Rise of the Green Machine

Toyota promised me 60. The spec sheet on the 2005 Prius clearly states that
the car gets five dozen miles per gallon of gas on city streets. But
I'm test-driving a beige hatchback along Sepulveda Boulevard on the
outskirts of Los Angeles, and according to the touchscreen on the dash,
I'm topping out at 49.7.

Granted, 49.7 miles per gallon is at least twice what all the gas
hogs around me are getting. But whenever I hit the accelerator, no
matter how gradually, my mileage dips. I must be doing something wrong.
I click the screen over to a real-time schematic of the hybrid
gas-electric power train. Rolling out of a stop, the car is golf-cart
silent while the display shows the 50-kilowatt electric motor providing
all the power to the wheels. Once I hit 9 miles per hour, the gas
engine takes over, transforming the electric motor into a performance
booster that kicks in only when I need some extra juice. The secret to
increasing my fuel economy, I realize, is to manipulate the
relationship between the two halves of the engine. The more I canuse
the electric propulsion, the better mileage I'll get. 

And that's when I have my eureka moment. There's a sweet spot on the
accelerator. When the car hits 40 miles per hour, I coast for a few
seconds, letting the gas engine go idle, then use the electricity to
maintain my speed by depressing the pedal ever so slightly. My mileage
starts to climb - 50.1, 50.4, 50.8.

My ad hoc videogame on the traffic-clogged streets of LA is nothing
new to the 120,000 Prius owners in the US. Some fanatics even drive
shoeless to be in better touch with the accelerator. For true masters,
50 miles per gallon is a piker's score; they shoot for a consistent 60.
When it comes to gas mileage, Prius owners can make TiVo users and Mac
addicts seem blasé. A typical newsgroup posting from one of hundreds of
customers who frequent fansites like PriusChat.com: "This is the
greatest car ever invented!"

Which is pretty much how Toyota feels. The company introduced an
environmentally friendly, rather homely car to a niche of pocketbook
activists five years ago. Having proved a market, Toyota remodeled the
car's body, increased the engine's power, worked out the bugs, and
turned a profit. Now it's rolling out phase two of its strategy:
bringing hybrids to the masses. "We're at the edge of making the
internal combustion engine similar to regular film for a camera," says
Ernest Bastien, VP of Toyota's vehicle operations group. Bold
words,considering that more than 99 percent of the cars Toyota sold
last year had traditional internal combustion engines. 

In phase two, Toyota is doubling production to sell 100,000 new
Priuses in the US this year. This spring, the company will introduce
the Lexus RX 400h, billed as the world's first luxury hybrid, followed
by the Toyota Highlander Hybrid SUV. And it's considering opening a US
manufacturing facility. Toyota has also begun advertising the Prius to
the mass market. The company kicked off a TV ad campaign with a $5
million, 60-second spot during the Super Bowl that hit on a few
important marketing messages: The Prius is good for Mother Earth, and
itdoesn't need to be plugged in - a major point of confusion in Middle
America. The commercial also confirmed Toyota's role as Detroit
antagonist by jabbing the industry for failing to advance the
automobile engine in the last 120 years.

Of course, Toyota's not the only company with a hybrid on the
market. Honda has the Civic Hybrid, Accord Hybrid, and Insight. Nissan
licensed Toyota's technology for the forthcoming Altima Hybrid. Ford
introduced the Escape Hybrid SUV and Chevrolet has the Silverado Hybrid
pickup. But Toyota has sold more hybrids than all other automakers
combined, and it's the only manufacturer fully embracing the
technology's long-term prospects. Other automakers fear that hybrids
are too expensive or too complex to augur real change - not the
digitalcamera that eventually revolutionized that market, to use
Bastien's analogy, but rather a niche product like the old-fashioned
Polaroid - and that hybrid technology will be supplanted by
hydrogen-powered fuel cells. 

Which means that if there's going to be a hybrid in every garage
come 2020, Toyota must lead the way. It may seem odd that the company
poised to overtake General Motors in the next few years as the world's
biggest automaker is out to render the traditional internal combustion
engine obsolete. But the early success of the Prius is making believers
out of Toyota suppliers. Toshiba, for example, recently committed $95
million to build a facility to manufacture hybrid control system
microchips. Likewise, Sanyo announced that it will double output ofits
rechargeable hybrid batteries. For hybrids to become ubiquitous,
however, Toyota needs to make a convincing case to drivers from
Baltimore to Beijing - not to mention executives in Detroit - that
hybrids are neither a stopgap nor a luxury, but affordable, cool, and
here to stay.

