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.

To some consumers, the word "hybrid" may even be a turnoff. Some buyers of the Camry hybrid, for instance, have asked if the small "hybrid" badge on the back can be removed. (Not by Toyota, but any dealer would be happy to take it off—for a charge.) One possible adjustment is making hybrid engines a basic under-the-hood option on the Camry and other popular models, instead of a distinct trim line with its own identity.

Toyota is also weighing snazzy new hybrid features, to prolong the buzz. "We want to extend the 'wow' of the hybrid," O'Brien says. One likely feature of the next-generation Prius: a button on the dashboard that allows the driver to run the gas-electric powertrain purely on battery power—perhaps for a couple of miles of driving—before the batteries hit a depletion point and the gas engine kicks back in. Its potent batteries could also support several two-prong power outlets for laptops and small appliances. That's a feature found on some big trucks and SUVs, which have robust electrical systems, but rare on smaller vehicles.

Right behind that is Toyota's strategy for a "plug in" hybrid with batteries that, like a cellphone's, will be rechargeable from an ordinary power outlet at home. Toyota says its first plug-in won't go on sale for several years, which would put it behind GM's Chevrolet Volt, due in 2010. GM has promised an ambitious set of features: a safe, reliable, mass-market plug-in that's rechargeable from an ordinary power outlet and can travel 40 miles on a single charge before a small engine kicks in. And it is planned to cost $30,000 or less, without requiring massive subsidies.

Even GM admits it's a tall order. But the Volt has gotten Toyota's attention. In January, Toyota President Katsuaki Watanabe announced that the company would field a "significant fleet" of plug-ins available to commercial customers, matching GM's 2010 target date. "For the first time, they're seeing a reinvigorated challenge from GM," says powertrain analyst Kevin Riddell of J. D. Power & Associates.

Still, Toyota's strategy is admittedly less aggressive than GM's. Instead of game-changing breakthroughs, which some GM executives are hinting at, Toyota plans to introduce a plug-in that's an incremental improvement on the Prius. "Think of it as a Super Prius," Reinert says. It will be able to travel 6 or 7 miles without the gas engine, far less than what GM is promising with the Volt. But Toyota does plan to leverage its reputation for reliability. "Our plug-in will be excuse free," Reinert insists. "It will be able to meet a 150,000-mile warranty without being subsidized."

Toyota-watchers anticipate some other strategy shifts. One Toyota misstep, some believe, was waiting too long to offer a big, American-built pickup truck, then introducing the new Tundra last year just as rising gas prices and a housing recession were strangling the pickup segment. And the delay at the Mississippi plant indicates slowing demand for the once-hot Highlander—which has grown in size, not shrunk, compared with earlier incarnations. Revamping assembly lines—in Mississippi, for instance—to build smaller vehicles is one possible step.

"Toyota is a small-car leader," says David Magee, author of How Toyota Became #1. "Anybody who knows Toyota knows they're going to plow everything they've got into the areas where they're strongest."

Like its competitors, Toyota is also investing in more research into diesel engines, turbocharging, direct injection fuel systems, and other ways of improving a car's efficiency. Such technologies tend to be expensive—but they make more sense as gas prices rise. Combining direct injection with a turbocharger, for instance, is one way to get more power from a smaller engine—and improve fuel economy without asking buyers to cram themselves into a smaller car. And it could accelerate a trend toward smaller engines. "I can easily imagine deleting the V-6 from the Camry lineup," O'Brien says.

Looking down the road, Toyota scientists sound less optimistic than others about ethanol and other biofuels, pointing to a host of unresolved problems, such as the arable land required to produce feedstocks and the cost of technology for converting other material to fuel. Hydrogen may offer more promise, but it will still take years to perfect the technology and build a nationwide network of fueling stations.

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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