How Hybrids Are Going Mainstream

When Toyota Motor (TM ) President Fujio Cho predicted in June, 2001, that cumulative sales of the company's hybrid vehicles would hit 300,000 within four years, many industry watchers heard hype. After all, Toyota sold only 15,556 of its first-generation Prius hybrids in the U.S. that year. But Cho now looks prescient. After plowing hundreds of millions of dollars into developing these vehicles, which cut fuel use by mating an electric motor to a gas engine, hybrids have gotten traction. Prius sales in the U.S. alone are expected to hit 100,000 in 2005.

Now Toyota is shifting into Phase Two of its strategy: moving hybrid technology into the core of its lineup. Early next year, the auto maker plans to launch hybrid versions of its Highlander and the Lexus line of RX SUVs. Toyota also says it's considering a hybrid version of the Camry, America's best-selling car. Toyota isn't alone: Honda, which already sells a hybrid Civic, will roll out a hybrid Accord in December.

With each model, the Japanese auto makers are trying to ensure buyers get a car that offers better fuel economy but doesn't skimp on power and comfort. Their goal: popularize the technology enough that they can scrape out the economies of scale needed to bring the cost of building hybrids -- and thus their prices -- more in line with conventional models. If Toyota and Honda succeed, not only will they find it easier to roll out hybrid versions across their product lines but they will also gain a big advantage on their Motown rivals as the industry finally moves away from gas-guzzling engines. "Detroit is a couple of generations behind the Japanese," says Rex Parker, an analyst at Tustin (Calif.)-based AutoPacific Inc. "And in this business that's a long, long time."

Given how new hybrid technology is, no one knows how fast it will reach critical mass. But the notion that hybrids are no more than a niche market for greens is fast fading. If gas prices stay high and the technology continues to improve, consultants Booz Allen Hamilton Inc. figure hybrids could grab up to 20% of the U.S. market by 2010. "There is no longer a performance gap" with non-hybrids, says Bill Jackson, vice-president in charge of Booz Allen's automotive practice. "And with gas prices hovering north of $2, the economics are starting to look pretty compelling."

For now, though, auto makers still have to convince drivers it's worth paying up to $3,400 extra for a hybrid. Honda and Toyota hope to lure them with both power and luxury. The Accord will sport the first six-cylinder hybrid engine, providing 15 more horses than the already peppy conventional Accord engine; yet fuel consumption in city driving, Honda claims, will improve by 43%. The sedan also will boast leather seats, side airbags, and an XM Satellite (XMSR ) radio. Honda expects to sell 20,000 hybrid Accords and 30,000 hybrid Civics next year. Down the road, it's considering building hybrid SUVs or light trucks, says Dan Bonawitz, Honda's vice-president of corporate planning for the U.S.

Toyota, meanwhile, is bringing hybrid technology to the midsize SUV. The company's Lexus RX and seven-seater Toyota Highlander SUVs will feature 270-plus horsepower and better than 27.6 mpg -- currently the average for a compact sedan. "The objective was to have a six-cylinder engine with all the power of a V-8," says Dave Hermance, a top Toyota environmental engineer. "It's for folks who want to do the right thing without making compromises."

While Detroit for the most part has sat out the hybrid revolution so far, Ford Motor Co. (F ) is moving toward a similar, mainstream strategy. It beat the Japanese to market with the first hybrid SUV, the Ford Escape, which was launched to loud applause in September. Still, it's several years behind its rivals in developing a strong array of models.

Ultimately, getting prices down is crucial. And the only way that will happen is if auto makers develop a technology sufficiently mainstream to be mass produced. To get there, Toyota has begun licensing its hybrid technology to rivals like Nissan Motor Co. (NSANY ), which plans to launch a hybrid Altima in 2006. Toyota and Honda are betting their strengths in engineering and manufacturing will keep their newest hybrids well ahead of competitors. If past is prelude, that's a bet few would take.

By Chester Dawson in Los Angeles

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