Get Your Green Motor Running

Toyota has since dramatically cut the costs of producing the Prius by achieving economies of scale. Toyota has already reached the break-even point on sales of its hybrids; by contrast, its foreign competitors, like GM, still have years of bleeding red ink ahead of them. Toyota says the parts in its next line of hybrids, due for release next year, will cost about half the current bunch, allowing it to drop prices and raise profits. While the company is estimated to have lost about $10,000 on each car produced when the line was launched back in 1997, "the new Prius is going to be hugely profitable," says Nikko's Matsushima, bringing in thousands of dollars per car. And Toyota aims to cut hybrid production costs over the next decade. With so much more manufacturing experience than its rivals, Toyota will be "the price leader" for the next generation of hybrid vehicles, says Matsushima.

To be sure, virtually every car company in the world is ramping up intriguing green-car projects. Even slow-moving GM plans to debut the plug-in hybrid Volt in 2010, but it is racing from behind against Japanese rivals that work in often exclusive national supply networks, as they have for decades.

Japanese carmakers aim to protect their edge by joining forces with makers of electronics and batteries, the key to the next generation of high-tech cars. Toyota's joint venture with Panasonic (which is majority-owned by the car company) has already made it one of the world's leading battery companies. Similarly, Nissan recently increased its stake in its own battery joint venture with NEC, investing in a big new factory with the aim of marketing its lithium-ion batteries to other carmakers. Japanese battery companies have a big lead in design and mass production, which will make their prices hard to match. A.T. Kearney's Eiji Kawahara says that, even if Japan does not come up with the next big breakthrough in battery design, the technology for putting it into mass production will likely be Japanese.

Mitsubishi's new electric car, the i MiEV, offers another nice illustration of the factors underlying Japan's lead. Until now, many electric vehicles have been limited by range, meager acceleration and long charging times. The four-door i MiEV boasts a range of 160 kilometers per each full charge (compared with 40 for a GM Volt), and, as a recent test-drive around Tokyo demonstrated, its pickup in urban traffic differs in no notable way from a gas-powered car. Other new electric vehicles—like Tesla's much-hyped roadsters—may offer even better performance. But in stark contrast to Tesla—an innovative but tiny start-up—Mitsubishi is reaping the benefits of a tie-up with leading Japanese battery maker GS Yuasa that has the two companies preparing for mass production of state-of-the-art batteries by the end of 2009.

Already the i MiEV's battery weighs in at a mere 204 kilograms (compared with 454 for Tesla's model), and the effect on cost is palpable. Mitsubishi plans to start selling i MiEVs in Japan at the end of next year for a price of about $28,000 after planned subsidies of about $10,000—compared with a cool $100,000 for a Tesla. Meanwhile, thanks to its work with Japanese power companies, Mitsubishi says it's close to perfecting "quick charge" devices that would bring the battery up to 80 percent of capacity in half an hour—thus opening up the prospect that you could recharge your car in the supermarket parking lot while picking up the groceries, for example.

Japanese companies have been plugging away at the green-car challenge for years, in a slow and steady way that plays to the strengths of their manufacturing tradition. While U.S. automakers have spent as much on R&D as top Japanese makers do, the former have been pursing totally different priorities—still sticking money into bulky SUVs while the Japanese were already well down the hybrid road. That money is filtering into other areas of Japanese industry, reinforcing technological progress. "We are now seeing the result of numerous companies' ferocious effort to innovate technologies" to meet carmakers' demands, says Masahiro Ohta, analyst at Fuji Chimera Research Institute.