the mid-sized SUV RAV4 instead of the Corolla in Canada starting in 2019. Toyota is also considering production of the RAV4 at the Kentucky plant in order to catch up with the expanding SUV market. For powertrains, Toyota plans to start producing 120,000 hybrid transaxles (hybrid vehicle transmissions) per year at its West Virginia plant starting in 2020 and further increase the production capacity by 120,000 units per year in 2021. Toyota also plans to raise the production capacity of four-cylinder engines and V6 engines by 230,000 units by 2021.

As for Toyota’s vehicle development in North America, the Toyota Technical Center spearheads the design, planning, and evaluation of vehicles and parts as to their ability to meet customer needs. Toyota will continue to promote self-reliance towards producing even better cars in the future.

In July 2017, Toyota launched its new North American headquarters in Plano, Texas and unified its North American manufacturing, sales and marketing, financial services and other functions. Toyota plans to promote collaboration and efficiencies across functions, position itself to deliver “ever-better cars” to customers and work towards realizing sustainable growth in the North America market.

Europe

Toyota’s principal European markets are Germany, France, the United Kingdom, Italy, Spain and Russia. Toyota’s principal competitors in Europe are Volkswagen, Renault, Ford, Opel and Peugeot, as well as Korean manufacturers Hyundai and Kia.

While competition in Europe continues to intensify, Toyota has expanded its lineup of hybrid models to further strengthen its sales operations, and has entered into supply agreements with PSA for light commercial vehicles. To strengthen its business setup so that it is less likely to be affected by exchange rates, Toyota

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launched RAV4 for Russia at OOO “TOYOTA MOTOR” (“TMR”) and C-HR at Toyota Motor Manufacturing Turkey Inc. (“TMMT”) in 2016 in the form of local production. In addition, Toyota is actively promoting production and sales measures that meet local demand by strengthening its value chain including used car dealerships, after-sales services and finance and insurance services.

In 2018, the European automotive market remained unchanged from the previous year as the growth of the Russian, French, Spanish, Polish and other European markets made up for the sluggish market in Turkey and the United Kingdom.

Toyota sales in 2018 in Europe exceeded the previous year due to an increase in units sold for the Camry and the Fortuner in Russia as well as higher sales in principal markets such as France and Spain from the sales expansion of hybrid core models including C-HR and Yaris. Sales in Poland, Baltic countries, Hungary and Kazakhstan hit a new record. Toyota’s consolidated vehicle sales in Europe in fiscal 2019 was 994 thousand units, an increase of 2.7% from fiscal 2018.

Toyota has increased European production capacity in response to sales growth. For example, in August 2016, Toyota increased the production capacity in Russia to 100,000 units and the production of the RAV4 commenced in addition to the Camry. Also, Toyota commenced production of the compact crossover C-HR by increasing the annual production capacity of TMMT from 150,000 units to 280,000 units (three-shift) in September 2016.

In terms of model change, Toyota Motor Manufacturing (UK) Ltd. (“TMUK”) and TMMT implemented a model change for the Corolla in 2018 and 2019, respectively. Also, in Russia, Toyota redesigned the Camry into an all-new model with the TNGA platform in April 2018.

In terms of auto parts, in October 2016, Toyota decided to produce hybrid transaxles and gasoline engines in Poland. Toyota started production of hybrid transaxles in 2018 at Toyota Motor Manufacturing Poland (“TMMP”), a production plant for transmissions and engines, and add two gasoline engines — a 1.5L in 2017 and a 2.0L in 2019 — at Toyota Motor Industries, Poland (“TMIP”), a production plant for diesel engines. In concert with the enhancement of the gasoline engine business, the two companies were integrated in April 2017.

Asia

Toyota’s consolidated vehicle sales in Asia (including China) in fiscal 2019 was 1,684 thousand units, an increase of 9.2% from fiscal 2018.

In light of the importance of the Asian market that is further expected to grow in the long term, Toyota aims to build an operational framework that is efficient and self-reliant as well as a predominant position in the automotive market in Asia. Toyota has responded to increasing competition in Asia by making strategic investments in the market and developing relationships with local suppliers. Toyota believes that its existing local presence in the market provides it with an advantage over new entrants to the market and expects to be able to promptly respond to demand for vehicles in the region.

In this region, Toyota has been further strengthening its business foundations by improving its product line-up, expanding local procurement and increasing production capacities.

Toyota’s principal Asian markets are Thailand, India, Indonesia, Malaysia and Taiwan.

In Thailand, Toyota has three plants capable of producing approximately 800 thousand units per year, not only to meet domestic demands but to serve as a production base for regions inside and outside the ASEAN region, and produces and exports the Hilux, the Hiace, the Corolla, the Camry and the Vios. In February 2018, Toyota started production of the C-HR at its second Gateway plant, in response to the diversification of market needs. Regarding the existing models, Toyota implemented a model change for the Camry in 2018 and for the Hiace in 2019, and is steadily working on the redesigning of such models.

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In India, Toyota constructed a second plant with an annual production capacity of 70 thousand units in 2011 and has increased the production capacity as necessary up to 210 thousand units. In 2018, Toyota newly launched the Yaris compact model in such second plant. Moreover, in line with the global redesigning of the Camry, Toyota implemented a model change in India and began producing the TNGA model as well.

In Indonesia, Toyota introduced the Etios and commenced operation of a second plant in Karawang in 2013 in order to meet the diverse customer needs and the expanding market. Currently, Toyota is producing the Vios, the Yaris and the Sienta, and the initial production capacity of 70 thousand units per year has become 120 thousand units per year. Similar to the plant in Thailand, PT Toyota Motor Manufacturing Indonesia (“TMMIN”) is positioned as a production base for regions inside and outside of the ASEAN region, including the production of Innova and the Fortuner at the first plant. Toyota also constructed a passenger vehicle engine plant that commenced production in February 2016.

In Malaysia, Toyota built a new plant dedicated to passenger vehicles to transfer the production of the Vios thereto in 2019. The existing plant was converted into a plant dedicated to commercial vehicles and the production framework was reorganized accordingly. In addition, in 2016 Toyota began production and sales of the Sienta in Taiwan in response to diversifying demands.

In March 2019, Toyota implemented a model change for Corolla in Taiwan.

China

Toyota has been conducting operations in China through joint ventures, and its success in producing products that meet local demands and in establishing its sales and service network has significantly contributed to Toyota’s profits. Based on the firm business foundation that it has established, Toyota is conducting its operations with the aim of promoting further growth and increasing profitability through further development of its sales and service network and expansion of its product lineup.

In China, Toyota has been conducting joint ventures with two major partners, namely, China FAW Group Corporation and Guangzhou Automobile Group Co., Ltd. First, with respect to the joint venture with China FAW Group Corporation, from when production and sales of the Vios started in 2002, production and sales of the Land Cruiser Prado, the Corolla, the Crown, the Coaster and the RAV4 has expanded to include such models. The joint venture has developed production bases in three regions, namely, Tianjin, Changchun and Sichuan, and in Tianjin, the joint venture completed the construction of a new production line to replace an aging existing line in the Teda area in June 2018, and introduced the new-model SUV IZOA, which is a TNGA platform vehicle. In Changchun, where the new plant was launched in 2012, the initial production capacity of 100 thousand units per year has now become 130 thousand units per year. The joint venture also increased annual production capacity of the plant in Sichuan from 30 thousand units to 50 thousand units in the spring of 2015 to increase production of the Prado, and is steadily increasing its production capacity of these three plants, which on an aggregate basis is currently approximately 690 thousand units per year. In addition, the joint venture sought to improve production efficiency by closing small, aging production lines at the Changchun East Plant of Sichuan FAW Toyota Motor Co., Ltd. in December 2016 and the Xiqing Plant of Tianjin FAW Toyota Motor Co., Ltd. in February 2017.

GAC Toyota Motor Co., Ltd. (“GAC Toyota”), a joint venture between Toyota and Guangzhou Automobile Group Co., Ltd., expanded the production and sales of the Camry, the Yaris, the Highlander, the Levin, etc. With regard to production capacity, GAC Toyota has an annual production capacity of approximately 560 thousand units in total due to starting a third plant in early 2018 in addition to the existing first and second plant. GAC Toyota redesigned the Camry in 2017 and the C-HR in 2018 into an all-new model with the TNGA platform as well as launched new models.

In terms of auto parts, in 2014, Toyota opened a plant in Changshu in Jiangsu, China for the production of the Continuously Variable Transmission (“CVT”) as the first CVT plant outside of Japan and in September 2015, Toyota also began production of HV Transaxles at the CVT plant. Toyota also launched a plant to produce hybrid vehicle batteries in October 2015.

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Total vehicle sales in the Chinese market decreased 4% from 29.28 million in 2017 to 28.23 million in 2018. In this market, Toyota’s sales in 2018 were 1.48 million vehicles, up 14% from the previous year. In the domestically produced passenger vehicle market in mainland China (22.85 million units), Toyota had a market share of 6%. In 2018, sales of SUVs expanded as a result of customers’ value diversification. As for Toyota’s distribution network, Toyota has been expanding the distribution network for locally produced vehicles in cooperation with Chinese joint venture partners under Tianjin FAW Toyota Motor Co., Ltd. and Guanqi Toyota Motor Co., Ltd., and for imported vehicles, Toyota has also been expanding primarily the Lexus brand sales network. Toyota plans to further increase sales by expanding the number of dealers and the product lineup for both locally produced and imported vehicles. In addition, as the market in China develops and becomes more sophisticated, Toyota plans to promote the so-called “Value Chain” businesses such as used cars, services, financing and insurance so as to contribute to the development of a mobility society.

South and Central America, Oceania, Africa and the Middle East

Toyota’s consolidated vehicle sales in South and Central America, Oceania, Africa and the Middle East (collectively, the “Four Regions”) in fiscal 2019 were 1,327 thousand units, a decrease of 4.6% from fiscal 2018.

In these regions, which are expected to become increasingly important to Toyota’s business strategy, Toyota aims to develop new products which meet the specific demands of each region, increase production and further promote sales.

Toyota’s principal markets in the Four Regions are Brazil in South and Central America, Australia in Oceania, South Africa in Africa and Saudi Arabia in the Middle East.

The core models in this region are global models such as the Corolla, IMV (the Hilux) and Camry. In order to increase production of IMVs, Toyota increased annual production capacity of the plant in Argentina to 140 thousand units per year at the end of 2015. In order to expand business in Brazil, Toyota constructed a new factory in Sorocaba with an annual production capacity of 70 thousand units, and in 2012, began production and sales of compact vehicles. Starting from the beginning of 2016, Toyota increased production capacity to 110 thousand units per year and started production of the Yaris from June 2018.