Who but a tree hugger or a Hollywood politico would pay $20,000 for
a four-door hatchback with a puny 1.5-liter engine? Toyota COO Jim
Press has heard the question before, and he jumps on it. "How much
premium are people paying today for their Hemi V-8?" he asks, referring
to the 345-horsepower engine that's an option on the Dodge Ram pickup.
The answer: about $1,000. "What do they get out of that? They can go
faster from stoplight to stoplight. Why wouldn't they pay for a more
fuel-efficient engine that gives you better performance butalso saves
the planet?"

"Saves the planet"? OK. The EPA classifies the Prius as a Super
Ultra Low Emissions Vehicle. It uses less fuel than the most efficient
diesel car and emits 95 percent fewer carcinogens into the atmosphere.
So its green cred is irrefutable. But "better performance"?

Ever since General Electric first dabbled unsuccessfully in
gas-electric technology in the early 1900s, the knock on hybrids has
been that they don't have enough pep. (Engineers of the day couldn't
get the cars much past the 35-mph barrier.) That was true of the first
Prius, introduced in Japan eight years ago. Like today's version, it
had a gas engine and an electric motor linked by a "power split
device," a set of gears connecting two power systems to one axle. Each
half of the power train can work independently or together, depending
on the situation. The battery is recharged by the gas engine, as well
as through a process called regenerative braking, in which the car's
kinetic energy is converted into juice that's stored in the battery.

Despite the technologically impressive power train, the original
Prius was suited to little more than the start-and-stop city driving
that's common in Japan. Basic hybrid technology works well in vehicles
that stop frequently and travel at low speed. (Which is why several
package-delivery companies, including FedEx, are experimenting with
hybrid fleets.) When Toyota brought the Prius to the US in 2000, it
increased the electric motor's power to meet the typical American
driver's hunger for acceleration. Still, the Prius went zero to 60 in a
lethargic 14 seconds - making highway on-ramps an adventure - and
drivers had to tolerate the annoyance of feeling the power train toggle
between gas and electric.

Despite these drawbacks, and a sticker price about $3,000 higher
than a similarly equipped Corolla, dealers could hardly keep the early
Prius on their lots, in part because of Toyota's savvy rollout
strategy. New cars are usually doled out evenly to 12 US sales regions.
But the marketing department knew that only a special customer would
pay $20,000 for a compact car. Specifically, someone with a master's
degree, a six-figure income, and a fondness for composting.

So Toyota diverted a larger percentage of cars to the San Francisco
Bay Area. "If we had used a conventional distribution system, we would
have had consumers waiting in Northern California, and dealers with
cars sitting on lots in Jacksonville," says Bastien. Bay Area early
adopters were willing to sacrifice performance for psychological

But if the goal is to go big, there can be no sacrifices. The
second-gen Prius accelerates 25 percent faster due to a new boost
converter that turns the nickel metal hydride battery's 200 volts of DC
output into 500 volts of AC to power the electric motor. Advances in
battery chemistry also helped the battery shed nearly 29 pounds, making
the car a bit quicker off the line and stingier with fuel.

The biggest development in the Prius 2.0 comes in the way the
transmission manages both halves of the engine. As I discovered on my
test-drive, the power train doesn't merely use electricity at low
speeds, gas on the highway. Rather, the two sides of the engine work in
tandem. The patented algorithm that manages that relationship is the
real secret to the power train's success. It tells each part of the
system when to whir to life or shut down, optimizing both fuel
efficiency and performance. Toyota's engineers also sped up interaction
between the onboard computer and the transmission, which now allows the
power train to more quickly sense when the electric motor should
provide extra oomph to merge onto the freeway or climb a steep incline.

The second-generation Prius handles like any other midsize sedan,
and has impressive power on straightaways. Last August, Toyota's
engineers set a hybrid speed record on the Bon-ne-ville Salt Flats: 134
miles per hour. Except for a few minor modifications - reduced weight,
enhanced gear ratios - the green and white speedster was a street-grade
Prius; the Bonneville team even left the CD changer intact. The
Highlander Hybrid and Lexus RX 400h perform even better. The
all-wheel-drive Lexus boasts a 268-horsepower 3.3-liter V-6, two
electric motors, and a more powerful boost converter, which transforms
the battery's 200 volts into 650 volts. And though its estimated 30
miles per gallon can't match the Prius, the Lexus offers fuel
efficiency that beats most four-cylinder sedans.

