Its Batteries Helping Toyota Lead Charge

• Miho Nagano
• On 5:26 pm EDT, Friday October 30, 2009

Prius-maker Toyota raced to first place in the hybrid car arena more than a decade ago, but staying No. 1 in alternative vehicles might take another gear.

Honda (NYSE:HMC - News) continues to battle fiercely, cutting its hybrid prices to the point where Toyota (NYSE:TM - News) has been forced to respond. Ford (NYSE:F - News), finding success with its Fusion hybrid, competes with Honda for the No. 2 spot in the U.S. hybrid market.

In the meantime, carmakers late to the hybrid game are trying to move faster to the next advance, all-electric cars. (See related story, this page.)

Yet Toyota remains in the alt-vehicle driver's seat. Analysts point 15 two huge advantages. One, Toyota opted from the start to develop its own batteries for use in hybrids and, eventually, all-electric vehicles. The battery is key.

And No. 2, Toyota's first-mover advantage has given it a trunkful of patents, aiding its alt-car development.

"Toyota's biggest strength is that it's already invested 12 years in R&D of mass-produced hybrid cars and established its technologies such as batteries and motor," said Nikko Citi analyst Noriyuki Matsushima.

But the auto industry is filled with twists and turns.

In May, Toyota released its third-generation line of Prius vehicles. Sales are good, analysts say, but they question profit margins. Toyota had to sell the car at lower prices than it wanted in order to compete with Honda's Insight, analysts say.

Honda priced the new Insight at $19,800. Toyota couldn't go that low; it's a bigger car. But it had to get close. Its base price starts at $22,400, just $400 above second-generation Prius prices.

Insight was the top-selling hybrid in Japan in April -- then the new Prius came out. From May through August, the most recent figures available, the new Prius has been the top-selling hybrid in Japan and the U.S. In the U.S., the Prius accounted for 47.5% of all U.S. hybrid sales in the first nine months of this year, according to figures from Toyota and Automotive News. The Toyota Camry hybrid is No. 2, at 8.3%, while Honda's Insight is No. 3, at 7.2%.

Toyota Grapples With Pricing

So Prius keeps its big lead, but perhaps at a cost.

"Because the Prius is such a price value, many owners of higher-priced Toyota vehicles in Japan are switching to Prius," said Masaaki Sato, a journalist and the author of "The Toyota Leaders" and "The Honda Myth." This is hurting Toyota's profit, he says.

Toyota already faced hurdles. In May, it reported an annual net loss of $4.4 billion for its fiscal year ended March 31, its first annual loss in six decades. The strong yen hurt. Its full-size Tundra pickup sold in the U.S., its biggest market, was another drag. It had to idle a Texas plant that made the Tundra from August through November 2008. And it decided to close the NUMMI plant in Northern California where it made its Tacoma pickup (partner GM had opted out earlier). The company expects deeper losses this year. It sold only 126,540 vehicles in the U.S. in April, 42% fewer than in April 2008 and less than were sold by Ford. In June, Toyota named company president Akio Toyoda, grandson of the company founder, to replace Katsuaki Watanabe at the helm.

Toyota says it failed to move fast enough to solve problems, as it quickly expanded globally.

But for that same fiscal year, Honda reported a profit of $1.5 billion, helped by a 13% increase in unit motorcycle sales in Asia and by the success of its Fit. The sub-compact Fit is a conventional gas car, and gets 27 mph in the city, 33 highway. And unlike Toyota, Honda is not interested in selling full-sized pickups.

Analysts say Toyota's in-house battery expertise will help fuel better results.

In 1996, a year before Prius debuted, Toyota formed a joint venture with Panasonic (NYSE:PC - News) to make batteries for a hybrid gas- and electric-powered vehicle. In 2005, Toyota took control of the joint venture and now owns 60% to Panasonic's 40%.

The joint venture, Panasonic EV Energy, develops and makes two different kinds of batteries for Toyota. One is a nickel-metal hydride battery. The other is a lithium-ion battery, which will power the just-emerging generation of plug-in hybrids.