Moreover, in terms of auto parts, Toyota commenced production at a plant in Brazil for passenger vehicle engines in February 2016.

Production

Toyota and its affiliated companies produce automobiles and related parts and components through more than 50 overseas manufacturing companies in 27 countries and regions besides Japan. Toyota’s major manufacturing facilities include plants in Japan, the United States, Canada, the United Kingdom, France, Turkey, Thailand, China, Taiwan, India, Indonesia, South Africa, Argentina and Brazil. Daihatsu brand vehicles are produced at four factories in Japan and two manufacturing companies in two other countries of Indonesia and Malaysia. Hino brand vehicles are produced at four factories in Japan and 11 manufacturing companies in 11 countries, including Indonesia and Thailand, and Toyota is planning to increase the bases in the U.S. and Russia. For a listing of Toyota’s principal production facilities, see “Information on the Company — Property, Plants and Equipment.”

In promoting a sustainable growth strategy, establishing a system capable of providing optimal supply of products in the global market is integral to Toyota’s strategy.

In line with its basic policy of manufacturing in countries or regions where there is demand and where Toyota is truly competitive, Toyota will make efficient use of and maximize capacity utilization at its existing plants to respond to the expanding market and will continue to focus on making efficient capital investments as necessary. Furthermore, Toyota will continue to place top priority on safety and quality in strengthening true competitiveness with the aim of achieving sustainable growth.

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In 2017, 75.9% of Toyota vehicles sold in overseas markets were manufactured in overseas plants by Toyota and its unconsolidated affiliated companies. In 2017, approximately 71.1% of Toyota vehicles sold in North America were produced in North America. Of the vehicles sold in Europe in 2017, approximately 81.5% were produced in Europe. In fiscal 2019, Toyota produced on a consolidated basis 4,309 thousand vehicles in Japan and 4,676 thousand vehicles overseas, compared to 4,286 thousand vehicles in Japan and 4,678 thousand vehicles overseas in fiscal 2018.

The following table shows Toyota’s worldwide vehicle unit production by geographic market for the periods shown. These production figures do not include vehicles produced by Toyota’s unconsolidated affiliated companies. The sales unit information elsewhere in this annual report includes sales of vehicles produced by these affiliated companies. Vehicles produced by Daihatsu and Hino are included in the vehicle production figures set forth below.

Toyota closely monitors its actual units of sale, market share and units of production data and uses this information to allocate resources to existing manufacturing facilities and to plan for future expansions.

See “— Capital Expenditures and Divestitures” for a description of Toyota’s recent investments in completed plant constructions and for a description of Toyota’s current investments in ongoing plant constructions.

The Toyota Production System

Toyota pioneered the internationally recognized production system known as the “Toyota Production System” (“TPS”). The TPS is based on Toyota’s own concepts of efficient production of only necessary and quality products and efficient cost reduction, and has the following two principal elements:

Just-in-Time is an approach in which necessary parts and components are manufactured and delivered in just the right quantity in a timely manner just as they are needed. This allows Toyota to maintain low levels of inventory while maintaining operating efficiency.

Jidoka is a production concept which involves immediate stop of work when problems arise in the production line in order to stop the production of defective items from being passed on to subsequent stages of the process, and therefore making quality assurance an inherent part of the production process. To achieve this, Toyota’s equipment is designed to detect and highlight abnormalities and to stop whenever abnormalities occur. Toyota also authorizes its machine operators and other members of its production team to stop production whenever they note anything suspicious. This helps Toyota to build quality into the production process by avoiding defects and preventing the waste that would result from producing a series of defective items.

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Toyota believes that the TPS allows it to achieve mass-production efficiencies even in high-mix, low-volume production. This belief gives Toyota the flexibility to respond to changing consumer demand without significantly increasing production costs. While the TPS remains the basis of Toyota’s automobile production, the system has been expanded for use in Toyota’s parts production, logistics and customer service activities as well.

Through the TPS, issues are identified and analyzed at the actual site, the entire production process is made visible and production efficiency as well as product quality are improved through the application of measures to address the sources of problems. As one method to implement these measures, Toyota utilizes sophisticated information technologies to improve each step of its vehicle development process, from product planning to commencement of mass-production. These technologies are intended to enhance flexibility, simplification, quality, cost competitiveness and speed. Specifically, detailed virtual assembly and other simulations of manufacturing processes are conducted on computers for a new vehicle or new production equipment/systems before a prototype is made. An actual prototype is made only after defects and related issues have been identified and resolved by computer simulation, thereby minimizing the time required for rebuilding prototypes and significantly shortening the time required before starting mass production. Moreover, this system is used to prepare virtual factories and other visual aids in order to facilitate training and communication at overseas plants and enable the efficient transfer of necessary technology and skills.

In January 2018, Toyota established the TPS Group, and in order to stay true to itself, Toyota has gone back to its roots, positioning TPS as the bedrock of its management, and is moving forward with initiatives to ensure that TPS is passed on to the future as part of Toyota’s DNA. Specifically, Toyota will have the concepts of “ Just-in-Time ” and “ jidoka, ” which are the two main pillars of the TPS, spread within the entire company and have all divisions, including technical and administrative divisions, work to reduce lead time and ensure that abnormalities are made visible, through which Toyota will achieve results by both cost reduction through improved productivity as well as improved work quality.

Toyota is currently working towards producing even better cars across the company. With the aim of realizing “cars that offer a rewarding experience for customers” through “truly competitive manufacturing” in terms of production technology and manufacturing, Toyota is developing innovative production systems, equipment and processing technology and introducing them to its mass-production line in due course.

Distribution

Toyota’s automotive sales distribution network is the largest in Japan. As of March 31, 2019, this network consisted of 279 dealers employing approximately 32 thousand sales personnel and operating approximately 4.7 thousand sales and service outlets. Toyota owns 13 of these dealers and the remainder is independent.

Toyota believes that this extensive sales network has been an important factor in its success in the Japanese market. A large number of the cars sold in Japan are purchased from salespersons who visit customers in their homes or offices. In recent years, however, the traditional method of sales through home visits is being replaced by showroom sales and the percentage of automobile purchases through showrooms has been gradually increasing. Toyota expects this trend to continue, and accordingly, is working to improve its sales activities such as customer reception and meticulous service at showrooms to increase customer satisfaction.

Sales of Toyota vehicles in Japan are conducted through four sales channels — “Toyota,” “Toyopet,” “Corolla” and “Netz.” In addition, Toyota introduced the Lexus brand to the Japanese market in August 2005, and currently distributes the Lexus brand vehicles through a network of 168 sales outlets in order to enhance its competitiveness in the domestic luxury automotive market. The following table provides information for each channel as of March 31, 2019.

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In April 2019, Toyota merged four dealers that were wholly owned subsidiaries in Tokyo, with the merged company being renamed “Toyota Mobility Tokyo Co., Ltd.” (“TMT”) At the same time, Toyota abolished the sales channels system in Tokyo; TMT has started, ahead of other areas in Japan, distributing all Toyota vehicle models.

Outside Japan, Toyota vehicles are sold through approximately 169 distributors in approximately 194 countries and regions. Through these distributors, Toyota maintains networks of dealers. The chart below shows the number of Toyota distributors as of March 31, 2019 by country and region:

Improving Efficiency

Toyota is working on the following to create a corporate structure allowing for efficient development, production and sales that can respond flexibly to changes in the external environment:

Toyota also plans to improve profitability and enhance operating efficiency by continuing to pursue aggressive cost reduction programs, including:

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Toyota is further improving production efficiency by installing more versatile equipment and systems, modifying vehicle body designs to allow for a greater variety of models on each production line and sharing more parts among vehicles, not simply among different models but also among different platforms.

In April 2012, Toyota announced a new development framework, the TNGA, which reconciles sweeping advances in product appeal with cost reductions. The new framework sets forth an architecture that incorporates not only the three fundamental vehicle functions of moving, turning and stopping, but also ergonomics such as driving position as well as freedom of design. Toyota plans to efficiently develop cars with high basic-performance attributes by developing parts and modules based on this architecture. The TNGA provides for handling multiple models simultaneously in grouped development projects that will increase the sharing of parts and core vehicle components. This sharing, carried out in cooperation with suppliers, will result in lowered costs, thereby allowing developmental manpower and funds to be reinvested in R&D to meet consumer preferences and R&D to meet regional needs, resulting in further product improvement.

By April 2013, Toyota established systems to rapidly promote the TNGA and carried out product development under this new way of doing business. As a result, Toyota realized high basic performance and marketability in the Prius that was introduced in Japan in December 2015. Toyota subsequently applied the TNGA initiatives to the Camry, Lexus LC and LS in 2017 and the Crown and Corolla Sport in 2018. Toyota has rolled out, and plans to continue to roll out, the results of such development to other vehicles as well.

Realizing a Smart Mobility Society that expands through connected car technologies

In the midst of rapidly changing societies, including the falling birth rate and aging populations in developed nations, an increasingly diverse range of energy sources and the evolution of IoT, among others, the automotive industry is facing a time of profound transformation that could happen only once in a hundred years. As a company responsible for the freedom of mobility, which is one aspect of social infrastructure, Toyota is firmly determined to contribute to solving social issues by changing the very ways in which people, things, and information flow through the world. Based on this commitment, Toyota is moving forward with initiatives striving to realize a smart mobility society, in which people can “enjoy freedom of movement and feel at ease and excited,” by connecting vehicles, people and communities with its connected car technologies.

Our Connected Strategy for Realizing Connected Platforms

Connecting cars is not only providing new value and services to customers, but creating new modes of use and new roles in society for cars. To stay at the forefront of this evolution, Toyota established an in-house Connected Company in April 2016 and announced its Connected Strategy in November of the same year. This strategy comprises three pillars that we initiated almost simultaneously.

The key to connecting all cars is on-board data communication modules (“DCMs”), which connect cars to data centers. In 2002, Toyota commercialized its DCMs and launched the G-BOOK service for Toyota vehicles (this service was replaced by T-Connect in 2014). In 2005, DCMs became a standard feature in Lexus cars, and Toyota launched the G-Link service in Japan before expanding it to North America and China. As the first step towards connecting all vehicles, in June 2018, Toyota also

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launched sales in Japan of the new Crown and Corolla Sport with DCMs as standard features for all vehicles. This marked the start of Toyota’s full-scale roll out of connected cars. Toyota plans to adopt common standards worldwide for its DCMs by 2019, equip virtually all passenger vehicles it sells in Japan and the United States with DCMs by 2020, and steadily equip more vehicles with DCMs in other major markets around the world going forward.