The question now is how to further improve the fuel efficiency and
performance of hybrids without increasing the sticker price. Toyota's
engineers have exhausted the most obvious tricks. The boost converter
probably can't produce much more than 650 volts unless the entire
electronics system is overhauled. It may be possible to capture more
energy from the brakes and return it to the battery, but that will be
an incremental improvement. One significant advance could come in
battery development, as companies such as South Korea's LG Electronics
develop lithium ion. Li-ion batteries pack the same wallop as NiMH
units but cut 18 pounds off the weight of hybrid power trains - enough
to add a few more miles per gallon.

Beyond that, automakers are going to have to get more creative to
reach new levels of fuel economy. One option is to use carbon fiber
parts to decrease weight, but that will significantly increase costs.
"There is room for triple-digit fuel economy if you're willing to go to
a very, very low-mass solution," says Dave Hermance, executive engineer
for Toyota's environmental engineering group. "But I'm not sure the
market is ready for an all-aluminum body."

The record of the Honda Insight suggests Hermance is right about how
much change the market will accept in return for better mileage. The
tiny two-seat Insight is even more fuel efficient than the Prius,
averaging 66 miles per gallon on the highway, thanks to the car's
aluminum chassis and funkier, more aerodynamic teardrop shape. But
Honda sold only 583 Insights in the US last year; Toyota sold 55,390

Beyond looming engineering challenges, Toyota also faces a marketing
dilemma as hybrid engines find their way into normal-looking vehicles.
The Prius has been a hit in part because of its unique looks: Buy a
hybrid and passersby will know that you're both hip and intelligent,
not to mention part of a club that includes Leonardo DiCaprio, Cameron
Diaz, and former CIA director James Woolsey. The look-at-me factor,
however, is soon to fade. The Highlander Hybrid appears almost
identical to its gas-burning cousin. Toyota is rumored to be
introducing for 2006 a hybrid version of the Camry, the best-selling
car in the US, which will probably look exactly like its vanilla
namesake. Word is that the Lexus GS 450h, a hybrid version of the GS
430 sports sedan, will hit the market around the same time. Only then
will Toyota know whether Prius owners are plunking down the extra
$3,000 to help the environment or for the head-turning appeal.

The internal combustion engine under your car's hood isn't much
different from the one that Gottlieb Daimler and Wilhelm Maybach
patented in 1885. There have been occasional advances to limit
emissions and increase fuel efficiency, most notably the introduction
of electronic fuel injection in the 1980s. Otherwise, automotive
innovation has focused on adding horsepower to ever smaller, ever
cheaper internal combustion engines. Between 1981 and 2003, the average
horsepower of cars sold in the US rose 93 percent.

Until recently, there seemed little need to worry about fuel
economy. The thermo-dynamic properties of fossil fuels are hard to
beat, and as long as oil remained cheap and plentiful, there was no
reason to spend a fortune bringing a new type of car to market.
Compared with tech-driven industries, automaking has been on a flat
innovation curve. "You can't design a new car, bake it, and start using
it when it comes out the other end," says Jim Press. "You've got
billions of dollars of research and testing, and parts suppliers that
have to be dealt with. On engines and power trains, you need 10- to
20-year life cycles to amortize the investments."

The long investment cycle makes some auto companies skittish about
adopting new approaches. Selling 120,000 cars in Palo Alto and
Hollywood is one thing - but what do middle-class families in Houston
want? The average fuel economy of all 2004 vehicles was, in fact, 6
percent less than it was in 1987. Automakers say they're just giving
the market what it demands - more of the same.

And so it came as no surprise that the word at this winter's auto
show in Detroit was horsepower. Sure, the Ford Escape Hybrid was a
promising newcomer, winning the trophy for 2005 North American Truck of
the Year. And Ford vows to roll out four more hybrid models by the end
of 2008. But for now, the company is making only 20,000 Escape Hybrids
a year because it considers a $5,000 premium over the conventional
Escape too steep for the mass market.

The same goes for Nissan. It will release a hybrid Altima in 2006
with Toyota's power train under the hood, but CEO Carlos Ghosn isn't
sold on the technology. At the Detroit show, he warned that unless
costs are reduced dramatically, "the hybrid is going to be like the
electric cars" - a historical footnote, on par with the famously failed
EV1 of the late 1990s. Honda, which put the first hybrid on the US
market, still doesn't have real traction. Sales of its Civic hybrid
have been disappointing; the company moved just 1,169 in January, a 45
percent drop from the previous month. Honda has no plans to put its
hybrid system into the Element or Pilot SUVs.

One reason carmakers like to focus on horsepower is that it's damn
hard to develop an algorithm that manages a hybrid power train. No
company has been able to come up with a formula that beats Toyota's.
Ford developed its own algorithm only to realize it was very similar to
the Toyota approach; in order to avoid a lawsuit, it ended up
purchasing a license rather than pursuing a patent. Mercedes was
stunned to discover that its vaunted F 500 Mind concept car, a
diesel-electric hybrid, actually got worse mileage on the highway than
a gas-only version. Nissan just threw up its arms and licensed nearly
all of Toyota's hybrid technology.

