Monday, March 30, 2009

Toyota, Honda Heat Up the Hybrid War

Toyota, Honda Heat Up the Hybrid War

Given the parlous state of the auto industry, the rivalry between Honda's (HMC) new Insight and Toyota's (TM) third-generation Prius is proving to be an enjoyable diversion. Committed to increasing sales of gas-electric models, the companies are launching hybrid cars in quick succession—and neither one is skimping when it comes to generating hype. The Insight boasts a sub-$20,000 sticker price, fuel economy of 40 miles per gallon in the city and 43 mpg on the highway, and is arguably more fun to drive. The latest Prius is larger than its Honda rival, gets better mileage, and (unlike the Insight) has an EV mode, where the driver instructs the car via the touch of a button to run solely on battery power. However, the soon-to-be-released Prius is expected to be more expensive, with a U.S. sticker price starting at around $23,000.

The battleground is nowhere more intense than in Japan, where the Insight went on sale in early February. Its initial success—Honda has received more than triple the 5,000 orders a month it was expecting—hasn't gone unnoticed at Toyota. At a recent test drive at Fuji Speedway for the near-final version of the Prius, Chief Designer Akihiko Otsuka said Toyota is planning a smaller, cheaper hybrid based on its Yaris platform to take on the Insight. "We are going to compete by expanding our hybrid vehicle lineup to smaller hybrids," Otsuka told reporters.

And Toyota has another Insight killer in store. On Mar. 26, Toyota Chief Executive Katsuaki Watanabe said the company will take the unusual step of selling a cheaper version of the current Prius alongside the new one. "There will be demand for the two to co-exist," Watanabe said at the unveiling of the new car for the Japanese market. "That Honda has come out with a wonderful car like the Insight gives us a big impetus to try to be more competitive." According to the Nikkei newspaper, this cheaper Prius, like the Insight, will go on sale in Japan for less than $20,000. Watanabe didn't say if Toyota will pursue a similar strategy in other markets.

A Wise Move?

Analysts question, however, the impact of launching a cheap version of the old Prius alongside the new one. They worry the older Prius may eat into sales of the new Prius and similar-sized models such as the Corolla, or that it might force Toyota to cut prices of nonhybrid models. If that wasn't enough to boost hybrid sales, unconfirmed reports in the Japanese media say the new Prius may go on sale in Japan for as little as $20,900, which would be $3,000 cheaper than the current model—even though the new Prius has a larger engine and is more luxurious.

With Toyota upping the ante, Honda is considering its next move. On Mar. 25, Norio Ano, who heads Honda's global Civic hybrid and Insight programs, said Honda will examine where it can make efficiency improvements in the production of the Insight. However, he warned against steps that eat into profitability. "I applaud Toyota if they can make it work as a business at the prices being reported," he said. "We will have to go back to scratch and review all our procedures from step one."

Yet even as the sparks fly—albeit politely—between Japan's two leading automakers, it is feasible both can win the hybrid war. For one thing, the rivalry is helping to bring the "hybrid premium"—the incremental cost of making hybrids compared with regular vehicles—down to levels where owning is as much about economic sense as sending an "I'm green" message.

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