Comin' Through!

General Motors and Toyota were once neck-and-neck when it came to developing high-mileage gasoline-electric hybrid cars. About a decade ago, you see, both firms had cracked the code on how to engineer a hybrid, and GM even had a running prototype. But the new technology was so costly that the automakers would have had to initially sell hybrids at a loss to build a market for them. The differing paths the two companies took symbolize why Toyota has become wildly profitable in the United States while GM has been losing its shirt in its home market. And why Toyota, riding GM's bumper, is likely to pass it this year to become the world's biggest car company.

To GM, selling hybrids at a loss didn't make business sense. So it took a pass. To Toyota, hybrids looked like a reasonable bet on the future. It developed the Prius, selling it at a loss for years (by all accounts except its own). Today, the Prius is eking out a small profit for Toyota in the United States. Vastly more important, it's the hottest hybrid on the market and provides a halo for Toyota, making it appear to be the world's greenest carmaker even as it rolls out gas-guzzling trucks. GM, meanwhile, is playing catch-up and defending itself from allegations that its Hummer SUV melts the planet. "We made a bad decision," GM vice chairman Bob Lutz now says. "Being known as the technology laggard is not conducive to selling automobiles."

In addition to taking different technological paths, Toyota and GM have taken different approaches toward expansion in the U.S. market. Toyota last week announced plans to build a $1.3 billion assembly plant, its eighth in North America, in Elvis Land: Tupelo, Miss. "No company since Henry Ford has grown production at the rate Toyota is," says economist Sean McAlinden of the Center for Automotive Research. GM, by contrast, is closing U.S. plants. It's also overhauling its models to make them more stylish and fuel-efficient. While GM achieved a surprising 3.4 percent increase in sales last month, its biggest expansion hopes hang on a possible purchase of money-losing Chrysler, whose problems are very much like GM's own.

What's at stake here goes miles beyond a battle between two automakers. After all, nearly 900,000 Americans work in the auto industry—the largest chunk still for the Detroit Three—and the car business accounts for nearly 4 percent of the nation's GDP. For the United States and Japan, GM and Toyota are trophy corporations that have been protagonists in a long-running national rivalry. The winner of this race could determine who drives the global economy in the 21st century.

You've heard plenty about the differences between GM and Toyota when it comes to jobs, carbon emissions, pensions and health-care costs. But it all boils down to a simple bit of math: Toyota makes cars for less than it costs GM, and it gets to sell them at a higher price than GM does.

It's taken 50 years for Toyota to reach this point—but, then, staying power and the "Toyota Way" philosophy of continuous improvement are what the automaker is all about. Since introducing the tinny, 60-horsepower Toyopet Crown in the United States (1957 sales: 288), Toyota has built a rock-solid reputation for producing reliable cars. It achieved that by investing in bulletproof quality, advanced technology and high-mileage engines. It developed a superefficient manufacturing method, known as the Toyota Production System, that relentlessly roots out waste and builds in quality. (Workers stop the line thousands of times a day to make sure no glitch gets through.) It is emulated the world over and slavishly copied by GM. Toyota didn't dump cars into airport rental lots just to keep its factories rolling, as GM did. The result: a virtuous cycle that gives Toyota models topnotch resale value. After three years, Toyota's models retain 52 percent of their value, versus 43 percent for GM, according to the Automotive Lease Guide. That's a big reason the Toyota Camry has been America's favorite car for the past five years, outselling GM's No. 1 car, the Chevy Impala, by 35 percent in 2006.