Toyota vs. the World

In hybrids, it's Toyota vs. the world; if market develops, the technology will be a cash cow From AutoWeek of March 25, 2005 MARK RECHTIN | Automotive News Posted Date: 3/25/05 LOS ANGELES -- Toyota Motor Corp. is going all-in on hybrids and its gamble is part of one of the industry's highest-stakes poker games. While other automakers are hedging their bets - fearing that stiff development costs and higher sticker prices of hybrids will limit the technology to a niche - Toyota stands to benefit handsomely if its rivals are wrong. Toyota is the only automaker developing production hybrid powertrains for front- and rear-drive vehicles, for both cars and trucks, and for four-, six- and eight-cylinder engines. "Eventually all of our vehicles" will be offered with a hybrid option, says Jim Press, COO of Toyota Motor Sales U.S.A. Inc. Hybrids use an internal combustion engine and an electric motor to power the wheels. Toyota believes a large pool of consumers will want hybrids to boost fuel efficiency or performance. Hybrids also provide a technological halo for all Toyota vehicles. And Toyota's heavy spending is creating patents - 650 and counting - that could provide an edge over competitors. As one indication of that, Ford Motor Co. licenses some of Toyota's technology for the Escape hybrid. Toyota sees even more advantages if fuel cell vehicles are a major commercial success. Fuel cell vehicles will use a lot of hybrid technology, potentially creating decades of income from licensing deals. Fuel cells use hydrogen to create pollution-free power. K.G. Duleep, managing director of transportation for Energy and Environmental Analysis Inc., in Arlington, Va., sees "a lot of carryover between hybrids and fuel cells in the electronics and motors. Toyota could have a real competitive advantage in developing fuel cells. It's one of the few companies that has the money to do everything." Even if fuel cells fail to become a significant alternative to the internal combustion engine, Toyota will be well positioned in a proven alternative to save fuel: hybrids. Wary automakers But other automakers are wary. They are unsure how many people will pay a premium for hybrid technology, estimated by analyst Duleep at $3,500 per vehicle (see box above). Some even have knocked Toyota by calling the Prius hybrid a massive PR campaign to deflect attention from Toyota's big pickups and SUVs. Toyota starts selling a full-sized pickup in fall 2006. Honda Motor Co. and Ford are selling hybrids in the United States but are proceeding more deliberately than Toyota. Nissan Motor Co. is licensing the Toyota technology and plans an Altima hybrid in 2006. General Motors is planning full-sized hybrid-powertrain pickups and SUVs in 2007 at the earliest. Many European automakers are concentrating on diesel technology instead. Toyota doesn't have a stranglehold on hybrid technology. Breakthroughs are possible with any emerging research effort. Ford and Honda are learning from their early work, and GM's December deal with DaimlerChrysler will accelerate those companies' hybrid development. And Hyundai is working at its gleaming new South Korean r&d studio. And while Toyota does not have all of its products on the road, the hybrid plan has the full weight of the company behind it. President Fujio Cho calls it "the core technology of the future." Eric Noble, president of The Car Lab consulting firm in Orange, Calif., sees Toyota as the "800-pound gorilla of hybrid technology." He believes Toyota will have a lock on licensing its intellectual property. Licensing the technology from Toyota is "smarter than parallel competing development, especially when no one can keep up in spending with Toyota," Noble adds. "It's nothing to be ashamed of." Toyota's 650 hybrid patents cover the "power flow" of the hybrid system, encompassing the system's control logic, as well as primary power source, secondary energy storage system and the motor-generator system. Toyota spent about $800 million developing the Prius, estimates analyst Duleep. "But a lot of Toyota's basic r&d in Prius is being applied to other vehicles, too," Duleep says. The Prius' price tag is roughly the same as developing a drivetrain from scratch - with significantly more fiscal upside if hybrids take off. Toyota officials say their hybrids are breaking even, even at this early stage of development. And Toyota has about $30 billion in cash, so money is not an issue. Future fuel cells Toyota's push into hybrids is about much more than market share. Toyota desires the intellectual property rights for the heart of the fuel cell propulsion system of the future, says Dave Hermance, executive engineer for environmental engineering