Honda's new FCX clarity feels like a perfectly ordinary car—which may well be the most shocking thing about it. It looks and drives like a run-of-the-mill four-seat sedan. Slip behind the wheel and press the pedal with your foot, and the car accelerates with satisfying punch. But after a few minutes of cruising, you'll notice that something is missing. The only audible engine noise is a faint 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. The once bulky fuel-cell stack that supplies energy to the engine has been reduced in size by half over the past decade while increasing the power output by 50 percent. It's the first to be certified by the U.S. Environmental Protection Agency, and the first to be delivered to retail customers (albeit on a leasing basis). As for CO2 emissions, the only exhaust it produces is a trickle of water. And perhaps most important of all is what stands behind it: A state-of-the-art factory that's ready to produce thousands of the vehicles once the market's ready. Most of Honda's competitors, by contrast, are still bringing concept cars to the auto shows.
The Clarity is also just one of a number of next-generation green automobiles that are beginning to come off assembly lines in Japan. These vehicles, whether powered by fuel cells, long-lasting batteries or renewable biofuels, have been around for years, but almost always as one-off utopian designs or experimental models that were designed mainly to attract good green press. Now Japanese automakers are going to the next level, 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, with a global rollout in 2012. Toyota is road-testing a plug-in hybrid in Japan, the United States and Europe and plans to launch it in 2009 (there's a buzz, unconfirmed by the company, that this hybrid car could use solar power as well). Honda, a distant second to Toyota in the hybrid market, is preparing for the launch of a new car highly anticipated for its innovative green technologies, including its state-of-the-art battery. Mazda will offer the world's first hydrogen-gasoline hybrid in Japan by next March. All of 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, and I expect them to remain No. 1 in the future," says Mike Omotoso, an auto analyst for California-based J.D. Power and Associates. "It's definitely having a positive impact on the Japanese economy."
In large part, Japan's lead in green-car technology is an outgrowth of its old austerity. Japan was obsessed with energy efficiency long before global warming made it a worldwide obsession. For decades Japanese companies have struggled to cope with their oil-poor country's sky-high energy costs by placing a premium on energy-saving technologies, and it has paid off. Even old Japanese industries are cutting-edge in cutting energy costs. Japan continued to make batteries long after U.S. rivals quit, and now makes the most efficient batteries in the world. Japanese steelmakers have ceded ground to cheaper emerging-market rivals but are still unsurpassed in the fine niche art of making superlight steel for car bodies. The hidden strength of Japanese smokestack industries helped create its green cars, and now the success of those cars is pushing more and more Japanese industries—electronic-motor and control-unit producers, all sorts of material companies—to innovate faster.
It's impossible to tally the direct economic effect of the green-car race at this point, but it's huge and likely to grow. The Prius is already the most popular green car in the world, and Toyota plans to raise domestic output of the Prius by 60 percent to 450,000 a year by 2009. By 2015, Goldman Sachs expects the hybrid-vehicle market (including plug-in hybrids) to grow to 2.5 million, up from half a million 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 and into the electric era. Goldman analyst Kota Yuzawa says hybrid vehicles could account for 5 to 10 percent of operating profits for Honda and Toyota in 2010. And the potential markets look likely to grow as oil prices hit new highs and environmental regulations get tighter.
The focus on green cars reveals the kind of industrial vision that Japan is often criticized for having lost decades ago. Toyota launched the G21 Project, which ultimately produced the Prius, back in the 1990s, when oil prices were low and America's love of SUVs was still growing. The idea was to create a model car for the 21st century, and counter Toyota's reputation for "boring" vehicles. Toyota simply saw the long view before others, assuming that the petroleum-based economy was becoming unviable for a variety of environmental and economic reasons, according to Noriyuki Matsushima, analyst at Nikko Citigroup in Tokyo.
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.
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.
Other materials makers are also scampering to develop new products for high-tech cars. Toray, a pioneer of high-tech materials like the carbon fiber it puts into aircraft wings and into the fuselage of the Boeing Dreamliner, too, is just one of them. The company recently set up a new automotive research-and-development center for advanced materials in Nagoya, just down the road from Toyota and suppliers. Toray holds 34 percent of the world carbon-fiber market, and aims to develop a carbon fiber cheap enough for use in car bodies. It hopes to more than double its sales to the auto sector to $3.5 billion by 2015. Teijin, another high-tech-materials maker, aims to "cut the weight of a car by half" by using a variety of new materials like polycarbonate resin, and a bubble-shaped prototype is on display in its Tokyo showroom. Meanwhile, a superlight sports car produced by Ken Okuyama Design is set for sale this fall in Japan. Using carbon fiber and aluminum generously, the model weighs only 750 kilograms.
Another potential growth industry: bioplastics, which have been attracting R&D money from Mazda and Toyota, among others. Because these materials are derived from plants rather than from petroleum (as most plastics are today), bioplastics are carbon-neutral and require much less energy to make. These companies are experimenting with a range of items, including installment panels and floor mats.
Of course, by betting heavily on all the green-car technologies, Japan could easily find itself getting a couple of calls badly wrong. It's certainly missed forecasts in the past—when, for example, Japanese mobile-phone companies ended up backing the wrong standard in the early 1990s, largely shutting themselves out of the global cell-phone boom that followed. The lithium-ion batteries that Japanese companies are investing in right now have plenty of limits, and it's always possible that nimble non-Japanese entrepreneurs could figure out an even better technology.
So far it's unclear which of the new green-car technologies will triumph in the race for "sustainable mobility." Hydrogen-powered fuel-cell vehicles like Honda's Clarity still face some serious challenges if they're ever to break though into the market: not only are they costly, but the fuel stations and infrastructure to power them would have to be built from the ground up. While electric vehicles have the huge advantage of being able to tap into existing power networks, they, too, remain costly, and even the best batteries still don't offer the same range as a full tank of gasoline. Lithium-ion batteries hold some safety concerns. The batteries have a tendency to overheat, potentially causing fires; some manufacturers have had to recall lithium-ion laptop batteries for just this reason. Don Hillebrand, director at Argonne National Labs in Chicago and a leading researcher who has testified before the U.S. Congress on battery technology, warns: "This is a time of great potential and huge risk. Those leaders today may not stay leaders, because rules are going to change quickly."
Even the popular hybrids are still a niche product. But as far as Japanese carmakers are concerned, gasoline is no longer where the action is. Hillebrand believes that green technologies are changing the industry in an unprecedented way. If Ford invented modern car manufacturing when it built the first assembly line for the Model T, says Hillebrand, then the emerging green technology represents "the second invention of the auto industry. And it's the Japanese who are leading the charge."
Ecofriendly cars are leaving the auto shows and the design exhibitions and taking to the streets. Honda, for one, has already started leasing the FCX Clarity to a select group of high-profile customers in southern California. As American actress Jean Harris, one of those chosen as a Clarity user, says: "I love that it's not a huge leap from what we're already used to. It feels like a space-age regular car." If Japanese managers have their way, that simple phrase could well provide the key to a new economic boom.