Toyota unveiled the Prius in Japan in October
1997, two months ahead of schedule, and it went on sale that December. The
total cost of development was an estimated $1 billion.
Toyota: The Birth of the Prius - The
world's most admired automaker had to overcome punishing deadlines, skeptical
dealers, finicky batteries, and its own risk-averse culture to bring its hybrid
to market. By Alex Taylor III,
2/21/06.
New York (FORTUNE
Magazine): In late 1995, six months
after Toyota decided to move forward with its revolutionary hybrid, the Prius,
and two years before the car was supposed to go into production in Japan, the
engineers working on the project had a problem. A big problem.
The first prototypes
wouldn't start. "On the computer the hybrid power system worked very
well," says Satoshi Ogiso, the team's chief power train engineer.
"But simulation is different from seeing if the actual part can
work." It took Ogiso and his team more than a month to fix the software
and electrical problems that kept the Prius stationary. Then, when they finally
got it started, the car motored only a few hundred yards down the test track
before coming to a stop.
It's hard to imagine Toyota (Research), with its aura of
invincibility, running into such trouble. But the story of how it brought the
Prius to market -- a tale of technological potholes, impossible demands, and
multiple miscalculations reveals how a great company can overcome huge
obstacles to make the improbable seem inevitable. The gas-electric auto
represents only a tiny fraction of the nine million cars and trucks the
Japanese company will produce this year. But it is the first vehicle to provide
a serious alternative to the internal combustion engine since the Stanley Steamer
ran out of steam in 1924. It has become an automotive landmark: a car for the
future, designed for a world of scarce oil and surplus greenhouse gases.
For all its success as a
high-quality manufacturer, before the Prius, Toyota had never been much of a pioneer.
It was known as a "fast follower," a risk-averse company in which
process -- the famous Toyota lean production system -- trumped product. Indeed,
Toyota, based in rural Aichi prefecture, 200 miles from Tokyo, enjoys depicting
itself as a slow-moving company of simple country farmers. But as interviews
with company executives in Japan and the U.S. make clear, Toyota is capable of
breaking its own rules when it needs to. In rushing the Prius to market, it
abandoned its traditional consensus management, as executives resorted to such
unusual practices (at least for Toyota) of setting targets and enforcing
deadlines that many considered unattainable.
Toyota's push into hybrids
is only going to accelerate. Although the Prius first came to life under Hiroshi
Okuda and Fujio Cho, Toyota's two previous presidents, new boss Katsuaki
Watanabe wants hybrids to become the automotive mainstream. Watanabe, 64, who
became the company's top executive last June, has the deferential air of a
longtime family retainer. But he is intent on continuing Toyota's explosive
growth of the past five years, in which worldwide production rose by nearly
half. In an interview earlier this year at company headquarters in Toyota City,
he stressed that a key part of his strategy is making hybrids more affordable
for consumers. "We need to improve the production engineering and develop
better technology in batteries, motors, and inverters," he said. "My
quest is to produce a third-generation Prius quickly and cheaply." By
early in the next decade he expects Toyota to be selling one million hybrids a
year.
Since no other automaker can
even approach that quantity, Toyota is way out in front -- an unusual place for
a fast follower. "Is Toyota a conservative company?" asks Jeffrey
Liker, an engineering professor at the University of Michigan and author of The
Toyota Way. "Yes. Does it seem to be very plodding and slow to make
changes? Yes. Is it innovative? Remarkably so. Go slow, build on the past, and
thoroughly consider all implications of decisions, yet move aggressively to
beat the competition to market with exceptional products." If he's right,
Toyota is becoming a double threat: the world's finest manufacturer and a truly
great innovator. The story of the Prius suggests that he is.
IGNITION - The car that became the
Prius began life in 1993, when Eiji Toyoda, Toyota's chairman and the patriarch
of its ruling family, expressed concern about the future of the automobile.
Yoshiro Kimbara, then executive vice president in charge of R&D, heard the
rumblings and embarked on a project known as G21 (for global 21st century) to
develop a new small car that could be sold worldwide. He set two goals: to
develop new production methods and to wring better fuel economy from the
traditional internal combustion engine. His target was 47.5 miles per gallon, a
little more than 50% better than what the Corolla, Toyota's popular small car,
was getting at the time.