for Toyota Technical Center U.S.A. "To the extent that the future is fuel cell, it's a hybrid fuel cell," Hermance says. "All the work we do today lets us be the low-cost provider to three-fourths of the fuel cell system." Fuel cells may eliminate gasoline-powered engines, but the hybrid's electric motors still will propel the car, and the electronics will convert the direct-current power of the fuel cell and battery over to alternating current, Hermance says. If Toyota plays its cards right, other automakers will have to pay licensing fees to Toyota for every fuel cell car they build. "Toyota is building their own power controllers and motors, and they have a joint-venture with Panasonic to build batteries," says analyst Duleep. "Everyone else is depending on large Tier 1 suppliers like Siemens or Hitachi for their components." Honda steps back While Toyota is moving ahead full bore, marketers at Honda are pausing to examine the depth of the market. This change comes even though Honda was the first automaker to have three hybrid vehicles for U.S. sale. "We want to get a better sense for the depth of the (hybrid) market and the preference of the marketplace, then move forward in any number of directions," says Dan Bonawitz, American Honda vice president of corporate planning and logistics. Honda still plans to launch the 2006 Civic with new-generation hybrid technology. But Honda is looking into other technologies, including natural gas. Bonawitz declined to say when Honda or Acura would add another nameplate with a hybrid powertrain. He also downplayed the idea of Honda building larger hybrid vehicles, along the lines of the Lexus RX 400h and Toyota Highlander. "As you move up into bigger vehicles such as SUVs and minivans, there is more frontal area and weight, and you start getting a certain diminishing return" in terms of fuel economy, Bonawitz says. Ford, like Toyota, advertises the green halo of its hybrid, the Escape Hybrid. Ford Division expects to sell about 20,000 Escape Hybrids in 2005. It will start selling hybrid versions of the Mercury Mariner in the fall and the Mazda Tribute in 2007. The Mariner and Tribute are sister vehicles of the Escape. Ford's second-generation hybrid technology will debut in the Ford Fusion and Mercury Milan sedans in 2008. Ford says it developed the Escape Hybrid powertrain, but the methods used to switch from electric to gasoline power and to operate the regenerative brakes were similar to Toyota's. So, Ford says, it licensed some of the processes that Toyota patented as a legal precaution. Pessimists Then there are the pessimists. Once the early adopters buy their Priuses, the pessimists say, demand will not grow enough to satisfy all entrants. Nissan CEO Carlos Ghosn sees the cost-benefit equation as too risky. Hybrids "make a nice story," Ghosn said in January, "but they're not a good business story yet, because the value is lower than their cost." Nissan is covering its bases by licensing Toyota technology and offering it in the Altima in 2006. At the Detroit auto show in January, GM Vice Chairman Robert Lutz belittled Toyota's thrust into hybrids as little more than "an advertising expense. "We business-cased it, took a hard, analytical look and thought the engineering and investment were irresponsible vis-a-vis our shareholders," he said. GM's attitude irks Roland Hwang, vehicles policy director for the Natural Resources Defense Council. "GM is particularly troubling to us. It has been the ringleader in opposing new (environmental) standards. Hybrids are not about PR. It's a serious market," Hwang says. "GM has shown a lot of bling-bling concepts, but we're still waiting for the vehicles." GM's first full hybrid system, on full-sized SUVs and pickups, won't arrive until 2007 at the earliest. "People say we're a little late to the market," says Larry Nitz, executive director of GM's hybrid program. "This is a marathon, not a sprint." Consumer research by J.D. Power and Associates shows most mainstream buyers are interested in hybrids mostly for fuel economy, not for environmental benefits. For customers who want fuel economy to save money, there are many other cheaper technologies available, such as cylinder deactivation, clean diesel, turbocharging, ethanol and six-speed transmissions, which all give fuel economy benefits at a lower cost by hybrids. But analyst Noble says Toyota warns against automakers believing internal-combustion advances will be enough to thwart hybrids. "Any of the internal combustion technologies the others are proposing can be incorporated into hybrids anyway," he says. "While others wait, Toyota's lead will increase with market experience and they will advance their technological edge."