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Toyota's New Prius: A Hybrid Hotshot

Toyota Prius Chief Engineer Akihiko Otsuka cut a relaxed figure during a briefing at the carmaker's Tokyo offices on May 19. Toyota (TM), he said, is confident that sales of the new-generation Prius will run between 300,000 to 400,000 between now and the end of the year. Not bad for what was once dismissed as a niche product. The success of the Prius is a source of pride for Otsuka, a keen angler who heard he had been assigned to work on the current generation of the hybrid while fishing by a river in Kanazawa in western Japan.

He's even more upbeat about the future. Toyota plans to increase battery production for hybrids this year, from 500,000 to 800,000, and to more than 1 million by the early 2010s, in line with Toyota's aim to sell a million hybrids a year by the early part of the next decade. "Battery supply is the key here and we're raising our ability to supply batteries," he says. Without that kind of capacity, it's very difficult for other carmakers to close the gap.

Otsuka has other reasons to be happy about the new Prius. Around the world, the past few weeks have been good ones for automakers making green cars. Although sales slowed in 2008, gas-electric fuel sippers look like one of the global auto industry's few bright spots in 2009. In the U.S. and other countries, governments are talking up hybrids and offering incentives for greener cars. On May 19, President Barack Obama called for new rules that require passenger vehicles and light trucks in the U.S. to average 35.5 miles per gallon by 2016. Regulatory changes in Europe, especially tougher rules on nitrogen oxide emissions, should help, too. The latter, he says, would give hybrids an edge over diesels, which currently account for over half of car sales in some European countries.

Meanwhile, back in Japan, the latest version of the Prius and the Honda Insight are the hottest tickets in town. The Insight, which debuted in February, was the best-selling car in Japan (excluding 660cc minicars) in April, the first time a hybrid had topped the rankings. The new Prius, launched on May 18, attracted 80,000 orders before its release, a record. The previous record holder was a Toyota subcompact, which had an order book of 47,000 before its release in 2002.

Made in Mississippi?

With such good numbers, might Toyota's mothballed Blue Water (Miss.) plant start making cars soon? The factory, initially slated to make SUVs, was supposed to begin production of the new Prius next year, but with recession in the U.S., Japan, and other markets battering Toyota's earnings, the Japanese automaker has put those plans on hold. Otsuka says Toyota will likely eventually make the Prius in Mississippi, but if U.S. car sales don't pick up, production might not start until Toyota readies the next generation of the car. The second-generation Prius, which is about to be replaced, has been in production since late 2003, so that could be quite a wait. Unless U.S. sales rise, "it doesn't make sense to build another model in the Mississippi plant," he says.

Otsuka was equally cautious on the prospects for plug-in hybrids and, particularly, electric vehicles. Toyota will lease 500 plug-in versions of the new Prius, but the cost of the lithium ion batteries—three to four times the price of the nickel metal cells used in the regular hybrids—is a headache. Until the cost comes down, the economics of plug-ins or EVs (electric-drive cars) look challenging. "I don't think EVs can replace hybrids in the near future," Otsuka says. "We have to think about the balance between the EV driving range, the size, and the cost."

In addition to the Prius, upcoming gas-electric vehicles will include a Yaris-sized car that will likely go head-to-head against a hybrid version of the Honda Fit. Otsuka disputes suggestions that Toyota's more complicated hybrid system means it is less well-suited to a smaller car. While Toyota's system uses two motors, compared with just one used in Honda's (HMC) mild hybrid system, he says Toyota's doesn't need a continuously variable transmission. That, he says, means that Toyota, despite needing larger batteries, can make its hybrid system cheaply enough to use even in smaller cars.

Aiming for Even Better Fuel Economy

As for the Prius itself, Otsuka is already thinking of what the next version will look like. The fourth-generation Prius, he hopes, will be smaller and lighter than the new version but, perhaps taking advantage of space-saving technologies employed in the tiny Toyota iQ, will be of similar proportions on the inside. "I think the size and weight should become smaller to help reach a new fuel economy target," he says.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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