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THE GAS MISER

Richard Pearce has turned out his old love, a 1989 Dodge pickup truck. In 2002 the 50-year-old retired soldier and his wife decided to bring a Toyota Prius hybrid back to their Virginia home. They "fell in love with the technology," which uses an electric motor at low speeds and a small engine at high speeds to power the car with a lot less gas. Now a new, 2004 Prius sits in the garage alongside the older model, and the pickup languishes in the driveway, used sparingly to haul garbage to the landfill. Pearce says he'd never think of taking the truck on his 26-mile commute. It gets less than 20 miles a gallon, while the Prius gets 60, so he wouldn't be able to use the special lane Virginia has set up for fuel-efficient cars. "We'll never have anything but a hybrid again," he says.

Pearce's extreme embrace of the Prius was once the stuff of wild dreams for the Toyota engineers who developed the brand. They had hoped the gas-electric hybrid, introduced in Japan in 1997, would become nothing less than a new Corolla or Camry sedans that made the company's reputation in America. Last year sales of those two models helped push Toyota past Ford to become the world's second largest carmaker, laying huge tire tracks for the unproven Prius to fill. The first hybrids sold at such a high premium over regular sedans that buyers couldn't save enough on fuel to come out ahead yet were so expensive to make, Toyota took a big loss on each one. While Toyota's engineers made grand statements about the car of the future, its bean counters wondered whether there would ever be a mainstream market for these things.

The answer has caught Toyota off guard. Since October, Toyota has had to increase production of the Prius three times, most dramatically in August when it announced a 50 percent boost for next year to 15,000 vehicles a month worldwide. That's a fraction of its Corolla output, but enough to raise serious questions about whether Toyota innovations are once again leading a major revolution in the American market. While the automaker plans to send most of the new production run to the United States, there are still 22,000 customers on waiting lists for the car. "We didn't know how the consumers would react to this technology," says Don Esmond, a senior vice president and general manager at Toyota. "They've voted for it, they've voted with their dollars."

To be sure, the hybrid phenomenon is still only a ripple in the pool of American gas guzzlers. The highest estimates for the United States predict annual sales of 500,000 hybrid cars by 2009—about 3 percent of the 16.7 million car market. Analysts think that the price of fuel would have to hit $3 a gallon to see bigger sales sooner. Yet already the Prius is the first significant departure from the combustion engine to make any major inroads in the auto industry since Henry Ford invented the Model T in 1908. And major carmakers have learned never to ignore the ambitions of Toyota, arguably the best-run big automobile company in the world, with a reported stock-market value of $107 billion, almost four times more than GM or Ford. "For Toyota," says prominent Japanese car critic and environmental-technology specialist Tadashi Tateuchi, the hybrid car "may well be the key to world domination."

The key to the Prius story is rapidly advancing technology. The original project was launched in 1993 under the code name G21, for 21st Century Generation, with strong backing from Toyota chairman Shoichirou Toyoda, an heir of the founder. When the first Prius was unveiled seven years ago, it was an undersized, underpowered and overpriced experimental box of a car, which competitors felt free to ignore. Most rivals said they would concentrate on fuel cells and other fuel-efficient technology that wouldn't be widely available until 2010. When Toyota introduced the Prius to North America in 2000, it sold only 15,000 cars its first year—a minor hit, but mainly with environmentalists and Hollywood liberals like Leonardo DiCaprio and Cameron Diaz.

Toyota's napping rivals had given it a five- to 10-year technological lead by the time the new Prius came out last October, says Tateuchi. The new model's electric motor was 50 percent more powerful, its interior was almost twice as roomy and its body was designed to look like a futuristic sedan rather than an ecological-science project. The redesign cost Toyota untold millions, and putting that much into a product that "consumers didn't even know they wanted yet," says Esmond, was "a bit of a crapshoot."