As the number of connected cars on the road increases, so does the big data they generate and Toyota is using this data to contribute to the good of customers and society while revolutionizing its own businesses. Aggregate route history maps were made publicly available after the Great East Japan Earthquake, and such data has subsequently been used in evacuation, response, and recovery operations following several natural disasters. Furthermore, by analyzing the diverse information collected from cars on the road using big data approaches, Toyota will be able to utilize that information to create and enhance services that provide safety and peace of mind. Making DCMs standard features also makes Toyota’s online services more convenient and easier to use. The voice recognition-enabled artificial intelligence (AI) virtual agent understands passengers’ natural speech and performs tasks such as setting the destination for the navigation system. Toyota also has operators standing by 24 hours a day, 365 days a year, to provide a more in-depth response to customer requests. By offering both virtual (AI) and real-world (operators) services, Toyota seeks to provide what it calls “Human Connected Services.”

Toyota will accelerate cross-industry collaboration through the Mobility Service Platform (MSPF). Using the MSPF, Toyota is taking an open approach and working together with all kinds of service providers to contribute to the creation of new mobility services. Toyota has already begun a range of collaborative initiatives. In May 2016, Toyota and Uber Technologies, Inc. (“Uber”) began to consider a partnership in ride-sharing. In 2017, Toyota conducted a pilot program for its Smart Key Box with the United States car-sharing company Getaround, Inc.; began a partnership with Grab Holdings Inc. (“Grab”), the leading ride-hailing service company in Southeast Asia; and began verification testing of connected taxis with the Tokyo Taxi-Hire Association. Going forward, Toyota will work to deepen these and other initiatives in order to create new mobility services and accelerate their commercialization.

As practical measures for realizing a Smart Mobility Society based on the Connected Platforms, Toyota is promoting: 1. “Connected with vehicles and roads (SAFETY) — Cooperative ITS, driving assistance functions and automated driving”; 2. “Connected with people (COMFORT) — Connected Service”; and 3. “Connected with society and the community (ECO & CONVENIENCE) — Maas (Mobility as a Service).”

Connected with vehicles and roads (SAFETY) — Cooperative ITS

Enhancing transport systems requires taking a general approach that addresses various factors across a wide scope that are pertinent not only to vehicles but also roads, people and public transport systems in order to ensure smooth and efficient movement of people and vehicles and to build a safe transportation environment. In addition to VICS and ETC (Electronic Toll Collection System), which are already standard in Japan, “Cooperative ITS,” which combines cutting edge IT and vehicle technology, is in development and has begun to be partially implemented.

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Toyota is committed to developing new ITS products. Toyota believes that intelligent transport systems will become an integral part of its overall automotive operations and enhance the competitiveness of its vehicles. As familiarity with and demand for ITS products grow, Toyota expects an increasing number of ITS products to become commercially available and achieve greater acceptance each year.

Connected with vehicles and roads (SAFETY) — driving assistance functions and automated driving

Toyota’s driving assistance functions offer functions that assist drivers with an aim to lessen the burden of driving, enhance safety and provide to everyone the pleasure of driving. Toyota has commercialized enhancements to various functions that assist the driver in sensing external information, avoiding danger and making appropriate maneuvers.

In 2015, Toyota commercialized the Toyota Safety Sense, a package that includes the Pre-collision System and driving assistance functions. In 2018, Toyota commercialized the new-generation Toyota Safety Sense (Toyota Safety Sense 2.0 in the United States), which has brakes capable of mitigating collision damage and advanced driving assistance functions. The most recent Toyota Safety Sense 2.0 has the following functions:

Toyota has completed installation of Toyota Safety Sense on nearly all models sold in Japan, the United States and Europe at an affordable price aimed at widespread adaption. The accumulated global shipments of

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vehicles with Toyota Safety Sense installed exceeded 10 million vehicles (of which approximately 5 million vehicles were shipped to the United States) as of the end of October 2018.

In addition to the above, with the aim to realize the ultimate goal of zero casualties from traffic accidents, Toyota is promoting the development of technologies such as “Parking Support Brake (pedestrians),” which supports avoiding collisions by detecting pedestrians in the rear of the vehicle using a camera, and “Active Steering Assist — Pre-Collision System,” which is a system that, in situations where the system decides that a collision cannot be avoided by automatic braking alone and there is room in the driver’s lane to avoid a collision, supports avoiding collisions by automatically controlling the steering after the Pre-Collision System controls the brake.

Connected with people (COMFORT) — Connected Service

The driving experience can be enriched and its convenience can be improved through information communication technologies that add a new “connecting” function to the basic vehicle functions of “running, turning and stopping.” Examples of the connecting function include the following:

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In addition to the above, Toyota also operates a Japanese-language web portal for automobile information, GAZOO.com. The name “GAZOO” originates from the Japanese word gazo , meaning images. GAZOO was established as an Internet membership service linking Toyota, its national dealer network and GAZOO members, and has provided information on new and used Toyota vehicles and related services, as well as online shopping services. GAZOO later expanded to include information on other automakers, as well as a rich blog feature as a social networking portal site on automobiles.

Furthermore, in 2010, by utilizing technology cultivated through the Internet and telematics services, Toyota developed the Toyota Smart Center (“TSC”) that optimally controls electricity and links EVs and PHVs with homes. Toyota aims to offer new services, achieve better vehicle quality and enhance product attractiveness as well as contribute further to society by utilizing the vehicle information, road conditions and other parameters collected via telematics services and stored at the TSC. With regard to contribution to society, Toyota began offering the Big Data Traffic Information Service in June 2013, through which traffic information, statistics and other related information are provided to local governments, universities and businesses to support traffic flow improvement and assist disaster prevention measures. In December 2016, Toyota launched the TC Smartphone Navigation free-of-charge to users, including those other than Toyota users, to provide readily usable route history maps. Toyota plans to continue to work with new information technologies and the IT industry to establish a framework for TSC’s global implementation and to realize a mobility society of the future.

In 2016, Toyota has been working actively on “connected car technology” and alliances with other companies for effective vehicle data utilization to “make ever-better cars” and for safer and securer “connected” service. In January 2016, Toyota announced a “connected vehicle framework” to increase installation of DCMs into a broader range of its vehicles starting in the United States from 2017. In April 2016, Toyota established a new company, “Toyota Connected, Inc.,” in the United States to consolidate and analyze information collected from vehicles and to develop new products, and thereby promoting “making ever-better cars” through utilizing big data.

As a further engagement in the insurance industry, Toyota established Toyota Insurance Management Solutions USA, LLC (“TIMS”), a new U.S. telematics car insurance services company, to promote analysis of big data and development of algorithms. TIMS provides telematics insurance services best suited to Toyota’s customers by consolidating Toyota’s data, financing and insurance knowhow.

Connected with society and the community (ECO & CONVENIENCE) — MaaS (Mobility as a Service)

In November 2016, based on the proliferation and popularity of mobility services such as car-sharing, Toyota started to establish MSPF, which has various functions to support mobility services. MSPF is a platform that aggregates and covers individual business functions, such as vehicle management systems and leasing programs, that Toyota developed and offered to mobility service providers such as ride-sharing operators when working together with them. In addition, as one example of the functions that MSPF offers, Toyota developed the smart key box (“SKB”) that enables users to lock and unlock doors and to start the engine with their smartphones — thus providing a safer and more secure way of locking/unlocking doors and starting the engine. Using the MSPF and SKB, Toyota started a pilot program in collaboration with Getaround, a venture company providing car-sharing services targeted at individuals in the United States, in March 2017 in San Francisco, California. In addition, Toyota is working with Toyota Financial Services Corporation (“TFSC”) to make vehicles with expired leases available on Getaround, in order to effectively utilize TFSC’s assets. Toyota is also examining the viability of car sharing using SKBs. Furthermore, Servco Pacific Inc., a Toyota dealer in Hawaii, began a car-sharing services program in July 2018.

In terms of ride-sharing, in May 2016, Toyota and Uber entered into a memorandum of understanding to explore collaboration with respect to ride-sharing. In August 2018, the scope of collaboration was expanded: Toyota and Uber will be developing vehicles utilizing the technologies of both companies and used exclusively for ride-sharing, and introducing the same into Uber’s ride-share network. Technology establishment of the

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in-vehicle equipment and control interface is underway. Furthermore, in April 2019, in order to accelerate the development and practical realization of automated driving vehicles for ride-sharing, Toyota announced that it will invest in Uber Advanced Technologies Group together with Denso Corporation and SoftBank Vision Fund L.P.

In Southeast Asia, Toyota started to collaborate with Grab in August 2017, and commenced a pilot program in Singapore to collect driving data generated from vehicles owned by Grab. In June 2018, Toyota further expanded the collaboration with Grab, invested in Grab, and moved forward with providing various connected services that use MSPF to Grab. As a specific example of such services, in December 2018 Toyota provided the Toyota-developed total care service for vehicles to 1,500 vehicles owned by Grab and started both to provide high-efficiency maintenance reflecting TPS as well as to cooperate with local insurance companies with the aim to effectively utilize driving data collected from MSPF in insurance services.

In August 2016, Toyota and Japan Federation of Hire-Taxi Associations entered into a memorandum of understanding to explore areas for collaboration, so as to develop and introduce the “Japanese taxi of the future.” Through use of taxis to collect and analyze information concerning the road traffic environment, and applying those results to the development of the Mobility Teammate Concept, which embodies Toyota’s vision of automated driving, Toyota and the Japan Federation of Hire-Taxi Associations will continue to be important partners in helping to develop Japanese taxis into the “world’s safest, most pleasant, world-class public transportation service” and to strengthen the Japanese transportation infrastructure.

In October 2018, Toyota agreed with SoftBank Corp. (“SoftBank”) in the realization of a Mobility Network that delivers safe and comfortable mobility to all people. In February 2019, Toyota and SoftBank established a joint venture, MONET Technologies Inc. (“MONET”). Anticipating the realization of an automated driving society, cooperation with 17 local governments in Japan to provide next-generation on-demand mobility service began. In March 2019, MONET established the Monet Consortium with the participation of 88 companies in an effort to promote inter-corporate cooperation as a way of ‘team building’ that aims for the realization of mobility innovation.

