March 2 (Bloomberg) -- Toyota Motor Corp. is poised to introduce its 2010 Prius, the world’s top-selling hybrid, into a shrinking U.S. auto market that now includes a cheaper, revamped competitor from Honda Motor Co.

With a pledge to “build to demand,” the goal of selling 180,000 units in the car’s first year starting in mid-2009 may have to be dialed back, Bob Carter, vice president for U.S. sales, said last week at a briefing in Yountville, California.

Fuel at less than half of last year’s peak and the weakest industry sales since the early 1980s are casting doubt on Toyota’s plan to revive the model after 2008 deliveries fell 12 percent. Even with improved mileage, the Prius also may lose buyers in a recession to Honda’s gasoline-electric Insight.

“This is a car that can do 90 percent of what Prius can do in terms of fuel economy, with 90 percent of the size of Prius, selling for about 90 percent of the cost,” said Aaron Bragman, an IHS Global Insight analyst in Troy, Michigan. “People are very careful about purchase decisions right now. Maybe 90 percent is enough.”

Toyota, the world’s largest automaker, says the new Prius averages 50 miles (80 kilometers) per gallon in city and highway driving, 4 mpg more than the current car even though it’s more than 100 pounds (45 kilograms) heavier.

Price Range

Carter declined to provide prices for the Prius, which now retails for $22,000 to $24,270. Honda has said it may set a base price of less than $20,000 on the Insight, a five-passenger hatchback that will get 41 mpg and reach showrooms in April. The original Insight was a two-seater that in 1999 became the first hybrid sold in the U.S. The Prius arrived in 2000.

While the Insight may drain a few sales from the Prius, the compact-class Honda won’t compete directly with the midsize Toyota, Carter said. Honda says the Insight will get 41 mpg and is due in showrooms in April.

“The market has the room for both Prius and Insight, in their respective segments,” Carter said.

A bigger challenge for Toyota City, Japan-based Toyota may be the changes in the U.S. market since the first 7 months of 2008, when gasoline surged to a record $4.114 a gallon and dealers’ Prius stocks could be measured in hours, not days.

“Our inventory people at one point calculated a 0.3-day supply,” Carter said. “I’d never seen that before.”

A 54 percent plunge in U.S. retail gasoline from its July record through Feb. 27 tempered demand for hybrids. Industry sales crumbled, battered by a recession that sent consumer confidence tumbling last month to its lowest level in 42 years of record keeping.

Demand in Japan, Toyota’s home market, is also falling. The carmaker’s domestic sales dropped 32 percent in February as the overall market fell to the lowest level for the month in 35 years.

Watching the Market

“We’ve got to see where this market is going and certainly we will build to demand,” Carter said.

Toyota’s first-year sales target would put the model back close to its level in 2007, the car’s best. In road tests last week by Bloomberg, the new Prius averaged 48 mpg to 53 mpg in California’s Napa County.

“Being in the 50s is big for Prius owners because they tell me that’s a number that will get noticed by other consumers in the market,” Carter said in an interview.

Besides boasting improved fuel economy, the Prius will be available with a solar roof to cool the cabin, an optional self- parking feature and cruise control that adjusts speed to maintain a set distance from vehicles. Toyota is still working on a so- called plug-in model that can be recharged at household outlets, like the Chevrolet Volt being developed by General Motors Corp.

Starting Production

Production will start in April in Tsutsumi, Japan. The December decision to suspend construction of a $1.3 billion Prius factory in Blue Springs, Mississippi, reflected the depth of the contraction in the U.S., Toyota’s biggest market.

“We’re just waiting for the U.S. market to come back before we make any further investment,” spokesman Mike Michels said last week.

The goal for the redesigned Prius was to improve fuel economy, comfort and power, and to do so while chopping about half the expense of the hybrid parts, including the nickel-metal hydride battery pack and electric motor, Akihiko Otsuka, the car’s chief engineer, said in an interview last week.

In the end, the savings on hybrid components compared with the current Prius was only “about 30 percent,” Otsuka said. Prices for commodity metals and other materials complicated efforts to wring more costs out of the new system, he said.

To contact the reporter on this story: Alan Ohnsman in Yountville, California, at aohnsman@bloomberg.net

Last Updated: March 2, 2009 02:43 EST