Get Your Green Motor Running

The secret to making better batteries lies less in blazing transformations than in incremental innovation—something the Japanese are traditionally good at. Japanese battery makers and automakers have been collaborating since the late 1990s. Both sides use the word suriawase, meaning "coordination and integration." Indeed, car-industry observers took note last year at the Detroit Motor Show when Toyota president Katsuaki Watanabe adorned his company's stage with a huge PANASONIC sign (Panasonic supplies batteries for the Prius). The fact that car manufacturers and suppliers have such close relationships in Japan facilitates speedy experimentation and innovation. "It's not like assembling personal computers," says Tatsuo Yoshida, analyst at UBS Securities. "When you're making cars, you just can't put a set of components together to make a perfect product. A car is made of tailor-made parts and tailor-made components."

Slowly but surely, these relationships come together to give Japan an edge. Nissan is also working to develop a next-generation battery, partnering with NEC in an effort to begin mass production next year. A.T. Kearney's Kawahara says, "Those [Japanese] manufacturing technologies are the most confidential of the confidential." Though Ford and GM have been loudly touting hybrid vehicles of their own, those are estimated to be much more expensive, and U.S. manufacturers are already finding themselves compelled to turn to the Japanese for batteries that offer the necessary staying power.

Since the batteries that power cars could also someday be used to heat homes, a lead in the area has vast implications for the broader Japanese economy. Nobuaki Yoshioka is a senior executive at Automotive Energy Supply Corp. (AESC), a joint venture between Nissan and NEC. His company has been pushing the envelope of battery technology by developing lithium-ion batteries with manganese components—something NEC has been working on since 1990. "I think [the potential of this technology] is enormous," says Yoshioka. "We know that oil is going to be depleted, and that's going to make it indispensable to somehow store energy that is generated. Today we're focused on cars. But it's clear that the number of possible applications as storage of energy is huge."

For example, superefficient batteries might store electricity generated at times of low demand for use during peak hours. Batteries could be used to change the infrastructure of the energy industry not just in Japan but also throughout Asia. Fumikazu Kitagawa, an auto-sector consultant at Nomura Research Institute, believes that combining the new generation of batteries with solar-power generators will completely revolutionize household energy systems. "This sort of system will be available at reasonable cost, and fairly soon," says Kitagawa.

Batteries are only one part of a green automotive-components industry, including electric motors, inverters and the like, which Japan already dominates. Nomura estimates that the market for hybrid components alone could triple to $5 billion by 2012, and reach $9 billion by 2015. "Japan now has a huge potential to become a world supply center," says Yozo Hasegawa, author of the book "Clean Car Wars," which details the competition for green-car technology among Japanese carmakers and their foreign rivals.

Japan's push for the ultimate green car will also spill over into the materials sector. Consider the steel industry (steel is the main ingredient in automotive bodies). Amid intensifying global competition and consolidation, Japan's steelmakers have kept their edge, increasingly focusing on high-end innovative products coveted by the auto industries (about 80 percent of Japanese production is in this area, which yields the highest profit margins). Yasuhiro Daisho, a professor at Waseda University, says Japanese steelmakers have been leaders of ultralight and high-strength steel for years. "Nippon Steel and JFE Steel have the technologies that ArcelorMittal is very anxious to have," he says. Asian makers, in particular the Chinese, are also trying to catch up with Japan's lead in steel innovation.