With the background of expanding mobility services and the tightening of data regulations in Europe, Toyota has established Toyota Connected Europe, Limited in April 2018, and plans to utilize MSPF in Europe as well to promote car-sharing businesses in coordination with local dealers.

In January 2018, at “2018 International CES” held in Las Vegas, Nevada in the United States, Toyota announced the “e-Palette Concept,” a next generation EV designed exclusively for MaaS, leveraging electrification, connected vehicles and automated driving technologies. The e-Palette Concept can be adapted for various services, such as passenger transportation, logistics services or retail services, and is the embodiment of Toyota’s concept of “new mobility” that supports the lifestyles of its customers. Amazon.com, Inc., DiDi Chuxing, Pizza Hut, LLC, Uber and Mazda Motor Corporation are collaborating with Toyota as initial launch partners in order to explore vehicle specifications that are even more practical and to ensure the realization of a new mobility service. Going forward, Toyota is planning to support the transportation of athletes and staff in the Olympic and Paralympic village in the 2020 Tokyo Olympic and Paralympic Games, as well as commercialization around 2023 upon conducting a pilot program with alliance partners.

In addition, Toyota joined the “Toyota City Low-Carbon Society Verification Council” (established in August 2010), and carried out experiments relating to the “Establishment of a System for Low-Carbon Emission Transportation” until March 2015. As a way of building on the results of such experiments, Toyota launched an experimental ultra-compact electric vehicle sharing program in Tokyo from April 2015. It also launched an experimental ultra-compact electric vehicle program for tourism using a Toyota developed car-sharing system in Okinawa from January 2016. Furthermore, in Toyota City and Okinawa in April 2017, and in Tokyo in April 2019, these experimental programs were commercialized, and management was transferred to local companies and organizations.

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Financial Services

Toyota’s financial services include loan programs and leasing programs for customers and dealers. Toyota believes that its ability to provide financing to its customers is an important value-added service. In July 2000, Toyota established a wholly-owned subsidiary, TFSC, to oversee the management of Toyota’s finance companies worldwide, through which Toyota aims to strengthen the overall competitiveness of its financial business, improve risk management and streamline decision-making processes. Toyota has expanded its network of financial services, in accordance with its strategy of developing auto-related financing businesses in significant markets. Accordingly, Toyota currently operates financial services companies in 37 countries and regions, which support its automotive operations globally.

Toyota’s revenues from its financial services operations were ¥2,153.5 billion in fiscal 2019, ¥2,017.0 billion in fiscal 2018 and ¥1,823.6 billion in fiscal 2017. In fiscal 2018, weak used vehicle prices in the United States resulted in increased disposal losses for vehicles with expired leases as well as losses on depreciation compared with the past. Interest rates also increased in the United States and some emerging countries. This market environment exerted downward pressure on revenue in the financing business. In fiscal 2019, the trends of rising interest rates and increases in lease-up vehicles continued, but because used vehicle prices in the United States remained higher than expected, the financial business as a whole was generally stable. Under such circumstances, as a result of Toyota’s continued collaboration with dealers in various countries and regions and efforts to expand products and services that meet customer needs, Toyota’s share of financing provided for new car sales of Toyota and Lexus vehicles in regions where TFSC operates remained at a high level of approximately 35% and the balance of loan receivables continued to steadily increase globally, with the exception of some countries. In addition, Toyota is making efforts to provide both its customers and dealers with stable financial services by diversifying its funding methods such as issuing Green Bonds in Japan in addition to using already existing means as commercial paper, corporate bonds, bank borrowings, ABCP (Asset Backed Commercial Paper) and ABS (Asset Backed Securities). Furthermore, Toyota continued to perform detailed credit appraisals and serve customers by monitoring bad debt and loan payment extensions, and the percentage of credit losses remained low, at 0.27% and 0.30% in fiscal years 2019 and 2018, respectively. Toyota continues to work towards improving its risk management measures in connection with credit and residual value risks.

Toyota Motor Credit Corporation is Toyota’s principal financial services subsidiary in the United States. Toyota also provides financial services in 36 other countries and regions through various financial services subsidiaries, including:

Toyota Motor Credit Corporation provides a wide range of financial services, including retail financing, retail leasing, wholesale financing and insurance. Toyota Finance Corporation also provides a range of financial services, including retail financing, retail leasing and credit cards. Toyota’s other finance subsidiaries provide services including retail financing, retail leasing and wholesale financing.

In September 2018, Toyota established Toyota Fleet Mobility GmbH in Germany to provide full service leasing. Going forward, Toyota is planning to develop bases in each European country. In addition, Toyota established KINTO Corporation, which provides full service leasing (subscription service), in Japan in January

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2019. Furthermore, in January 2019, Toyota established a finance leasing business for commercial trucks and buses as a subsidiary of Toyota Finance Corporation. This subsidiary is a joint venture with Sumitomo Mitsui Auto Service Company, Limited and Hino Motors, Ltd.

Net finance receivables for all of Toyota’s dealer and customer financing operations were ¥16,928.8 billion as of March 31, 2019, representing an increase of 6.9% as compared to the previous year. The majority of Toyota’s financial services are provided in North America. As of March 31, 2019, 55.2% of Toyota’s finance receivables were derived from financing operations in North America, 13.0% from Asia, 12.3% from Europe, 8.2% from Japan and 11.3% from other areas.

Approximately 45% of Toyota’s unit sales in the United States during fiscal 2019 included a finance or lease arrangement with Toyota. Because the majority of Toyota’s financial services operations are related to the sale of Toyota vehicles, a decrease in vehicle unit sales may lead to a contraction of Toyota’s financial services operations.

The worldwide financial services market is highly competitive. Toyota’s competitors in retail financing and retail leasing include commercial banks, credit unions and other finance companies. Commercial banks and other automobile finance subsidiary companies serving their parent automobile companies are competitors of Toyota’s wholesale financing activities. Competitors in Toyota’s insurance operations are primarily national and regional insurance companies.

For information on Toyota’s finance receivables and operating leases, please see “Operating and Financial Review and Prospects — Operating Results — Financial Services Operations.”

Retail Financing

Toyota’s finance subsidiaries acquire new and used vehicle installment contracts primarily from Toyota dealers. Installment contracts acquired must first meet specified credit standards. Thereafter, the finance company retains responsibility for installment payment collections and administration. Toyota’s finance subsidiaries acquire security interests in the vehicles financed and can generally repossess vehicles if customers fail to meet their contractual obligations. Almost all retail financings are non-recourse, which relieves the dealers from financial responsibility in the event of repossession. In most cases, Toyota’s finance subsidiaries require their retail financing customers to carry automobile insurance on financed vehicles covering the interests of both the finance company and the customer.

Toyota has historically sponsored, and continues to sponsor, special lease and retail programs by subsidizing below market lease and retail contract rates.

Retail Leasing

In the area of retail leasing, Toyota’s finance subsidiaries acquire new vehicle lease contracts originated primarily through Toyota dealers. Lease contracts acquired must first meet specified credit standards after which the finance company assumes ownership of the leased vehicle. The finance company is generally permitted to take possession of the vehicle upon a default by the lessee. Toyota’s finance subsidiaries are responsible for contract collection and administration during the lease period. The residual value is normally estimated at the time the vehicle is first leased. Vehicles returned to the finance subsidiaries at the end of their leases are sold by auction. For example, in the United States, vehicles are sold through a network of auction sites as well as through the Internet. In most cases, Toyota’s finance subsidiaries require lessees to carry automobile insurance on leased vehicles covering the interests of both the finance company and the lessee.

Wholesale Financing

Toyota’s finance subsidiaries also provide wholesale financing primarily to qualified Toyota dealers to finance inventories of new Toyota vehicles and used vehicles of Toyota and others. The finance companies

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acquire security interests in vehicles financed at wholesale. In cases where additional security interests would be required, the finance companies take dealership assets or personal assets, or both, as additional security. If a dealer defaults, the finance companies have the right to liquidate any assets acquired and seek legal remedies.

Toyota’s finance subsidiaries also make term loans to dealers for business acquisitions, facilities refurbishment, real estate purchases and working capital requirements. These loans are typically secured with liens on real estate, other dealership assets and/or personal assets of the dealers.

Insurance

Toyota provides insurance services in the United States through Toyota Motor Credit Corporation’s wholly-owned subsidiary, Toyota Motor Insurance Services, Inc. (“TMIS”) and its wholly-owned insurance company subsidiaries. Their principal activities include marketing, underwriting and claims administration. TMIS also provides coverage related to vehicle service agreements through Toyota dealers to customers. In addition, TMIS also provides coverage and related administrative services to affiliated companies of Toyota Motor Credit Corporation. Toyota dealers in Japan and in other countries and regions also engage in vehicle insurance sales.

Other Financial Services

Toyota Finance Corporation launched its credit card business in April 2001 and began issuing Lexus credit cards in 2005 when the Lexus brand was introduced in Japan. As of March 31, 2018, Toyota Finance Corporation has 15.8 million card holders (including Lexus credit card holders).

All Other Operations

In addition to its automotive operations and financial services operations, Toyota is involved in a number of other non-automotive business activities. Net sales for these activities totaled ¥1,676.3 billion in fiscal 2019, ¥1,646.1 billion in fiscal 2018 and ¥1,321.0 billion in fiscal 2017.

Housing

Toyota established its subsidiary Toyota Housing Corporation (“Toyota Housing”) in April 2003 and has transferred to it product planning and sales operations related to the manufacture and sale of housing. Furthermore, in order to quickly and accurately grasp clients’ needs and to plan, develop and sell products on a timely basis, in April 2008, Toyota transferred the product development operation to Toyota Housing. In October 2010, Toyota spun-off its housing operations (project planning, technology development and manufacturing) through a statutory demerger and integrated them into Toyota Housing. Toyota conducted this in order to quickly respond to the needs of even more customers in a vastly changing housing market, through rapid decision-making and flexible business operations based on the integration of the development, manufacture and sales functions. In March 2005, Toyota, together with institutional investors, agreed to jointly invest in Misawa Home Holdings, Inc. (“Misawa”; renamed Misawa Homes Co., Ltd.) pursuant to its request for assistance in its rehabilitation. In April 2010, determining that a stronger collaboration with Misawa would be desirable in order to achieve further growth in the difficult operating environment of the housing industry, Toyota Housing agreed to purchase Misawa shares from an institutional investor. In addition, Toyota transferred ownership of Misawa to Toyota Housing in October 2010. Through these activities, Toyota has strengthened the housing business of both companies.

