New Honda Takes on the Prius

http://www.nytimes.com/2009/03/21/business/21hybrid.html?_r=1&partner=rss&emc=rss

TOKYO — The road is about to get a little more crowded for the Toyota Prius. Starting Tuesday, the Honda Motor Company will offer American consumers what it bills as “the world’s first affordable hybrid.”

Costing just shy of $20,000, the Honda Insight promises to let drivers respond to both of the leading crises of our day: the environment and the recession.

If the Insight’s introduction in Japan is any indication, Toyota should be worried. The car went on sale here on Feb. 6, and orders have soared, reaching 18,000 in just the first three weeks — topping Prius’s current sales. In fact, the Insight pushed Prius out of the top-10-selling cars for February.

“I have people asking about hybrids that I never had before,” said Tsuguhito Tokita, a Honda dealer in Tokyo. “With this price, it’s easy to recommend to anyone.”

If Honda makes inroads in the United States, the world’s largest market for hybrids, it could force the market leader, the Toyota Motor Corporation, to bring down its prices. Japanese news media have reported that Toyota, which controls 70 percent of the American hybrid market, will introduce a cheaper hybrid model with a smaller engine in 2011 — in part, reportedly, because of the Insight’s success.

Sales of hybrids have been hit hard by the global economic crisis. After several years of strong growth in Prius sales, Toyota had virtually no increase in 2008 from the previous year, as the overall auto market struggled.

“In the short term, it’s a very difficult sell,” said Christopher Richter, a Tokyo-based auto analyst at CLSA. “We’ve entered into a very deep recession, and consumers aren’t keen on buying new cars. Fuel prices have plunged, with fuel so cheap people don’t care much about it.”

But so far the Insight has been a bright spot for Honda in an otherwise dismal year of plunging sales that have led the automaker to make painful cutbacks and give up its prized Formula One racing team.

Toyota plans to lower the sticker price of the Prius, according to Japan’s largest business daily, Nikkei. The automaker has refused to confirm the report.

“But I can tell you we’re not satisfied with the current state,” said Paul Nolasco, a Tokyo spokesman for Toyota, which has sold one million Prius vehicles since their introduction a decade ago. “The Insight’s popularity is evidence that the public is recognizing hybrid technology.”

The market for hybrids could be headed for a huge expansion. The development of cheaper technology, economies of scale and more government subsidies for environmentally friendly vehicles could take what was a niche technology into the mainstream.

A bigger market for hybrids could also ensure that they stay the green vehicle of choice over full electric or hydrogen cars, which remain prohibitively expensive. A report released by J. P. Morgan in October predicted that the global market for hybrids “will rise exponentially” to 9.6 million in 2018 from 500,000 units in 2007— and the current economic slump will not significantly slow that rise, the authors said.

The Insight could bring about a big turnaround for Honda, which tried selling hybrids for a decade without much success. In fact, it discontinued a previous Insight model in 2006, believing consumers found hybrids too expensive. But when sales of Toyota’s Prius rose as oil prices spiked, Honda quickly changed course.

Behind the less expensive Insight is an aggressive cost-cutting effort, as well as technological sacrifices.

Instead of the more complicated hybrid system used in the Prius, the Insight’s main source of power is a lightweight gasoline engine that is assisted by smaller batteries. That greatly reduces manufacturing costs, but gives the Insight lower fuel efficiency than the Prius — 43 miles per gallon on the highway compared with 45 miles per gallon for the Prius. The Insight also shares parts with other Honda models, which helps the carmaker keep costs to a minimum.

Honda has also struck a chord with an overhaul of the car’s shape. One reason its previous hybrids failed to take off, analysts say, was that they did not come in distinctive shapes.

“A lot of people who drive hybrids want to make the statement, ‘I am driving a hybrid,’ “ Mr. Richter said.

But Honda’s new Insight looks remarkably like — well, Toyota’s triangular Prius, which has become synonymous with hybrid technology. Analysts say that should help sales.

The global economic slowdown could be an advantage for the Insight, at least over the Prius.

“Several years ago, the Prius would have won hands down,” Mr. Richter said. “But when you’ve got a raging recession, you come down to the question: Do you want the fancier car with greater fuel economy, or the one that still has pretty good economy, allows you to be seen driving hybrid, and is cheaper?”

“The Insight could steal a lot of Toyota’s thunder,” he said.

Whatever the outcome of the new hybrid race, it is certain to reinforce the dominance of Japanese automakers in eco-friendly cars. Unlike their American counterparts, Japanese automakers have long made energy efficiency a priority, teaming up with Japan’s electronics conglomerates to develop high-powered batteries.

In 1996, Toyota and Matsushita, now Panasonic, formed a joint venture to produce nickel-metal hydride batteries for hybrid cars. It plans to produce a million batteries a year by 2010. The venture also plans to make more powerful lithium-ion batteries.

Honda, which gets its batteries from Panasonic and Sanyo, has also invested heavily in battery production, setting up a company with a battery maker, GS Yuasa, to produce lithium-ion batteries. That move came partly because Honda was nervous about obtaining batteries from the same company as its archrival, Toyota. The greater capacity would allow Honda to introduce hybrid versions of its other models.

A string of auto companies worldwide, from Ford to start-ups like Tesla Motors, have announced or introduced hybrids, plug-ins or electric cars. Others are hurrying research into fuel cells and other alternatives. A technological breakthrough could still turn the market on its head, analysts say.

But for now, only Toyota and Honda have invested the money to mass-produce the mainstay batteries at a scale that makes economic sense. Batteries are still expensive to develop and produce, and kinks in the technology remain, as demonstrated by a string of flare-ups involving Sony-made lithium-ion laptop batteries three years ago.

“Other companies just don’t have a mass-production setup yet,” said Kohei Takahashi, a Tokyo-based auto analyst for J. P. Morgan. “They might be able to come up with hybrids, but they’re too expensive.”