GM seems enthusiastic about hybrids, trumpeting a system it's
developing with DaimlerChrysler that can beat Toyota on highway
mileage. But GM doesn't exactly have a stellar track record in this
arena. The company convinced King County, Washington, that its GM
Allison New Flyer buses could increase fuel efficiency up to 40 percent
over conventional diesels. The county purchased 235 buses at $645,000
each, a $200,000 premium per vehicle over their existing fleet, only to
realize that the New Flyers don't get better mileage.

As a result of hybrid tech's complexities, many companies are
looking in other directions. Audi, BMW, and Volkswagen are working on
clean diesel. At the Detroit auto show, most manufacturers showed off
hydrogen vehicles, which use fuel cells and emit only water vapor.
Hydrogen cars are definitely the endgame, but making fuel for them
requires copious energy. Building a network of filling stations will
cost hundreds of billions of dollars. It'll take decades to solve such
problems. In the meantime, many automakers seem content to point to
their hydrogen prototypes as evidence that they're working on new
solutions while actually embracing the status quo.

Not so at Toyota. Hybrid vehicles are showing up all over US roads
because the Japanese carmaker has thrown its full weight behind the
technology. The company has its own fuel cell prototype in the works,
but executives are quick to note that the Prius is actually more
efficient when you factor in how much energy it takes to produce the
hydrogen fuel in the first place. And unlike hydrogen cars, hybrids
work with the current energy infrastructure.

As far as the price premium that's so troubling to other automakers,
Toyota just doesn't seem all that concerned. Even in a best-case
scenario, hybrid power trains will always be more expensive due to the
engine's increased sophistication. But the company is betting gas
prices are going nowhere but up. If that's true, the hybrid tax begins
to recede. It's a gamble, but a calculated one. Prius sales rise or
fall from month to month in almost direct correlation to the
fluctuating price of oil. And then there are the geopolitical factors
to consider. "The cost of oil, the real cost of oil, is not just what
you pay at the pump," says Press. "It's what we're paying in Iraq.
That's the true cost." In short, Toyota has chosen the hybrid track for
a simple reason: The world cannot afford to wait another 40 years.

Global warming. There. We said it. So declared a 2001 advertisement
taken out by Ford in newspapers nationwide. It was an unusually frank
admission from an industry better known for pooh-poohing all evidence
of rising greenhouse gas emissions. But carmakers have begun to do the
math. Right now, there are about 800 million cars in active use. By
2050, as cars become ubiquitous in China and India, it'll be 3.25
billion. That increase represents an enormous sales opportunity for
automakers and an almost unimaginable threat to our environment.
Quadruple the cars means quadruple the carbon dioxide emissions -
unless cleaner, less gas-hungry vehicles become the norm.

Toyota knows China is the future. It will open a Prius manufacturing
plant in Chang-chun by the end of the year, and Press believes driving
conditions in China make hybrids an ideal fit - if not the Prius, then
perhaps a more low-cost, low-power alternative perfect for puttering
around megacities. Or maybe the demand will be for so-called mild
hybrids, like Honda's Civic Hybrid, which save fuel and limit emissions
but can't run on electricity alone. Such vehicles improve fuel economy
by 10 to 25 percent, chiefly by using an electric motor to start the
engine. The technology is nowhere near as impressive as the Prius power
train, but it's simpler and cheaper - which will be important to
Chinese workers making $800 a month.

If Prius' early track record is any indication, the world will
embrace hybrids. Prius waiting times have stretched six months or more,
even with dealers selling above MSRP; the Lexus RX 400h had a preorder
list of 18,000 names in January, three months before its release. And
the masses are taking notice. A 2004 study by the Public Policy
Institute of California found that 47 percent of those surveyed would
consider buying a hybrid, higher prices and all.

Being pro-environment and actually slapping down an extra $3,000 are
two different matters, of course. But several ominous forces could
easily tip the market toward hybrids: worsening climate change, war in
the Middle East, a tripling of gas prices due to regional turmoil,
raised emission standards in China.

Jim Press says "the oil-drinking party" is nearing an end. When the
lights come on, the US auto industry will see the energy equivalent of
a Wall Street correction. And it will realize there's money to be made
in slowing the depletion of our ozone and tapping into fears that we're
leaving the planet worse than we found it. Toyota already understands
this. Before long, Detroit will remember the last time a Japanese
carmaker came up with a better way to build automobiles.

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