Toyota Readies Plug-In Hybrid

Toyota said it is rolling out 500 Prius Plug-in Hybrids for commercial lease in the U.S., Europe and Japan around year's end. The company plans to sell the vehicle in the U.S. by 2012.

The plug-in will travel up to 12 miles on pure electric power before the gasoline engine kicks in. That might not sound like much, but its nickel-metal hydride-powered hybrid gets about one mile all-electric before the gas engine kicks in.

For now, Toyota said it continues to use nickel-metal hydride batteries for current Priuses because of its proven reliability and lower costs.

Toyota considers it crucial to have its core batteries technology in-house, says Jeffrey Liker, an engineering professor at the University of Michigan, and the author of "The Toyota Way."

"Toyota never wants to depend on outsiders," Liker said. "They want a very high degree of reliability."

Making batteries in-house helps Toyota keep a lid on its costs and accumulate know-how, he says.

Toyota and its group companies also develop and make most of the other parts used in hybrid vehicles, including the electric motor and many of the chips found in the cars, says Ryoichi Saito, an auto analyst at Mizuho Investors Securities in Tokyo.

For the Insight, Honda buys nickel batteries from Sanyo, Japan's major battery maker. It reportedly wanted to work with Sanyo on lithium-ion batteries in an exclusive relationship, but Sanyo reportedly said no, fearing that would limit its own growth.

Honda formed a lithium-ion joint venture with a Japanese firm called GS Yuasa in April. Honda holds a 49% stake in the venture, named Blue Energy. "Honda wanted a majority stake, but they couldn't get it," analyst Saito said.

Meanwhile, General Motors is buying lithium-ion battery cells from South Korea's LG Chem for the Chevrolet Volt all-electric vehicle, slated to go on sale in 2010. GM plans to assemble lithium-ion battery packs in Michigan.

Liker isn't impressed. "How can you compare that to the 12-year investment by Panasonic and Toyota, in which they have put billions of dollars into it?" he said.

Toyota has been protecting its hybrid technology advances by patenting them. Toyota has a "compulsive patenting" strategy, says Liker. "They are patenting everything in order to control as much of the technology as they can," he said.

Toyota spokesman Paul Nolasco said in an e-mail that Toyota has 2,092 patents for its three generations of Prius hybrids.

Ford has licensed some of Toyota's hybrid-system control technology, and Nissan (Other OTC:NSANY.PK - News) is buying Toyota hybrid systems. By using Toyota's technology, Nissan rolled out its Altima hybrid.

Toyota archrival Honda didn't license any of Toyota's hybrid technology. Instead, it's developed its own hybrid system that fits best for its vehicles, which tend to be smaller than Toyota's.

"Honda clearly didn't want to use Toyota's patents," Sato said. "That's Honda's pride."

So Toyota and Honda have traveled different hybrid tracks.

Nikko Citi Analyst Noriyuki Matsushima called Toyota's system "stronger hybrid." Toyota's system has two motors. At EV (electric vehicle) mode, the latest Prius runs all on electric power for up to a mile, then its gasoline power kicks in.

Honda's Insight uses a "mild hybrid" system, Matsushima says. It has one motor, with electrical power aiding gas power from the start. This works fine on its smaller cars, like the Insight. But a larger car, such as Honda's Accord, wouldn't see any big mileage gain with such a system, analysts say.

"Our goal was to make a smaller and lighter hybrid and to cut the system cost by half compared with the Civic hybrid without sacrificing performance," said Yasunari Seki, the chief engineer for the Insight.

While a smaller battery and simpler hybrid system keep Insight's costs down, its mileage ratings don't match Toyota. The Insight gets 40 mpg in the city and Prius gets 51 mpg, according to the U.S. Environmental Protection Agency.

Honda in 2010 will roll out a hybrid version of its popular Fit subcompact in Japan. It will be smaller than the Insight. The price reportedly might be near $15,000. Honda declined to comment on price.

Buzz up!