The Trouble with Hybrids

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Battery Headaches on the Horizon

Toyota's challenge is slightly different. While Honda has given up the game on larger hybrids, Toyota continues to plow ahead, aiming to introduce new hybrids irrespective of size and cost. In May, Toyota launched the Lexus LS 600h and LS 600HL, which at $126,000 is the most expensive car ever made in Japan and will debut in the U.S. in the summer.

Persuading the buying public that hybrids are a mainstream option continues to be a challenge even for Toyota. By 2010, Toyota aims to sell 1 million hybrids per year, but that will still only be about 10% of its total sales. What's more, while Toyota says its hybrids are profitable, they're not nearly as profitable as cars powered by standard gasoline engines.

One reason is the cost of the hybrid systems for larger vehicles. UBS estimates that a hybrid equivalent to a conventional 4.0 liter, gasoline V8 costs about $7,000 to $8,000 extra to produce, compared with a premium of $3,000 to $4,000 for a clean diesel capable of meeting strict U.S. standards.

Nevertheless, Toyota expects the premium to fall. Last month, Masatami Takimoto, an executive vice-president at Toyota, said that by 2010 margins will be at the same level as conventional gasoline cars.

Another headache could be rumored delays in the introduction of lithium-ion batteries. In February, Toyota CEO Katsuaki Watanabe told BusinessWeek that Toyota's next-generation Prius, due late 2008 or early 2009, would include the cells, which are lighter and more powerful than the current nickel metal hydride batteries (see BusinessWeek.com, 3/19/07, "Toyota's Bid for a Better Battery").

Tight-Lipped on Plans

However, last month a report in Japan's Nikkan Kogyo newspaper, said that Toyota may delay the models' introduction to guarantee safety. Delays in introducing more efficient hybrids could hand rivals with different green techs a marketing edge.

There's also the question of how Toyota handles demand for clean diesels. While Honda is committed to unveiling a clean diesel for the U.S. by 2009 and Nissan (NSANY) by 2010, Toyota has so far been tight-lipped on its plans, despite selling diesels successfully in Europe, where about 40% of new cars sold use the fuel.

Analysts say one reason may be that it's difficult for Toyota to promote green diesels and hybrids at the same time. "I think they have the technology, but they're struggling how to communicate it. How can Toyota all of sudden say diesel is promising?" says Tatsuo Yoshida, an analyst at UBS in Tokyo of UBS.

Then there's Nissan, the other member of Japan's Big Three. Until recently, Nissan CEO Carlos Ghosn had been agnostic at best on hybrids, regularly arguing that the technology isn't yet mainstream. But while Ghosn was right in many respects, his stance was interpreted as being anti-hybrid and handed rivals a headstart in the increasingly import environmental image stakes.

Pinning Hopes on Lithium-Ion

Notably, in recent months, Nissan has been taking steps to improve its environmental standing. The new Altima has a hybrid option, albeit using technology borrowed from Toyota, but Nissan is also developing its only hybrid system for the next generation. Also, on Apr. 13, Nissan and electronics maker NEC (NIPNF) revealed that they had signed an agreement to establish a joint-venture company called Automotive Energy Supply, which will focus on the development and marketing of advanced lithium-ion batteries.

That's timely given that li-ions are expected to be vital for the success of next-generation hybrid systems and electric vehicles.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.