Toyota Works to Keep the Wow in Hybrids

$4 gas puts the automaker in position to expand its market share.

An experimental plug-in version of the Prius hybrid on the move in Detroit.

An experimental plug-in version of the Prius hybrid on the move in Detroit.

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For a company that hates to gamble, Toyota put a big stack of chips on the table when it decided, in 2003, to build pickup trucks in Texas. After debating the move for years, the Japanese automaker broke its own rules in order to plant a flag in the heart of truck country, hoping a Texas-built Tundra would earn the all-American cred needed to invade the one bit of automotive turf still dominated by its domestic competitors. The San Antonio plant would be a logistical stretch, far from other Toyota facilities that would provide engines and expertise. Instead of piggybacking on existing supplier networks, Toyota would have to build a costly new parts hub. By the time trucks started rolling off the line in 2006, the project seemed more like a public-works boondoggle than the kind of lean operation Toyota is famous for, with costs ballooning to $1.3 billion—60 percent over budget.

It got worse from there. Toyota ended up introducing the new Tundra (city gas mileage: 15 mpg) just as gas prices were beginning their ascent toward $4 per gallon. The housing meltdown and slowing economy have further constricted sales, since builders and contractors are prime pickup buyers—in flush times, anyway. So far this year, Toyota is 25 percent below its goal of selling 200,000 Tundras, and the San Antonio plant is running well below capacity. "The timing on that looks horrible," says David Magee, author of How Toyota Became #1. "Toyota makes plenty of mistakes. They're not flawless."

Yet no car company stands to gain more than Toyota as skyrocketing gas prices and the eroding economy batter all the automakers. Despite missteps like the Tundra, Toyota's renown in the car business borders on mythic: It had the vision, after all, to introduce the Prius hybrid back in 2000, when gas was a mere $1.50 a gallon and most American car buyers cared more about cupholders than gas mileage. Toyota sold 181,000 Priuses last year and can hardly meet demand. The company now offers six high-mileage hybrids—more than any other automaker—and has more on the way. That's helped Toyota remain steady while sales have plummeted at the Detroit automakers. Toyota now sells more cars in the United States than Ford or Chrysler, and it could catch up to General Motors before long.

So with gas prices bursting through the $4 threshold—on their way to $5, perhaps, or even $6—the elemental question in the car business is: What will Toyota do? And Toyota, for its part, is trying to figure out which of the cars on the drawing board could be another Prius—and which another Tundra.

Just like drivers, Toyota's planners wonder where gas prices are heading. A recent Goldman Sachs report drew gasps by predicting that oil, currently trading at roughly $125 per barrel, could hit $200 by 2010. Such a "superspike" would result in gas prices well above $5 a gallon, a scenario Toyota planners generally agree with. But after that, prices could drift back down as new sources of oil begin to come online.

The next question is: What will consumers do? When gas prices passed $3 per gallon—once considered a psychological and behavioral tipping point—drivers were surprisingly blasé, with only modest changes in car-buying patterns and driving habits. But $3.50 seemed to mark a more painful threshold, and with gas now at $4 in much of the country, a rout seems to be on. Sales of the biggest vehicles have plummeted more than 20 percent so far this year, and the only segment where sales have risen is compact cars. Some SUV owners can't even get rid of their big haulers without losing money; since nobody wants a used SUV that gets 15 mpg, it makes sense for many owners to simply hold on to their big gas guzzler and gird for $80 fill-ups.

Puzzle. But Americans are very reluctant downsizers, and every automaker knows what happened after the oil shocks of the 1970s: Drivers flocked to small cars—then abandoned them when gas got cheaper. Instead of riding that boomerang again, this time the automakers are racing to develop have-it-all technology that will be appealing if gas drifts back to $2 and essential if it rises to $6. They're also dealing with tough new government gas-mileage requirements and consumers accustomed to getting more, not less, car for their money. "I've never seen so many uncertainties," says Mike O'Brien, who oversees Toyota's U.S. product planning.



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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 rnewman@usnews.com.