The new Prius appears to be moving rapidly out of its green niche. Sales in the United States shot up by 153 percent in the first half of this year, by a whopping 874 percent in Europe; in Japan they increased tenfold. According to Esmond, once skeptical rivals are now jumping on the bandwagon. "I don't want to say they're scrambling, but they are trying to quickly put together their own hybrids," he says.

So far Honda has given Toyota the only competition for the hybrid market with the Civic and the Insight. But the first hybrid SUV, Ford's Escape, hits the streets in September. Nissan recently announced that its hybrid Altima sedan will arrive next year. Later this year Dodge plans to roll out a diesel-electric pickup. GM plans hybrid —models of the GMC Sierra and the Chevy Silverado. Honda plans to unveil a hybridized Accord in the fall. Hyundai says its hybrid will be ready in "the near future." According to CSM Worldwide, a Detroit-based research firm, by 2007 there will be some 22 hybrid options for popular models, including even Hummer's H2.

In America the lust for the largest gas guzzlers seems to be slowly waning. Though SUVs are still the top-selling vehicles, the mix of SUVs is tilting toward smaller models. And because big SUVs have driven the average gas mileage of the American fleet down to 20.4 miles per gallon, its lowest level in two decades, the Big Four automakers risk falling afoul of fuel-efficiency regulations. That's one reason many of the new American hybrid designs are for SUV models. But the bigger reason is Toyota. "We can't just sit here as a major corporation and say, 'Trust us, you'll get a fuel cell from us and in the meantime, we're not doing anything'," says GM vice chair-?man Bob Lutz. "With more and more of our competitors playing the hybrid card, there was just no way we could ignore that."

Europe has been slower to respond. It has already chosen diesel as its cleaner, more efficient fuel, and the diesel market is dominated by German carmakers. Indeed, one reason Toyota pursued hybrids was that it was so far behind in the diesel market. But growing sales of the new Prius could change all that. Lindsay Brooke, an analyst at CSM, says every big car company has to be thinking that "if the Japanese kick-start this thing, you've got to have this technology on the shelf, especially if the fuel price really rises."

The Prius faces two critical turning points before it can be called a true mass-market car. It needs to be profitable, and practical. When Toyota first introduced the Prius, it was reportedly losing $3,000 on each car. The company now says the line is profitable, but analysts aren't convinced. "I know engineers at rival carmakers who've done total teardowns of the Prius—comprehensive, bolt-by-bolt cost analysis," says Brooke. "Toyota is getting close to breaking even," probably within the next five years.

Reaching that point takes longer for the consumer. Most hybrids sell for $2, 000 to $3,000 more than comparable sedans, and drivers would need at least 10 years and 100,000 miles to recoup that much in gas savings, analysts say. But those who say hybrids must narrow that gap to boost sales ignore the power of instant gratification: Richard Pearce says he pays $10 a week in gas, compared with his neighbor's $60.

Last year Toyota launched a U.S. ad campaign pitching the Prius as a big, sexy "real car," not a green techno curiosity. One spot called Prius "the world's biggest hybrid," and showed the universe being sucked into the car's yawning rear hatch. The ad also noted that "you never plug it in" an attempt to distance the Prius from old electric cars. A Toyota ad this summer billed "mpg" as more peaceful getaways, over a picture of a scantily clad couple on the beach.

It's also worth noting how much attention Toyota is focusing on hybrid technology. Toyota is posting record sales and building a cash reserve of more than $40 billion while other carmakers are struggling. "They could eat a number of other car manufacturers for lunch without even noticing it on their balance sheet," says auto analyst Ryan Tutak at Ducker Worldwide. Yet Toyota has avoided the recent frenzy of industry mergers and instead focused on key models, including hybrids. A hybrid luxury SUV will appear next year and a hybrid Camry in 2006. "Ford and GM have more brands than anyone, but Toyota is piling up the money," says Tutak. "Which horse are you going to bet on?" For Toyota at least, hybrids look like a winner.

Written by: Michael Hastings - Newsweek

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