Toyota Is Way Ahead of the Hybrid Pack

Can its new Prius crack the mass market?

This model's roomier than the original. Faster, too. Super fuel-efficient. And of course, it's a Toyota.

But those aren't the real reasons Toyota Motor Corp. President Fujio Cho flew in expressly to introduce the latest Prius at the New York Auto Show. Cho wanted to declare before a pack of skeptical rivals that Prius' combo of gasoline engine and electric motor is no novelty. So in unveiling the next-generation Prius -- a sleek hatchback light years ahead of its dowdy predecessor -- Cho ditched his characteristic modesty. "It is a giant leap into the future," he said.

American and German carmakers remain unconvinced. Granted, Toyota has from the start led the pack in hybrid technology, which combines an electric motor for pollution-free driving with a gasoline engine for added power. But critics point out that Toyota makes its real money increasingly from gas-guzzlers such as the Highlander sport-utility vehicle.

The original Prius, launched in 1997, won rave reviews from environmentalists and Hollywood stars with green consciences, such as Leonardo DiCaprio. But with a starting price of $20,000, it never caught on with average folks, who refused to pay a premium for its cramped interior, low horsepower, and ugly-duckling body. Five years after its debut, Prius' worldwide sales hit 28,000 in 2002, down 1,000 units from the previous year. "The current model doesn't offer the most exciting design, nor does it deliver in terms of performance," says Stephen Usher, an analyst at J.P. Morgan Securities Asia. Yet Toyota vows it will be selling 300,000 hybrid vehicles worldwide by 2005. "It's a very high target," admits Hiroyuki Watanabe, senior managing director in charge of the program.

That's why Toyota has so much riding on the success of the 2004 model, which goes on sale in the U.S. and Japan this fall at an undisclosed price. Toyota insists its hybrid business is profitable. Yet industry analysts estimate that Toyota loses $3,000 to $4,000 on every Prius it sells. Toyota can't afford such losses forever, but if economies of scale can be achieved, hybrid cars could start adding to the bottom line. Besides, Toyota gets an invaluable public-relations boost. "It's about promoting Toyota as a green manufacturer," says HSBC analyst Chris Richter in Tokyo.

To move more metal, Toyota has tinkered considerably with Prius: The Sequel. For starters, it's larger. An additional 15 centimeters in its wheelbase gives it more legroom. No longer a compact, it has traded up to full-fledged midsize-sedan status, seating four adults comfortably. A retooled 1.4-liter engine delivers 50% more oomph than the sluggish original, giving the car acceleration comparable to a Camry. It also boasts 10% better fuel efficiency, to about 22 kilometers per liter, or 52 miles per gallon.

Then there's the aerodynamic styling and a hatchback for added utility on road trips. Toyota hasn't forgotten the green crowd, either: Tailpipe emissions have been cut an additional 30%. That's 90% below gasoline-only car engines. To lure potential buyers, the carmaker is offering standard antilock brakes, power windows and doors, and a start button on the dash instead of key ignition. Toyota dealers in the U.S. are pumped. "The shape's great, and it's almost the size of a Camry inside," says Chris Ashworth, general manager of a showroom in North Hollywood. "I absolutely expect it will be a best-seller." Toyota also has high hopes for a hybrid Lexus SUV.

But if demand for hybrids doesn't meet optimistic projections, Toyota may pay a heavy price for leaping ahead of the competition -- and the needs of average car buyers. Toyota's Cho noted at the Prius debut that the first patent for a hybrid gas-electric car was filed nearly 100 years ago. The vehicle was never built. He can only hope the next Prius isn't also too far ahead of its time.

By Irene M. Kunii in Tokyo and Chester Dawson in New York, with Christopher Palmeri in Los Angeles

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