By the end of 1993 the
development team had determined that higher oil prices and a growing middle
class around the world would require the new car to be both roomy and
fuel-efficient. Other than that, they were given no guidance. "I was
trying to come up with the future direction of the company," says
Watanabe, who headed corporate planning at the time. "I didn't have a very
specific idea about the vehicle."
Direct responsibility for
the project lay with executive vice president Akihiro Wada. To lead the team,
Wada went looking for an engineer with the right blend of experience and
open-mindedness. He found it in Takeshi Uchiyamada. As Wada, now an advisor to
Aisin Seiki, a Toyota brake supplier, explains, "Uchiyamada was originally
an expert in noise and vibration control. But he was serious and hardworking,
and we thought it would develop his capability to make him chief engineer of a
product that could go rapidly into production."
At first Uchiyamada assumed
he could increase the G21's fuel economy by making refinements to existing
technology. In a plan he submitted to Wada in 1994, he wrote that the
introduction of an improved engine and transmission system could boost fuel
efficiency by 50%. But that wasn't audacious enough for Wada, who didn't want
to be remembered for producing yet another Japanese econobox. "It was not
enough to be a simple extension of existing technology," Wada says. One
possible solution intrigued him: a hybrid power system.
The concept wasn't new.
Toyota had been dabbling for 20 years with the idea of placing a traditional
gasoline motor alongside an electric one powered by batteries that are
recharged whenever the car coasts or brakes. (Honda (Research) was working on a version
too.) Masatami Takimoto, now an executive vice president, says he was
developing a hybrid minivan at the time but that the project had run into
trouble. "There was a split between the engineers and sales
executives," he says. "Engineers had the firm belief that the hybrid
was the answer to all those questions -- oil depletion, emissions, and the
long-term future of the automobile society -- but the business people weren't
in agreement." They thought the premium price for the hybrid would make it
impossible to sell.
Wada sided with the
engineers and ordered the team to develop a concept car with a hybrid
powertrain for the 1995 Tokyo Motor Show, just 12 months away. To reinforce his
directive, he demanded that they raise the fuel-economy target even higher to
compensate for higher hybrid costs. "Don't settle for anything less than a
100% improvement," he says he told Uchiyamada. "Otherwise competitors
would catch up quickly." As Uchiyamada, now an executive vice president and
a member of Toyota's board, concedes, "At that moment I felt he demanded
too much."
To find the right hybrid
system for the G21, by now called the Prius, Uchiyamada's team went through 80
alternatives before narrowing the list to four, based largely on fuel
efficiency. "We had to go through numerous problems -- heat, reliability,
noise, and cost," recalls Takimoto, who shifted over to the project.
"We had experience in mechanical elements, but we didn't have much
experience with electronic components like motors and batteries, especially
high-powered ones." Then the team factored technical feasibility and cost
to come up with its final choice. In June 1995, Toyota got serious about
putting the Prius into production and set a target to begin manufacturing by
the end of 1998.
Two months later Hiroshi
Okuda became president of the company, which only increased the heat on
Uchiyamada. Okuda liked to move fast, and he told Wada he wanted the Prius to
go into production a year sooner, by December 1997. That meant Uchiyamada's team
had to develop the car, hybrid powertrain and all, in only 24 months -- about
two-thirds the time an automaker might take with a conventional vehicle. Okuda
believed the technology was critical to the future of Toyota, but his directive
wasn't very popular. "I have to admit that we were against the
decision," Uchiyamada says. "Our team believed it was too demanding.
Even Mr. Wada was initially against it."
Today Wada explains Okuda's
order philosophically. "This is always how it is," he says. "The
top management is not going to give detailed instructions on technology. As
long as engineers come up with solutions by the deadline, that is fine."
As Watanabe, who also had a lot riding on the decision, puts it,
"Everything was challenging about the development of the Prius."
THE ENGINE COUGHS - Watching developments from
across the Pacific were the product planners at the company's U.S. division,
Toyota Motor Sales, in Torrance, Calif. The TMS planners had first heard about
hybrids at a meeting in Japan in 1995. "It was all new and
unconventional," recalls marketing executive Mark Amstock. "There was
skepticism within the company about whether the hybrids were really cars."
