How Toyota Plans to Survive $4—Make That $5—Gas

Expect more small cars and snazzier hybrids, but asking consumers to do more with less won't cut it.

New Toyota Prius hybrid cars are displayed at City Toyota in San Francisco, Calif., April 23, 2008.

Car buyers these days need to dabble in soothsaying: If you think gas prices will stay high—or go higher—you're likely to buy the smallest car that will get you and your family around. But if you foresee lower pump prices, you might splurge on something, let's say, more nostalgic.

If your crystal ball seems cloudy, you're not alone: The automakers aren't sure what to do either. If any carmaker has guessed right lately, it's been Toyota. The pod-shaped Prius hybrid—which competitors lampooned after it hit the United States in 2000, when gas was a mere $1.50 a gallon or so—is now a bestseller. With gas prices cresting $4, Toyota today offers more hybrids—six—than any other carmaker, plus a stable of right-size vehicles that are luring buyers rushing to downsize. Toyota's U.S. market share has risen above 16 percent, a record high, and it seems certain the company will eclipse General Motors this year as the world's biggest automaker.

But even Toyota is stutter-stepping into an unpredictable world where gas could hit $5 or even $6. On top of that, tough new government mileage standards are pinching every automaker, and attitudes toward the environment and imported oil are shifting like desert sands in a windstorm. Toyota recently delayed the launch of a Mississippi plant that will build the Highlander SUV and scaled back production of its Tundra pickup, meant to invade Detroit's last piece of home-field turf.

GM is threatening to challenge Toyota's dominance in hybrids, and Toyota projects a 27 percent drop in profit in the coming year, due mostly to a flagging U.S. economy. "I've never seen so many uncertainties," says Mike O'Brien, who oversees Toyota's U.S. product planning.

The biggest uncertainty, of course, is what's going to happen to gas and oil prices. A recent Goldman Sachs report drew gasps by predicting that oil, currently trading around $130 per barrel, could hit $200 by 2010. That could boost gasoline well above $5 a gallon. Toyota planners generally agree with that assessment. "We don't see the situation getting any better before the end of the decade," says Bill Reinert, Toyota's national manager for advanced technology. "After that, for the next five or six years, we could see lower gas prices. Then, prices are likely to rise again."

The toughest question for automakers: What will car buyers do? After the oil shocks of the 1970s, Americans flocked to small cars—then abandoned them when gas got cheaper. So far, the first part of that scenario seems to be replaying. Sales of the biggest cars and SUVs have plummeted by 20 percent so far this year. And the only segment where sales have risen is compact cars.

But Toyota isn't betting that Americans will give up horsepower or comfort en masse. True, the Prius, designed for mileage rather than performance, has been a huge hit, with U.S. sales of 181,000 in 2007. Yet it appeals to a committed subset of green-minded drivers. While more buyers will clearly trade down, Toyota thinks many others will make different adjustments. Families, for instance, could make more efficient use of the two or three vehicles in the household fleet, with a smaller car dedicated to everyday errands and a bigger "freedom car" that transports the gang to the soccer field or the beach on weekends.

The energy bill passed last year adds other demands, forcing automakers to raise the gas mileage of their cars 25 percent by 2015. Toyota is closer to those targets than most of its competitors, and nearly a decade of experience with hybrids provides a timely advantage. Toyota plans to triple its hybrid sales in the United States, to 700,000 or more within five years. That will include a redesigned Prius and a new Lexus hybrid, both expected next year.

As hybrids become mainstream, however, consumer attitudes toward them are changing. More people are buying hybrids—but not to be environmental trendsetters. Just 35 percent of car buyers considering a hybrid today are motivated by environmental concerns, according to CNW Marketing Research. That's half the rate of three years ago. Instead, they want better gas mileage and lower costs.

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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at