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.
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.
By the time that happens, the typical Toyota may be a very different machine than it is today—but if you notice, something probably went wrong. "Customers are going to have to take a little medicine here," O'Brien says. "The successful carmakers will be the ones with the best-tasting medicine."