Early consumer research in the U.S. supported the skeptics. "It wasn't
clear that better fuel economy alone could drive premium pricing," says
Andrew Coetzee, now vice president of product planning for TMS. But another
factor was at play at TMS: the ever more stringent emission targets set by the
California Air Resources Board. Gradually support began to build around
hybrid's ecological potential.
Thirty miles to the south,
at Toyota's design studio in Newport Beach, stylists were competing with
colleagues in Japan to develop body concepts for the Prius. Like everything
else, it was a rush job. "Ordinarily we get two to three months to make
sketches and prepare models," recalls designer Erwin Lui. "For Prius
we got two to three weeks." Lui's design for a four-door sedan was one of
three that Toyota executives in Japan liked, and he went there in the summer of
1996 to develop an engineering production model. But some of his colleagues
were unenthusiastic. "The exterior design was polarizing," says
Amstock. "With the Corolla already in our lineup, we wondered if we would
be able to sell another fuel-efficient small car."
Meanwhile the engineers in
Japan kept running into problems. According to a 1999 account written by
Hideshi Itazaki and published in Japan, the batteries continued to be a
nightmare. The Prius needed a large battery pack to power the car at low speeds
and to store energy, but it would shut down when it became too hot or too cold.
During road tests with Toyota executives, a team member had to sit in the
passenger seat with a laptop and monitor the temperature of the battery so that
it wouldn't burst into flames.
Okuda kept up the pressure.
He told Wada in December 1996 that he wanted to announce by the following March
that Toyota had developed a hybrid technology. But despite 1,000 Toyota
engineers racing to get the Prius ready, Uchiyamada's team still didn't have a
workable prototype. During cold-weather testing in February on Hokkaido island,
the cars ground to a halt at temperatures below 14 degrees Fahrenheit. A media
test-drive was conducted in May, but each participant was limited to two laps
around the track because battery performance was so poor.
But one by one, the problems
were corrected. A radiator was added to an electronic component to prevent
overheating; two months were spent redesigning a semiconductor to keep it from
breaking down. And after endless fussing and tweaking, the team finally reached
66 miles per gallon -- the 100% mileage improvement Wada had asked for.
MAKING REPAIRS - Toyota unveiled the Prius in
Japan in October 1997, two months ahead of schedule, and it went on sale that
December. The total cost of development was an estimated $1 billion -- after
all the anguish, about average for a new car. But the Prius's initial reception
took some executives, including Watanabe, by surprise. "I did not envisage
such a major success at that time," he says. "Some thought it would
grow rapidly, and others thought it would grow gradually. I was in the second
camp." Production was quickly doubled to 2,000 cars a month.
Over in California, TMS
executives were still worried about sales prospects in the U.S. Introducing
cars with novel powertrains wasn't something they were used to. "It's
difficult to build consumer technology awareness," says Chris Hostetter,
now vice president of advanced-product strategy. "Consumers would have to
be taught that the car didn't come with an extension cord. Dealers would have
to be trained on how to sell the car and service it. "
When the first Prius arrived
in California in May 1999, TMS gave it a thorough going-over. There was still
concern about the design. Ernest Bastien, now vice president of vehicle
operations, thought an SUV configuration would work better because it would carry
batteries more easily; Hostetter was sure that an SUV would send the wrong
environmental message. What the California team needed was to gauge public
reaction. So they took what few cars they had -- all of them right-hand drives
for the Japanese market -- to Orange County to let potential buyers try them
out. The cars barely passed muster. Some drivers didn't like the feel of the
brakes; others complained that the interior looked cheap, that the arm rest was
too low, that the rear seats didn't fold down. TMS planners also discovered
that a baby stroller wouldn't fit in the trunk. "It was a Japan car,"
says Bill Reinert, national manager of advanced-technology vehicles. "And
it seemed out of context in the U.S."
When left-hand-drive models
finally arrived, the testers fanned out across the country for a demonstration
program. The cars had been modified for the U.S. market, with more horsepower
and additional emissions equipment, and the battery pack was now lighter. But
the team had a hard time figuring out who the car would appeal to. It quickly
learned that extreme environmentalists weren't interested in hybrids: They were
turned off by the technology and tight with a buck. And some dealers were still
skeptical. Salt Lake City dealer Larry Miller, who owns nine Toyota and Lexus
outlets, liked the way the Prius drove but wasn't sure about the design.