In May 2019, Toyota entered into agreements with Panasonic Corporation to establish a new joint venture related to the town development business (scheduled for January 2020). The joint venture will set the same ownership ratio between Panasonic group and Toyota in order to secure its autonomous management while continuing to receive support from Toyota as a shareholder and is expected to be out of the scope of consolidation for Panasonic Corporation and Toyota. In connection with the establishment of the joint venture, Toyota will temporarily make Toyota Housing and Misawa its wholly owned subsidiaries and thereafter transfer all of the outstanding shares in those two subsidiaries to the joint venture by a joint share transfer.

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Information Technology

See “— Enhancing Vehicle Functionality and Intelligent Transport Systems” for a description of Toyota’s information technology.

Governmental Regulation, Environmental and Safety Standards

Toyota is subject to laws in various jurisdictions regulating the levels of pollutants generated by its plants. In addition, Toyota is subject to regulations relating to the emission levels, fuel economy, noise and safety of its products. Toyota has incurred significant costs in complying with these laws and regulations and expects to incur significant compliance costs in the future. Toyota’s management views leadership in environmental protection as an important competitive factor in the marketplace.

Vehicle Emissions

Japanese Standards

The Air Pollution Control Act of Japan and the Road Transport Vehicle Act and the Act Concerning Special Measures for Total Emission Reduction of Nitrogen Oxides and Particulate Matter from Automobiles in Specified Areas regulate vehicle emissions in Japan. In addition, both the Noise Regulation Act and the Road Transport Vehicle Act provide for noise reduction standards on automobiles in Japan. Toyota’s vehicles manufactured for sale in Japan comply with all Japanese exhaust emission and noise level standards.

U.S. Federal Standards

The federal Clean Air Act directs the Environmental Protection Agency (“EPA”) to establish and enforce air quality standards, including emission control standards on passenger vehicles, light-duty trucks and heavy-duty vehicles. Manufacturers are not permitted to sell vehicles in the United States that do not meet the standards. In March 2014, the EPA finalized new “Tier 3” tailpipe emission and evaporative emission standards for passenger vehicles, light-duty trucks, medium-duty passenger vehicles and some heavy-duty vehicles. Under the new rule, tailpipe emission standards for volatile organic compounds, nitrogen oxides, and particulate matter, as well as standards for evaporative emissions, will become increasingly stringent in phases from 2017 to 2025, bringing the federal emission standards in line with California’s emission standards. The harmonization of the federal and California emission standards is expected to lead to reductions in the burden on development, such as a reduction in the number of tests required for certification and standardization of emission reduction systems. The new Tier 3 rule also required reductions in gasoline’s sulfur content beginning in 2017.

On August 28, 2012, the EPA and the federal National Highway Traffic Safety Administration (“NHTSA”) jointly issued the final rule to reduce greenhouse gas emissions and improve fuel economy for passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2017 through 2025. In the final rule, these vehicles are required to meet an estimated combined average emission level of 163 grams of carbon dioxide per mile in model year 2025, equivalent to 54.5 miles per gallon if these requirements were met through improvements in fuel economy standards. The NHTSA also issued Corporate Average Fuel Economy (“CAFE”) standards for passenger vehicles and light-duty trucks that would require manufacturers to meet an estimated combined average fuel economy level of 49.6 miles per gallon in model year 2025.

On January 12, 2017, the EPA, as part of a Midterm Evaluation of the rule, issued a final determination to maintain the final rule for model years 2022 through 2025. On March 13, 2017, however, the newly-appointed Administrator of the EPA and the newly-appointed Secretary of the Department of Transportation issued a notice that they were reconsidering the final determination. On May 1, 2018, California and 16 other states filed suit in the U.S. Court of Appeals for the District of Columbia to oppose the EPA and NHTSA’s decision to repeal the greenhouse gas emission standards. On August 2, 2018, the EPA and the NHTSA issued a joint Notice of Proposed Rulemaking. The Administration’s proposed rule would freeze the vehicle fuel economy and CAFE

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standards at 2020 levels for model years 2021-2026. The rule would also revoke the waiver granted to California to establish more stringent standards for vehicle emissions. In response to the Administration’s proposed rule, on August 7, 2018 the California Air Resources Board (“CARB”) posted a proposal to ensure that cars and light-duty trucks for model years 2021-2025 would continue to meet California’s more stringent standards. The EPA and California had been in discussions regarding their differences over vehicle emission standards, but these discussions broke off without resolution on February 20, 2019.

In addition, in July 2015 the EPA adopted a final rule to limit and eventually phase out, on account of their contribution to global warming, the use of hydroflourocarbons (“HFCs”) and HFC-containing refrigerant blends in, among other systems, the air conditioning systems of new vehicles. In August 2017, however, the D.C. Circuit Court of Appeals ruled that the EPA, which had based the rule on a section of the Clean Air Act which relates to the control of ozone depleting substances and not greenhouse gasses, had overstepped its authority. In October 2018, the Supreme Court of the United States declined to hear an appeal of the Circuit Court’s decision, and the rule is therefore no longer in effect. The EPA is working on formulating new rules to limit the use of HFCs. Toyota purchases air conditioning systems from third parties for use in its vehicles. Feasible alternatives to HFC refrigerants that may be prohibited by any future EPA rules may be costly or present other risks, such as flammability or other safety concerns.

California Standards

Under the federal Clean Air Act, the State of California is permitted to establish its own vehicle emission control standards if it receives a waiver from the EPA. As a result, the CARB required that a specified percentage of a manufacturer’s passenger vehicles and light-duty trucks sold in California be “zero-emission vehicles” (vehicles producing no emissions of regulated pollutants) as well as permitted certain advanced technology vehicles such as PHVs, and alternative fuel vehicles that meet “partial zero-emission vehicles requirements” to be granted partial qualification as EVs or FCVs. Toyota’s MIRAI qualifies as a zero-emission vehicle. The current Prius Prime has been certified as a partial zero-emission vehicle. Toyota intends to continue to develop additional advanced technologies and alternative fuel technologies that will allow other vehicles to qualify as zero-emission vehicles or partial-zero-emission vehicles.

In January 2012, the CARB adopted the Advanced Clean Cars (“ACC”) program. The ACC program includes new Low-Emission Vehicle regulations that reduce smog-causing pollutants (including nitrogen oxides and particulate matter) and greenhouse gas emissions from cars and light-duty trucks for model years 2015 to 2025, and more stringent zero-emission vehicle regulations which will require increased production of zero-emission vehicles and partial zero-emission vehicles for model years 2018 to 2025. The ACC program also lowers allowable smog-forming particulate emissions to one mg/mile or lower, to be phased in beginning with model year 2015.

In February 2010, the CARB had enacted a “deemed to comply” rule that provided that compliance with federal greenhouse gas emission standards for model years 2017 through 2025 would also satisfy California’s greenhouse gas emissions standards. However on March 14, 2017, in reaction to the EPA Administrator’s and the Department of Transportation Secretary’s decision to reconsider the EPA’s prior final determination to maintain the final rule for greenhouse gas emissions for model years 2022 through 2025, California petitioned the U.S. Court of Appeals for the District of Columbia to protect its interests in the final rule. Moreover, in a March 24, 2017 ACC Midterm Review, the CARB affirmed the ACC program’s requirements, and suggested that its decision to follow the federal final rule might change if the federal standards “were substantially changed.”

On April 2, 2018, upon the EPA and NHTSA’s announcement that it would repeal and replace the greenhouse gas emission standards for model years 2022 through 2025, the CARB stated that, regardless of this federal action, it would not change California’s more stringent standards. On May 1, 2018, California and 16 other states filed suit in the U.S. Circuit Court of Appeals for the District of Columbia to oppose the EPA and NHTSA’s decision to repeal and replace the greenhouse gas emission standards. On August 2, 2018, the EPA and

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the NHTSA issued a joint Notice of Proposed Rulemaking. The Administration’s proposed rule would freeze the vehicle fuel economy and CAFE standards at 2020 levels for model years 2021-2026. The rule would also revoke the waiver granted to California to establish more stringent standards for vehicle emissions. In response to the Administration’s proposed rule, on August 7, 2018 the CARB posted a proposal to ensure that cars and light-duty trucks for model years 2021-2025 would continue to meet California’s more stringent standards. The EPA and California had been in discussions regarding their differences over vehicle emission standards, but these discussions broke off without resolution on February 20, 2019.

Other States’ Standards

Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Vermont have adopted regulations substantially similar to California’s zero-emission vehicles requirement, and in January 2019 the Governors of Colorado and New Mexico took executive actions requiring their relevant administrative agencies to establish equivalent requirements. Colorado, Connecticut, Delaware, Maine, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Oregon, Rhode Island, Vermont and Washington have adopted regulations substantially similar to California’s low emission vehicle and greenhouse gas emission regulations, and the Governor of New Mexico’s January 2019 executive action directed its relevant administrative department to adopt regulations equivalent to California’s low emission vehicle regulations.

Canadian Standards

Canada has finalized vehicle emission standards equivalent to the federal standards in the United States in October 2014, in response to the strengthening of the federal greenhouse gas emission standards in the United States applicable to model years 2017 to 2025. Furthermore, certain Canadian provinces are currently considering enacting their own regulations on vehicle emissions of greenhouse gases. On January 11, 2018, the Ministry of Sustainable Development, Environment and the Fight against Climate Change of the Province of Quebec issued regulations on zero-emission vehicles including EVs, FCVs and PHVs, among others. In November 2018, the premier of British Columbia announced that the government would introduce legislation concerning zero-emission vehicles (indicating the phase-in introduction starting from model year 2020). Canada also adopted a more stringent fuel rule, which is based on the fuel rule in the United States, that reduces refineries’ annual average sulfur concentration of gasoline to 10mg/kg from 2017 with a new addition of credit system to secure compliance.

European Standards

In 2007, the European Parliament adopted more stringent emission standards for passenger vehicles and light commercial vehicles. The effective date for phasing in these stricter standards for passenger vehicles was September 2014 for Euro 6. For light commercial vehicles, the effective date was September 2015 for Euro 6.

