Toyota rethinks Prius pricing under shadow of Insight

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.

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