Toyota Winning the Hybrid Race

A first-mover advantage -- and some slick ads -- allowed Toyota (TM) to take the lead in the production of hybrid cars when it launched the Prius in Japan back in 1997. So did a slow response from rivals to understand the potential of gas-electric vehicles. No more. General Motors (GM) will launch its first hybrid later this year, while Ford (F) will have four hybrids on sale by 2008.

Even Nissan (NSANY), whose CEO Carlos Ghosn is at best agnostic on hybrids, is launching a gas-electric version of the Altima later this year -- albeit using Toyota technology (see BW Online, 1/10/06, "Invasion of the Hybrids").

Yet for all the recent converts, rivals are unlikely to eat into Toyota's dominant 80% share of the hybrid market anytime soon. On Apr. 1, Japan's Nihon Keizai Shimbun (Nikkei), Japan's leading business newspaper, reported Toyota's latest plans for ramping up hybrid sales. Toyota plans to offer hybrids in all vehicles classes by 2012 from top-of-the-line luxury models to subcompacts such as the Vitz -- known as Yaris outside Japan -- in 2010 or later. If so, that could turn the whole hybrid category from a niche for the tree-hugging crowd into a mass-market auto category.


  The Nikkei says Toyota will roll out a new hybrid every time one of its cars undergoes a model change. That's pretty much what's happening with the new Camry, which will include a hybrid option, built in Kentucky, from the end of 2006.

Koji Endo, an analyst at CSFB in Tokyo, reckons that Toyota will offer a hybrid version of all models that sell more than 100,000 units. At present, that would mean hybrid versions of 15 of Toyota's 65 models. On top of that, Toyota, which has more than 1,000 hybrid-related patents, will also hope to increase the number of rivals using its hybrid technology in their cars. Currently, Nissan, Ford, and Fuji Heavy Industries all have deals to use Toyota's hybrid technology. "When it comes to hybrids, Toyota will become the global standard," Endo says.

The move would make sense if Toyota is serious about hitting sales target for hybrids. It aims to quadruple sales to more than one million -- equal to about 10% of the company's total projected sales, compared to 3% today -- by the early 2010s. Key to rolling out so many new hybrid models will be finding cost savings and reducing the size of Toyota's gas-electric system.


  At present, Toyota's hybrids typically cost about $5,000 more than straight gasoline models. And their hybrid systems, while more powerful, are also larger than Honda's. Honda's hybrid system needs about half the batteries and has only one electric motor, compared to Toyota's two. That has already led to speculation that Honda will produce a hybrid version of its Fit subcompact (see BW Online, 3/10/06, "Honda's Little Hybrid That Might").

Now, though, The Nikkei says Toyota is working on a lower cost next-generation hybrid that will find savings primarily by reducing the size of components and improving battery performance. Switching to lithium ion batteries from existing nickel metal hydride cells could help make systems much smaller (see BW Online, 1/24/06, "Hybrids With A Li-Ion In Their Tank").


  Together, those measures should help Toyota cut the premium to about $2,500 and make it easier -- and more economical -- to install hybrids in smaller vehicles. "The expectation is that Toyota will take advantage of mass production and lower costs," says Osamu Kobayashi, an analyst covering the auto industry at Standard & Poor's in Tokyo.

Nevertheless, even with cost savings and scale economies from increased production, some analysts question whether hybrids should be rolled out to lower-margin, smaller vehicles. The Nikkei reports that the decision to roll out hybrids to all vehicles classes followed much debate within Toyota -- with critics worried that higher costs would erode margins. And some remain unconvinced that Toyota will ever apply its hybrid system to subcompacts.

"I don't think the compact vehicle is suitable for the hybrid system," says Koichi Sugimoto, an analyst at Nomura Securities. "The more interesting question is whether a Corolla hybrid is meaningful or not." What no one doubts, though, is that having first created a buzz over hybrids with the Prius and then encouraging rivals to follow suit, Toyota is in no mood to give up its leadership position.

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