The primary focus of Euro 6 is to limit further emissions of diesel powered vehicles and bring them down to a level equivalent to gasoline powered vehicles. In addition, Euro 6 is being implemented in two stages, and beginning with the second stage (September 2017 for passenger vehicles and September 2018 for commercial vehicles), the EU is implementing the Real Driving Emission (“RDE”) regulations, which requires manufactures to conduct on-road emissions tests using portable emissions testers. Since September 2017, manufacturers have been required to reduce the divergence between the regulatory limit tested in laboratory conditions and the values of RDE tests. The EU has also decided to implement the Worldwide harmonized Light vehicles Test Procedure (WLTP), which were introduced on September 1, 2017 and will be phased in for all new cars between 2018 and 2019.

Chinese Standards

Emissions regulations are being implemented throughout China pursuant to the Chinese National Standards (GB) of the Ministry of Environmental Protection of the People’s Republic of China, and the manufacture and sale of models not meeting these regulations are prohibited.

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For passenger vehicles, pursuant to GB18352.5-2013, it has been decided that Level 5 Emissions Regulations (China 5) (corresponding to Euro 5 standards) are to be implemented throughout China for all models that are sold and registered after January 2018.

In an effort to improve the fuel quality in the market, stricter China 5 gasoline and diesel fuel standards have been stipulated in GB17930-2013 and GB19147-2013 to achieve the Level 5 Emissions Regulations, and it has been decided that these standards will be implemented from January 2018. Following that, however, given the accelerated improvement in fuel quality in the market, new China 5 fuel standards (corresponding to Euro 5) have been implemented in 11 provincial capitals in eastern China from January 2016 and nationwide in China from January 2017, as opposed to January 2018 as initially determined. In connection with this, the Ministry of Environmental Protection and the Ministry of Industry and Information Technology issued a directive on the implementation timing of the Level 5 Emissions Regulations, in accordance with which, the implementation started for gasoline-powered passenger vehicles in the 11 provincial capitals from April 2016 and nationwide in China from January 2017, as well as for diesel passenger vehicles nationwide in China pursuant to the regulations of GB18352.5-2013 from January 2018. The next-generation emissions regulations for passenger vehicles, or Level 6 Emissions Regulations (China 6), were issued as GB18352.6-2016 at the end of 2016, pursuant to which tighter requirements will be implemented in two steps, depending on the regulated subjects and the implementation timing. Specifically, China 6a will apply to all models to be sold or registered in July 2020 and beyond, and China 6b will apply to all models to be sold or registered in July 2023 and beyond. With respect to fuels in the market, the quality standards and the implementation from January 2019 for China 6 gasoline fuel and China 6 diesel fuel have been provided in GB17930-2016 and GB19147-2016 so as to keep up with the implementation timing of China 6 emissions regulations. Moreover, for areas where the air quality improvement is an urgent necessity, China 6 is scheduled to be implemented from July 2019 ahead of the implementation throughout China.

For heavy-duty diesel-powered commercial vehicles, pursuant to GB17691-2005, the China V Emissions Regulations are being implemented from July 2017. With the establishment of GB17691-2018, which provides next-level China VI Emissions Regulations (China VI), it has been decided that China VIa will be implemented from July 2021 and China VIb from July 2023 (these regulations will apply to gas-fueled vehicles and public vehicles for urban areas earlier than those dates). For heavy-duty gasoline-powered commercial vehicles, pursuant to GB14762-2008, Level IV Emissions Regulations (China IV) apply to new models after July 2012. After the first day the regulation is implemented to a new model, all new models released during the following one-year period also become subject to the regulation. Tightening of the next-generation emissions regulations (China V and China VI) is currently considered for heavy-duty gasoline-powered commercial vehicles.

Standards of Other Countries or Regions

In particular, in India, given the worsening air pollution, in December 2015, the Supreme Court banned the registration of diesel cars with engines that are two liters or larger in the National Capital Region, including the Delhi metropolitan area. In August 2016, the ban on registration was lifted on the condition that a deposit equal to 1% of the vehicle’s retail price is to be paid to the Environment Pollution Control Authority. Furthermore, the government accelerated the implementations of BS-6 (equivalent to EURO6) to 2020.

Vehicle Fuel Economy

Japanese Standards

The Act on Rationalizing Energy Use requires automobile manufacturers to improve their vehicles to meet specified fuel economy standards. Fuel economy standards are established according to the types of vehicles, and are required to be met by either fiscal 2011 (April 2010-March 2011), fiscal 2016 (April 2015-March 2016), fiscal 2021 (April 2020-March 2021), fiscal 2023 (April 2022-March 2023) or fiscal 2026 (April 2025-March 2026).

Toyota is promoting the improvement of its vehicles in order to achieve compliance with these standards.

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U.S. Standards

The Federal Motor Vehicle Information and Cost Savings Act requires automobile manufacturers to comply with CAFE standards. A manufacturer is subject to substantial civil penalties if, in any model year, its vehicles do not meet the CAFE standards. Manufacturers that exceed the CAFE standards earn credits determined by the difference between the average fuel economy performance of their vehicles and the CAFE standards. Credits earned for the five model years preceding the current model year, and credits projected to be earned for the next three model years, can be used to meet CAFE standards in a current model year.

In December 2011, the EPA and the NHTSA issued a joint proposed rule to further reduce greenhouse gas emissions and improve fuel economy for passenger vehicles, light-duty trucks and medium-duty passenger vehicles for model years 2017 through 2025. In the rule, which was finalized in August 2012, these vehicles are required to meet an estimated combined average emission level of 163 grams of carbon dioxide per mile in model year 2025, equivalent to 54.5 miles per gallon if these requirements are met through improvements in fuel economy standards. At the same time, the NHTSA also issued CAFE standards for passenger vehicles and light-duty trucks that would require manufacturers to meet an estimated combined average fuel economy level of 49.6 miles per gallon in model year 2025. As discussed above, however, on April 2, 2018, the EPA announced that the greenhouse gas emission standards for model years 2022 through 2025 would be repealed and replaced with new, presumably less-stringent standards, and that the EPA and NHTSA would jointly commence drafting a new rule that would set new and presumably less stringent CAFÉ standards for these model years. On May 1, 2018, California and 16 other states filed suit in the U.S. Circuit Court of Appeals for the District of Columbia to oppose the EPA and NHTSA’s decision to repeal and replace the standards. On August 2, 2018, the EPA and the NHTSA issued a joint Notice of Proposed Rulemaking. The Administration’s proposed rule would freeze the vehicle fuel economy and CAFE standards at 2020 levels for model years 2021-2026. The rule would also revoke the waiver granted to California to establish more stringent standards for vehicle emissions. In response to the Administration’s proposed rule, on August 7, 2018 the CARB posted a proposal to ensure that cars and light-duty trucks for model years 2021-2025 would continue to meet California’s more stringent standards. The EPA and California had been in discussions regarding their differences over vehicle emission standards, but these discussions broke off without resolution on February 20, 2019. Whatever the outcome of the EPA and NHTSA’s new rule making efforts or the related litigation, Toyota will continue to strive to meet applicable fuel economy standards by further developing fuel-efficient technology, alternative fuel technology and other advanced technology.

In April 2018, the NHTSA reviewed the penalties on nonconformity of CAFE standards and proposed to re-impose a fine of $5.5 for each inadequate fuel economy level of 0.1 mile per gallon and invited comments from the general public on the Federal Register.

European Standards

In February 2014, the European Parliament and Council reduced the average carbon dioxide emissions target for light commercial vehicles to 147 grams per kilometer beginning in 2020. In March 2014, the European Parliament and Council reduced the average carbon dioxide emissions target for passenger vehicles to 95 grams per kilometer beginning in 2021. 95% of each manufacturer’s new cars must comply with this new standard by 2020. Penalties apply to those manufacturers who fail to meet their targets, in amounts corresponding to the degree of shortfall. Manufacturers failing to meet their targets incur penalties of between €5 and €95 per each gram of carbon dioxide per kilometer shortfall for each non-compliant vehicle, and such penalties will rise to €95 from the first gram of exceedance onwards in 2019 and beyond.

In November 2017, the European Commission proposed new carbon dioxide standards for cars and light commercial vehicles for the period after 2020. Average emissions of the EU fleet of new cars and vans in 2025 are proposed to be 15% lower than in 2021, reduced further to 30% lower than in 2021 by 2030. In April 2019, the EU Parliament and the European Council approved more stringent 2030 limits of a 37.5% reduction for cars

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and 31% for vans relative to 2021. Starting from 2021, the emissions targets will be tested using the WLTP procedures.

An EU directive on motor vehicle air conditioning units required manufacturers to replace currently used refrigerants with refrigerants having a lower global warming impact for all newly registered vehicles starting in January 2017.

Chinese Standards

Fuel consumption regulations are being implemented pursuant to the Chinese National Standards (“GB”), and the manufacture and sale of vehicle models not meeting these regulations are prohibited. For light-duty passenger vehicles, GB27999-2011 was issued. In these Level 3 Fuel Consumption Regulations for passenger vehicles, the regulation framework was substantially revised, such as the introduction of new regulations requiring automobile manufacturers to meet standards of corporate average fuel consumption across models in addition to existing regulations requiring each model to meet consumption standards. Furthermore, in order to achieve the national target for average fuel efficiency for 2020, the following more stringent fuel consumption regulations have been enacted and enforced. First, GB19578-2014, which has been enacted to strengthen regulations for each model, is being applied to new models after January 2016. Second, GB27999-2014, which has been enacted as Level 4 Fuel Consumption Regulations for passenger vehicles to strengthen corporate average regulations, has been in effect since 2016. In addition, Level 5 Fuel Consumption Regulations for passenger vehicles are being examined as more stringent next-generation fuel consumption regulations. For light-duty commercial vehicles, GB20997-2015 was enacted, which further applied Level 3 Fuel Consumption Regulations to all new vehicles from January 2018 and is currently being enforced.

With respect to large commercial vehicles, pursuant to GB30510-2014, Level 2 Fuel Consumption Regulations apply to new vehicles from July 2014 and are currently being enforced. In addition, in an effort to further strengthen fuel consumption regulations, GB30510-2018 was enacted, pursuant to which Level 3 Fuel Consumption Regulations are scheduled to be applied to new vehicles from July 2019.

Vehicle Safety

Japanese Standards

In Japan, efforts have been made since 1998 to bring Japanese standards in line with the regulations of the United Nations Economic Commission for Europe (“UN”).

