Toyota's chief engineer, Akihiko Otsuka, chose a curvy test-drive course near Mount Fuji to show off the smooth handling of the prototype of the remodeled Prius hybrid, set to reach showrooms in May.
He proudly told reporters about its outstanding mileage — 50 miles per gallon — roof solar panel, collision safety features and how fun it was to drive.
But throughout the recent event at Fuji Speedway, Otsuka was just as intent on stressing how the Prius performed better than the new, hot-selling rival hybrid from Honda, the Insight. But he was surprised at the upstart's price — $2,000 to $4,000 less than the current Prius model.
"It was lower than anything I had expected," he said with a little laugh. "Honda has done a great job."
Welcome to the new price war in hybrid vehicles.
Toyota Motor's tm Prius, the long-reigning hybrid king, faces its toughest competition yet in the Insight, whose sales have already topped 21,000 in just a month and a half in Japan — more than triple Honda Motor's hmc target.
The Insight starts at 1.89 million yen ($19,000) in Japan, and $19,800 in the U.S., where it arrives in showrooms this month.
The current model of the Prius now sells for $22,000 in the U.S. and 2.3 million yen ($23,000) in Japan. The remodeled third-generation Prius is a bigger car with a more powerful engine than the current Prius and would have otherwise been expected to bear a higher price tag.
A hybrid offers savings at the gas pump because of its superior mileage that comes from switching between a gasoline engine and an electric motor. But they tended to be more expensive because of the motor, battery and other extra parts — until the arrival of the Insight.
Otsuka said Toyota is considering pricing the new model lower than the current model, while declining to disclose the price. The stronger yen has made price-slashing difficult in the U.S. But he also said Toyota is well aware it isn't a wise idea to set the U.S. price too much higher than the Japan price.
For the longer term, Toyota is also developing a smaller hybrid that will compete more directly with the Insight, he said.
He did not give details but said it would be a "Vitz-class" vehicle, a subcompact like the Yaris in the U.S. He said that would make for a more affordable addition to Toyota's lineup.
The Nikkei, Japan's major business daily, reported recently that the planned model would underprice the Insight, costing no more than a comparable regular car, and is expected to go on sale in 2011. It did not cite sources, which is standard for Japanese media reports.
The world's automakers have been working hard to develop hybrids although their appeal has subsided somewhat after oil prices have declined in recent months. Toyota's Prius is the global top-seller in gas-electric hybrids at a cumulative 1.2 million sold around the world since its 1997 debut.
Among the hybrids in the U.S. market, Ford Motor f has its Fusion hybrid, a midsize sedan, and its Escape SUV. Honda and Toyota both have hybrid versions of the Civic and the Camry. Toyota also has a Highlander SUV hybrid and its high-end nameplate, Lexus, has several hybrids. Nissan has a hybrid version of its Altima. General Motors gm makes hybrid versions of the Chevrolet Malibu and the Saturn Aura as well as several SUVs and pickups. German automakers Daimler dai and BMW are also planning hybrids, although those models as luxury cars are likely to cost more than the humbler Prius and Insight.
The battle among hybrids comes amid a steep drop in auto demand that has hit Japan's top brands hard. Toyota is expecting a 350 billion yen ($3.67 billion) loss for the fiscal year through March — its first such yearly red ink since 1950. Honda is forecasting an 87% fall in profit.
Still, there has been speculation in the Japanese media that Toyota would not only set the new Prius price lower than initially expected at about 2 million yen but that it will also continue to sell the current Prius, matching Insight's price.
It would be an unusual move in the industry, where old models are discontinued. Toyota declined comment on the reports.
"The popularity of hybrids is going to pick up momentum very quickly because of their low prices," said Yasuaki Iwamoto, analyst with Okasan Securities in Tokyo.
But the price war will also cut into profit margins from hybrids, already slimmer than those from regular vehicles, Iwamoto said.
Toyota has also cut costs required to make its hybrid system by about 20% to 35%, Otsuka said, while not giving specific numbers. To keep the starting price tag low, frills and perks for the new Prius will likely be offered as options, according to Toyota.
Norio Ano, a Honda official overseeing Insight's development, said Wednesday that further cost-cutting and leaner production would be needed at Honda, if Prius is going to be priced close to the Insight.
"We will have to go back to scratch and review all our procedures from step one," he said. "It's hats off to Toyota if they can make it work as a business at the prices being reported."
An ingenious feature of the Prius is the solar panel on the roof, which powers an air-ventillation fan that works automatically while the car is parked so you don't have to get into an uncomfortably hot car.
Otsuka isn't shy about his determination not to get beaten by the Insight.
It's no accident the marketing slogan for the new Prius is, "the only hybrid for the earth," he said. He really believes Prius will continue to be the best in mileage, drivability and brand power.
The Insight gets 40 miles per gallon in city driving and 43 mpg on highways, not as good as the 48 mpg in city driving and 45 mph on highways for the Prius already on sale. The revamped Prius gets 50 mpg, according to Toyota.
"We almost gave up on reaching our goal for mileage but we stuck to it," Otsuka said. "The Prius is the iconic hybrid."