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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Yet for Toyota, uncertainty is good news, not bad. Oracular vision may be part of Toyota's success, but its real strength is that it has the financial resources (2007 profits: about $15 billion, more than GM's entire market capitalization of about $10 billion) to play many hands at once—and thus the luxury of waiting until the last minute to decide which are the surest bets. That has helped Toyota guess right more than most of its competitors—and provided a hedging strategy to fall back on when it guesses wrong.

Toyota's lead on hybrids, for instance, is an obvious advantage in a world of $4 gas. But it's almost an accidental success. Even Toyota had doubts about the Prius when it debuted, giving it a meager U.S. sales goal of just 15,000 in its first year. That's why Toyota was working up plans for a beastly new Tundra at the same time and enlarging—not shrinking—other popular vehicles like the Highlander SUV and the Camry sedan. Gas was cheap, after all, and big cars like the majestic Chrysler 300 were an affordable luxury. The Detroit Three were making a profit of $15,000 or more apiece on some of their largest vehicles.

Now, as the market for big cars collapses again as it did in the 1970s, Detroit is scrambling for a backup plan. GM just announced that it's closing four plants that produce big trucks and SUVs, part of a permanent about-face toward smaller vehicles. It may even sell the rough-and-ready Hummer brand. Toyota is taking some lumps, too, with a projected 27 percent drop in profit in the coming year, mostly because of a flagging U.S. economy. But Toyota also has a ready stable of right-size vehicles, like the Corolla and RAV4, and the budget Scion lineup, that have already helped push the company's U.S. market share to about 18 percent, a record high. That's just 2 percentage points behind leader GM.

Hybrids are still a relatively small portion of Toyota's portfolio—but the biggest opportunity to break away from the pack. Hybrids get better mileage than conventional cars because they have both a gas engine and a battery-powered motor, with computers that toggle between the two in the most efficient manner. Some hybrids, like the Prius, are tuned for maximum gas mileage, while others, like Toyota's Lexus rx400h, are speedy performance cars with gas mileage that's just a notch higher than that of conventional competitors.

Virtually all the big automakers now offer one or two hybrids, with plans for more. Toyota plans to roll out more hybrids, too, but it's also weighing snazzy new features to maintain its dominance in the sector. "We want to extend the 'wow' of the hybrid," says O'Brien, the company's top product planner. One likely feature of the next-generation Prius, due next year, is a dashboard button 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. That's just the kind of feature that appeals to "hypermilers" who compete to see who can get the best mileage out of their hybrids.

Beyond hybrids, the race is on for new alternatives to gas engines that can be mass-produced. And every automaker craves the rewards that would come with finding solutions to America's dependence on foreign oil. The next step in that direction will most likely be a "plug-in" hybrid with batteries that will be rechargeable from an ordinary power outlet at home. On current hybrids, the batteries draw recharging power mainly from the gas engine—and gas, of course, is expensive. Power drawn from the electrical grid could cost the equivalent of $1 per gallon—and plug-ins could also go further on a charge than today's hybrids.

The stakes are huge: The automaker that seizes the plug-in market could dominate for years. And already GM has targeted the pole position on plug-ins, with the Chevrolet Volt, due in 2010. It wasn't long ago that executives at GM pooh-poohed hybrids as overcomplicated technology that was too expensive for ordinary consumers. Toyota clearly proved otherwise, which a humbler GM now admits. "Ever since Toyota assumed the mantle of technology leader," says GM Vice Chairman Bob Lutz, "there's been a certain class of buyer who wants to be associated with the best technology. In that sense, every Toyota has a little bit of Prius in it."



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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.