With respect to standards that were previously brought in line with the UN regulations, under the Japanese standards regarding seat belts, the range of vehicles and seats requiring the fitting of seatbelt reminder devices that warn the driver when seat belts are not fastened has been expanded; such requirements will become applicable in stages, starting in September 2020. Standards for approaching vehicle audible systems apply to new models beginning from March 2018 and to existing models still in production beginning in October 2020. With respect to standards that are scheduled to be newly brought in line with the UN regulations, the standards for accident emergency call devices will apply to new vehicles fitted with the devices from January 2020 and to existing models still in production from July 2021. Standards for ISOFIX attachment devices have been separated from the standards for seat belt attachment, and have applied as new standards to new vehicles since July 2018.

Furthermore, unique to Japan, guidelines for emergency driving stop systems (evacuate to road shoulder type) were established. The enhancement of visibility standards for rearward and surrounding area, as well as the standardization of measures relating to brake override systems, the strengthening of anti-spinal injury measures and anti-drunk driving measures are currently under consideration.

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U.S. Standards

In December 2015, the Fixing America’s Surface Transportation (“FAST”) Act was signed into law. The FAST Act increased the maximum civil penalty that NHTSA can collect for violations of applicable safety laws from $35 million to $105 million. In connection with recalls of defective vehicles, the FAST Act expanded the free remedy that manufacturers must provide car owners from applying to cars up to ten years old to applying to cars up to 15 years old.

In 2016, the NHTSA and the Insurance Institute for Highway Safety announced that they have agreed with twenty major vehicle manufacturers to standardize equipment of automatic emergency brakes on almost all new models by 2022. In the same year, the NHTSA also announced a policy regarding automatic driving vehicles to promote such vehicles safely, as well as best practices to enhance cybersecurity for vehicles.

In 2017, the NHTSA proposed to establish a new safety standard to require passenger vehicles and light-duty commercial vehicles to have dedicated short-range communication units that enable Vehicle-to-Vehicle communication.

European Standards

Fitting of emergency call systems (“eCall”) became mandatory for new vehicles from the end of March 2018 for light-duty passenger vehicles and light-duty commercial vehicles using the framework of “Whole Vehicle Type Approval.”

In May 2018, the European Commission made a proposal to tighten the regulations concerning safety and the protection of vehicle occupants and vulnerable road users, which would make certain vehicle safety equipment mandatory to a great extent, including: advanced emergency braking, emergency lane keeping systems, driver drowsiness and attention warning, intelligent speed assistance, reversing detection systems, tire pressure monitoring systems, and data recorders in case of an accident (“event data recorders”).

In March 2019, the European Parliament, Council and Commission reached a provisional political agreement on the proposed regulation and will start the procedures for the adoption. If this regulation takes effect, fitting of multiple equipment will become mandatory in stages from around 2022.

In addition, GEAR2030 (the High Level Group on the Competitiveness and Sustainable Growth of the Automotive Industry in the European Union) was established in January 2016 as a successor body of the CARS2020, deliberations were conducted at the European Commission and each member state, as well as among high-level related stakeholders, for strengthening the competitiveness of the automobile value chain in Europe by 2030, and the final report was issued in October 2017. The final report discussed the importance of the simplification of the existing and future regulatory framework and its implementation, specific measures addressing automated and connected vehicles, the creation of a EU type-approval framework for the certification of automated driving vehicles and the implementation of the ITS Directive and its delegated regulations by each member state. Detailed strategies are currently being deliberated based on the final report. As part of that, in February 2019 the European Commission adopted draft guidelines concerning the exemption procedure for the Whole Vehicle Type Approval (WVTA), as a short-term measure for promoting the use of automated driving vehicles. As a result, it will be possible for automated driving vehicles to be approved through “approval through the exemption procedure” even while the adoption of the EU or UN regulations on automated driving vehicles is pending.

United Nations Regulations

While automotive parts and vehicle systems are regulated by the UN regulations, there were no regulations with respect to Whole Vehicle Type Approval (WVTA) such as those in Europe. Japan proposed legislation

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establishing International Whole Vehicle Type Approval (IWVTA) under the United Nations in 2016, and the proposal was adopted as UN Regulation No. 0 (“R0”) in November 2017. IWVTA took effect in July 2018 (although the mutual recognition of IWVTA will not take place) and to be implemented with the mutual recognition in April 2019. Although this IWVTA (applies to passenger vehicles), which was created as a first step, is incomplete, it is significant because it creates a framework that enables the reciprocal recognition of whole vehicles type approval. Work is underway to formulate a complete IWVTA system for small passenger vehicles as the second step. If a complete IWVTA is formulated, integration of global approval administrative regulations of each country and simplification of vehicle construction regulations are expected.

The United Nations is currently discussing establishing new regulations for automated driving vehicles. As part of this effort, the existing working party was abolished and replaced by the Working Party on Automated/Autonomous and Connected Vehicles (GRVA) that is dedicated to examine automated driving. The European, U.S., Chinese and Japanese etc. governments are currently coordinating to establish sub-working groups under the GRVA (certain sub-working groups have already been established for functional safety requirements, new evaluation test method requirements, cybersecurity, software updates, data recording for automated driving vehicles and data recording in case of an accident). For the new regulation on automated driving vehicles, the draft regulation is aimed to be finalized in 2020 in light of the targeted timing for popularization of these vehicles in each country, and while the deliberation framework has been established, the deliberation on technical requirements has also commenced. As related initiatives, new areas such as compliance with regulations on vehicles in the use phase (including compliance with regulations outside the scope of the conditions prescribed by the type approval regulations) are also being examined.

Chinese Standards

Vehicle safety regulations in China were drafted with reference to the UN regulations and cover almost the same matters as the UN regulations. However, recently, these regulations also include unique provisions which take into account the distinctive characteristics of the Chinese market environment and the progress of technological development in China and there are increasing number of legislations that differ from the latest UN regulations or other international standards. As for future safety regulations, standards related to batteries, motors, the charging of EVs and data communication are currently being planned.

Environmental Matters

Japanese Standards

Toyota’s automotive operations in Japan are subject to substantial environmental regulation under laws such as the Air Pollution Control Act the Water Pollution Prevention Act, the Noise Regulation Act and the Vibration Control Act. Under these laws, if a business entity establishes or alters any facility that is regulated by these laws, the business entity is required to give prior notice to regulators, and if a business entity discharges, uses or stores substances that are environmental burdens or causes noise or vibration from such facility, the business entity is also required to comply with the applicable standards. Toyota is also subject to local regulations, which in some cases impose more stringent obligations than the Japanese central government requirements. Toyota has complied with these regulations. Under the Waste Management and Public Cleansing Act, producers of industrial waste must dispose of industrial waste in the manner prescribed in the same act. Toyota has also complied with the same act.

The Soil Contamination Countermeasures Act of Japan requires that land owners conduct contamination testing and submit a report at the time they cease to use hazardous substances, such as in connection with the sale of a former factory, or if there is a possibility of health hazards due to land contamination. If it is found that land contamination exceeds a certain level, the relevant prefectural authority designates the area as considered to be contaminated, orders the land owner to submit a plan for decontamination (such plan must describe the measures to be taken in the area, the reasons therefor, and the deadline for implementing such measures, etc.), and has the

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land owner take such measures in accordance with such plan. Toyota is suitably managing its land in accordance with the same law. In addition, under the Act on Recycling, etc. of End-of-Life Vehicles, vehicle manufacturers are required to take back and recycle specified materials (automotive shredder residues, air bags and fluorocarbons) of end-of-life vehicles and the provisions concerning such obligations of vehicle manufacturers became effective in January 2005. Toyota has coordinated with relevant parties to establish a vehicle take-back and recycle system throughout Japan. As a result, in fiscal 2019, Toyota achieved a recycling/recovery rate of 97% for automobile shredder residue (the legal requirement being 70%) and 97% for air bags (the legal requirement being 85%) and reached the targets set forth in this law.

U.S. Standards

Toyota’s assembly, manufacturing and other operations in the United States are subject to a wide range of environmental regulation under the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Pollution Prevention Act of 1990 and the Toxic Substances Control Act. Toyota is also subject to a variety of state legislation that parallels, and in some cases imposes more stringent obligations than, federal requirements. These federal and state regulations impose severe restrictions on air- and water-borne discharges of pollution from Toyota facilities, the handling of hazardous materials at Toyota facilities and the disposal of wastes from Toyota operations. Toyota is subject to many similar requirements in its operations in Europe, Canada and other countries.

Pursuant to the Clean Air Act, the EPA has promulgated National Ambient Air Quality Standards (“NAAQS”) for six “criteria” pollutants, including for ozone and particulate matter. The Clean Air Act requires that the EPA review and possibly revise these NAAQS every five years. On December 14, 2012, the EPA made the annual health-based particulate matter NAAQS more stringent. On October 1, 2015, the EPA made the annual health-based and welfare-based ozone NAAQS more stringent. The revised annual health-based particulate matter NAAQS and the revised annual health-based and welfare-based ozone NAAQS, as well as any future NAAQS revisions, could lead to additional pollution control requirements on the industry, including on Toyota’s manufacturing operations.

Toyota expects growing pressure in the next several years to further reduce emissions from motor vehicles and manufacturing facilities.

European Standards

In 2014, the EU adopted a regulation to reduce noise produced by cars, vans, buses, coaches and light and heavy trucks. Noise limit values must ultimately be lowered by four A-weighted decibels for vehicles other than trucks, and three A-weighted decibels for trucks. Compliance must be achieved in three steps over a ten to 12 year period.

Toyota believes that its operations are materially in compliance with environmental regulatory requirements concerning its facilities and products in each of the markets in which it operates. Toyota continuously monitors these requirements and takes necessary operational measures to ensure that it remains in material compliance with all of these requirements.

Toyota believes that environmental regulatory requirements have not had a material adverse effect on its operations. However, compliance with environmental regulations and standards has increased costs and is expected to lead to higher costs in the future. Therefore, Toyota recognizes that effective environmental cost management will become increasingly important. Moreover, innovation and leadership in the area of environmental protection are becoming increasingly important to remain competitive in the market. As a result, Toyota has proceeded with the development and production of environmentally friendly technologies, such as hybrid vehicles, FCVs and high fuel efficiency, low emission engines.

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In addressing environmental issues, based on an assessment of the environmental impact of its products through their entire life cycles, from production through sales, disposal and recycling, Toyota, as a manufacturer, strives to take all possible measures from development stage and continues to work towards technological innovations to make efficient use of resources and to reduce the burden on the environment.

Disclosure of Iranian Activities under Section 13(r) of the Securities Exchange Act of 1934

None.

