Leading the Green Charge

Honda's new FCX Clarity feels like a perfectly ordinary car—which may well be the most shocking thing about it. Slip behind the wheel and press the pedal, and the car accelerates with satisfying punch. But after a few minutes of cruising, you'll notice that something's missing. The only engine noise is a whir so faint that you can actually hear the tires swishing along the asphalt. That's because the Clarity is a hydrogen-fuel-cell car, one of the most advanced in the world. It's the first to be certified by the Environmental Protection Agency here in the United States, and the first to be delivered to retail customers (though on a leasing basis). As for CO2 emissions, the only exhaust is a trickle of water. And perhaps most important is what stands behind it: a factory that's ready to produce thousands of the vehicles once the market is ready. Most of Honda's competitors, by contrast, are still bringing concept cars to the auto shows.

The Clarity is just one of a number of next-generation green automobiles that are beginning to come off assembly lines in Japan. Such vehicles have been around for years, but almost always as one-off utopian designs or experimental models that were designed mainly to attract good press. Now Japanese automakers are entering the green-car mass market, in many cases years before their competitors. Nissan plans to introduce an electric vehicle to the United States and Japan by 2010. Toyota is road-testing a plug-in hybrid it plans to launch in 2009. (There's unconfirmed buzz that it may use solar power as well.) Mazda will offer the world's first hydrogen-gasoline hybrid in Japan by next March. All these companies are benefiting from close cooperation with electronics manufacturers, component makers and suppliers that are helping to push Japan to the forefront of green-car technologies. "Globally, Japanese companies are definitely at the top right now," says Mike Omotoso, an analyst for J.D. Power and Associates.

In large part, Japan's lead in green-car technology is an outgrowth of its old austerity. Japan, an oil-poor country, was obsessed with energy efficiency long before global warming made it a worldwide fixation. Now it's seeing the payoff. It's impossible to tally the direct economic effect of the green-car race, but it's huge and likely to grow. The Prius is already the world's most popular green car. By 2015, Goldman Sachs expects the hybrid-vehicle market (including plug-in hybrids) to grow to 2.5 million, up from 500,000 in 2007, with Toyota and Honda in the lead. Analysts say plug-in hybrids, which run on a battery alone for a short range, are the vehicles that will gradually ease drivers out of the gasoline age. Goldman analyst Kota Yuzawa says hybrids could account for 5 to 10 percent of operating profits for Honda and Toyota in 2010. Toyota is already seeing benefits as its costs of producing the Prius, now in its second decade, drop sharply.

Virtually every car company in the world is ramping up intriguing green-car projects. GM plans to debut the plug-in hybrid Volt in 2010, but it is coming up 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. 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 joint venture with the battery firm NEC. 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 illustration of why Japan leads. 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 100 miles per each full charge (compared with 25 for a GM Volt), and, as a recent test-drive around Tokyo showed, its pickup in urban traffic rivaled 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-in 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 450 pounds (compared with 1,000 pounds for Tesla's model), and the effect on cost is dramatic. 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. Mitsubishi also says it's close to perfecting "quick charge" devices that would bring the battery up to 80 percent of capacity in half an hour—letting drivers recharge their cars in the supermarket parking lot while shopping.

The secret to making better batteries lies less 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." Slowly but surely, these relationships are coming together to give Japan an edge. 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 turning to the Japanese for batteries that offer the necessary staying power. Batteries are only one part of a green automotive-components industry, which also includes electric motors, inverters and the like, which Japan already dominates. Some analysts estimate 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 "Clean Car Wars."