Research and Development

The overriding goals of Toyota’s technology and product development activities are to minimize the negative aspects of cars, such as traffic accidents and impact on the environment, and maximize the positive aspects, such as driving pleasure, comfort and convenience. By achieving these sometimes conflicting goals to a high degree, Toyota seeks to open the door to the automobile society of the future. To ensure efficient progress in research and development activities, Toyota coordinates and integrates all research and development phases, from basic research and advanced research to forward-looking technology and product development. With respect to long-term basic research in areas such as energy, the environment, information technology, telecommunications and materials, projects are regularly reviewed and evaluated in consultation with outside experts to achieve research and development cost control. With respect to forward-looking, leading-edge technology and product development, Toyota establishes cost-performance benchmarks on a project-by-project basis to ensure efficient development investment.

The chart below provides an overview of Toyota’s R&D at each phase.

Toyota is promoting research and development into the early commercialization of next generation environmentally friendly, energy-efficient and safe-vehicle technology. Toyota is also moving forward with the development of innovative technologies such as electrification, connected vehicles and automated driving so as to realize a mobility society of the future that enables everyone to enjoy freedom of movement beyond the conventional concept of vehicles. To this end, Toyota is focusing on the following areas:

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For a detailed discussion of the company’s research and development infrastructure, see “Operating and Financial Review and Prospects — Research and Development, Patents and Licenses.”

Components and Parts, Raw Materials and Sources of Supply

Toyota purchases parts, components, raw materials, equipment and other supplies from multiple competing suppliers located around the world. Toyota works closely with its suppliers to pursue optimal procurement. Toyota believes that this policy encourages technological innovation, cost reduction and other measures to strengthen its vehicle competitiveness. Toyota plans to continue purchases based on the same principle and does not anticipate any difficulty in obtaining stable supplies in the foreseeable future. For example, in 2018, Japan was hit by major disasters such as the Northern Osaka Earthquake (June), heavy rain in western Japan (July) and the Hokkaido Eastern Iburi Earthquake (September), Toyota minimized the impact of those disasters through utmost efforts with all Toyota suppliers to realize early restoration of damaged local areas and suppliers, as well as alternative production by other suppliers.

Because Toyota had more than 50 overseas operations in 27 countries and regions as of March 31, 2019, procurement of parts and components is being carried out not only locally in the country of the production site but also from third countries. As a result, the distribution network has become increasingly complex. In order to realize timely and efficient distribution while minimizing costs, Toyota is promoting efforts to optimize each stage of the supply-chain. To this end, Toyota has developed a standardized system of global distribution and is supporting the operation of the system at each production base. The use of the global distribution system aims at implementing parts procurement that meets changes in vehicle production in a timely manner. These varying efforts, combined together, have led to maximized customer satisfaction, as well as to building a good working relationship with Toyota’s suppliers.

Toyota aims to share information and collaborate among the procurement divisions in each of the regions throughout the world in order to procure parts and materials from the most competitive suppliers among Toyota factories located in various areas worldwide. At the same time, Toyota carries out streamlining efforts together with suppliers in each country in order to achieve sustainable growth. Toyota has been working on cost reduction measure, referred to as RR-CI and VA activities. Through RR-CI activities, which are conducted in conjunction with TNGA, Toyota aims to ensure cost competitiveness through such means as thorough localization, sharing parts and components and manufacturing reforms, together with producing products matching customers’ needs in each region and vehicle category, and reinforcing activities from a medium- to long-term perspective as the third phase of RR-CI. Toyota has been continuously working on VA (value analysis) activities for the various types of vehicles already on sale in collaboration with in-house vehicle companies. In pursuit of cost reduction, Toyota focuses on “developing a real cost-competitive structure” by working together with suppliers.

In the raw material market during 2018, the impact of OPEC’s coordinated production cut and the situation in Middle East resulted in higher prices for crude oil and naptha-related products, and the increase in actual demands for raw materials for automobiles also pushed up the prices of precious metals (palladium and rhodium). Furthermore, market prices of aluminum were volatile due to U.S. trade policy. The direction of prices is still unforeseeable and Toyota is continually promoting cost reduction efforts, such as reducing the amount of raw materials it uses.

Toyota’s ability to continue to obtain supplies in an efficient manner is subject to a number of factors, some of which are not in Toyota’s control. These factors include the ability of its suppliers to provide a continued source of supplies and the effect on Toyota of competition by other users in obtaining the supplies.

Intellectual Property

Toyota holds numerous Japanese and foreign patents, trademarks, design patents and some utility model registrations. It also has a number of applications pending for Japanese and foreign patents. While Toyota

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considers all of its intellectual property to be important, it does not consider any specific subset of its patents, trademarks, design patents or utility model registrations to be so important that their expiration or termination would materially affect Toyota’s business.

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Set forth below is information with respect to Toyota’s material plans to construct, expand or improve its facilities between April 2019 and March 2020, presented on a “by subsidiary” basis and as reported in Toyota’s annual Japanese securities report filed with the director of the Kanto Local Finance Bureau.

Set forth below is additional information with respect to Toyota’s material plans to construct, expand or improve its facilities.

In Mexico, Toyota increased production capacity at its Baja California factory from 100 thousand units to 160 thousand units in 2018 and is constructing a new plant to be opened by the end of 2019. In the U.S., Toyota plans to construct a new joint-manufacturing plant with Mazda in 2021. Toyota also plans to start new production lines of hybrid transaxles with annual capacity of 200,000 units in its West Virginia plant during 2020 and 2021. In Alabama, Toyota will increase annual engine production capacity by 230,000 units by the end of 2021. In China, Toyota launched a third plant in Guangzhou in 2018. Tianjin FAW Toyota Motor Co., Ltd. also constructed a new production line to replace an aging existing line in June 2018. At the beginning of 2019, Toyota launched a new plant in Malaysia dedicated to passenger vehicles with annual production capacity of 50,000 cars.

Toyota does not collect information on the amount of expenditures already paid for each plant under construction because Toyota believes that it is difficult and it would require unreasonable effort or expense to identify and categorize each expenditure item with reasonable accuracy as past and future expenditures. Toyota’s construction projects consist of numerous expenditures, each of which is continually being adjusted and incurred in variable and constantly changing amounts as part of the overall work-in-progress.

Seasonality

Toyota does not consider its seasonality material in the sense of significantly higher sales during any certain period of the year as compared to other periods of the year.

wrongful death claims involving allegations of unintended acceleration are still pending in several consolidated proceedings in federal and state courts, as well as in individual cases in various other states. The judges in the consolidated federal action and the consolidated California state action have approved an Intensive Settlement Process (“ISP”) for such claims in those actions. Under the ISP, all individual claims within the consolidated actions are stayed pending completion of a process to assess whether they can be resolved on terms acceptable to the parties. Cases not resolved after completion of the ISP will then proceed to discovery and toward trial. Toyota has offered the ISP process to plaintiffs in other consolidated actions and in individual cases, as well.

Toyota has been named as a defendant in 33 economic loss class action lawsuits in the United States, which, together with similar lawsuits against Takata and other automakers, have been made part of a multi-district litigation proceeding in the United States District Court for the Southern District of Florida, arising out of allegations that airbag inflators manufactured by Takata are defective. Toyota has reached a settlement with the plaintiffs in the United States economic loss class actions. The court approved the settlement on October 31, 2017, and the subsequent appeals have been withdrawn, making the settlement final. The economic loss class action lawsuits against Toyota have been dismissed. Toyota and other automakers have also been named in certain class actions filed in Mexico, Canada, Australia, Israel and Brazil, as well as some other actions by states or territories of the United States. Those actions have not been settled and are being litigated.

Toyota self-reported a process gap in fulfilling certain emissions defect information reporting requirements of the U.S. Environmental Protection Agency (“EPA”) and California Air Resources Board, including updates on its repair completion rates for recalled emissions components and certain other reports concerning emissions related defects. Toyota is involved in discussions with the EPA and the Civil Division of the Southern District of New York (“SDNY”) on this reporting issue. These agencies have requested certain follow-up information regarding this reporting issue, and Toyota is cooperating with the request.

Toyota also has various other pending legal actions and claims, including without limitation personal injury and wrongful death lawsuits and claims in the United States, and is subject to government investigations from-time-to-time.

Beyond the amounts accrued with respect to all aforementioned matters, Toyota is unable to estimate a range of reasonably possible loss, if any, for the pending legal matters because (i) many of the proceedings are in evidence gathering stages, (ii) significant factual issues need to be resolved, (iii) the legal theory or nature of the claims is unclear, (iv) the outcome of future motions or appeals is unknown and/or (v) the outcomes of other matters of these types vary widely and do not appear sufficiently similar to offer meaningful guidance. Based upon information currently available to Toyota, however, Toyota believes that its losses from these matters, if any, beyond the amounts accrued, would not have a material adverse effect on Toyota’s financial position, results of operations or cash flows.

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4.D PROPERTY, PLANTS AND EQUIPMENT

As of March 31, 2019, Toyota and its affiliated companies produced automobiles and related components through more than 50 overseas manufacturing organizations in 27 countries and regions besides Japan. The facilities are located principally in Japan, the United States, Canada, the United Kingdom, France, Turkey, Thailand, China, Taiwan, India, Indonesia, South Africa, Argentina and Brazil.

In addition to its manufacturing facilities, Toyota’s properties include sales offices and other sales facilities in major cities, repair service facilities and research and development facilities.

The following table sets forth information, as of March 31, 2019, with respect to Toyota’s principal facilities and organizations, all of which are owned by Toyota Motor Corporation or its subsidiaries. However, small portions, all under approximately 20%, of some facilities are on leased premises.

Toyota is constantly engaged in upgrading, modernizing and revamping the operations of its manufacturing facilities based on its assessment of market needs and prospects. To respond flexibly to fluctuations in demand in each of its production operations throughout the world, Toyota continually reviews and implements appropriate production measures such as revising takt time and adjusting days of operation. As a result, Toyota believes it

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would require unreasonable effort to track the exact productive capacity and the extent of utilization of each of its manufacturing facilities with a reasonable degree of accuracy.

As of March 31, 2019, property, plant and equipment having a net book value of approximately ¥641.5 billion was pledged as collateral securing indebtedness incurred by Toyota Motor Corporation’s consolidated subsidiaries. Toyota believes that there does not exist any material environmental issues that may affect the company’s utilization of its assets.

Toyota considers all its principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of its operations.

See “— Business Overview — Capital Expenditures and Divestitures” for a description of Toyota’s material plans to construct, expand or improve facilities.