"It was passable," he says. "It looked like it wouldn't
embarrass us." Focus groups further tempered the early hopes. "When
we told the dealers how difficult it was to predict who the buyer would
be," Bastien says, "they lost their enthusiasm to have a lot full of
them."
Meanwhile Honda, which had
been racing to get a hybrid, the Insight, to the U.S. market first, launched
its car in December 1999, seven months ahead of the Prius. But the Insight was
more an experiment than a serious car. It had extreme aerodynamic styling, no
back seat, and a smaller engine that used less sophisticated technology. Coming
in second provided a benefit for Toyota: An Insight buyer in the U.S. posted
his owner's manual on his website, and TMS used the information to modify its
warranties.
The two biggest decisions
TMS had to make were how many cars to order and how much to charge, the latter
causing friction between California and Japan. Under the Toyota system, the
U.S. sales group buys cars from the parent company at a negotiated price, then
resells them to dealers. Japan wanted the Prius to sell for more than $20,000,
putting it in Camry territory. But the Americans saw a car about the size of
the smaller Corolla and produced research showing that buyers would balk at
paying that much. A compromise was reached when TMS cut the dealer margin on
the car from 14% to 10% so that it could pay Japan more and still make a decent
profit. Since the Prius was expected to account for less than 1% of their total
sales, dealers didn't complain. The car went on sale with a base price of
$19,995. Japan lost money on the first batch -- not unusual for a small car.
Worried about the hybrid's
economics, the stateside Prius team armed itself with contingency plans to
boost sales if they started to sag: cut-rate leases, rental coupons, free
maintenance, roadside assistance. But with profit margins scant and volumes
low, there was no money for advertising. When Hostetter wanted to buy newspaper
ads on Earth Day, TMS chairman Yoshi Inaba turned him down. Instead, he relied
on grass-roots marketing, public relations events, and the Internet.
Since no one really knew who
might buy these things, Toyota created a special Internet ordering system to
ensure Priuses were allocated wherever demand popped up. Some 37,000 interested
consumers signed up, and 12,000 eventually became buyers. Preselling the cars
on the Internet also enabled Toyota to identify customer hot spots. (It came as
no surprise that the San Francisco area accounted for 30% of Prius sales,
compared with 6% for all other Toyota models.) But some Toyota dealers liked
the old system better; they felt they were being cut out of the process. "Online
was hard to get used to," says Miller, then head of the Toyota Dealer
Council. "I said, 'Boy, if Toyota has misestimated, it would fall to us to
market this turkey.'
SLEEPER HIT - The Prius made its U.S.
debut in July 2000. It wasn't a delight to drive, requiring 13 seconds to get
to 60 miles per hour (the Corolla needed just ten). A Car and Driver writer
reported, "The Prius alternatively lurches and bucks down the road, its
engine noise swelling and subsiding for no apparent reason."
But the Prius caught on
anyway and, as in Japan, sales were much higher than the company dared hope.
Buyers didn't care about the jerky ride or premium price -- they focused on the
improved fuel economy, lower emissions (as much as 80% lower), and advanced
technology. Resale value protected them on the downside: The Prius retained 57%
of its value after three years. Pride of ownership was so high that only 2% of
buyers opted to lease.
Then celebrities discovered
the Prius, and it really took off. Leonardo DiCaprio bought one from a
Hollywood dealer in 2001; Cameron Diaz soon followed. A California public
relations agency asked Toyota to provide five Priuses for the 2003 Academy
Awards. Toyota says no money changed hands, but the value of seeing Harrison
Ford and Calista Flockhart step out of a chauffeur- driven Prius was, as they
say, priceless.
The boost from the Oscars
and steadily rising gasoline prices stoked interest in the second generation
Prius, which was in development even before the first version went on sale in
the U.S. Launched in the fall of 2003, the new model became a fashion
statement. It had a unique hatchback body style that made it stand out in
traffic. It was faster and more powerful than its predecessor, used less gas,
and produced fewer emissions. (And, thanks to a successful effort by American
planners, it did not have a complicated touchpad control that required
scrolling through several menus just to operate the defroster. "We had
some pretty bare-knuckled fights [with Japan] because it was already packaged
in," says Reinert.) People waited months to get their Priuses, as
production struggled to keep pace with demand. U.S. sales doubled to 53,991 in
2004 and nearly doubled again to 107,897 the following year -- about 60% of
global Prius sales. "It's the hottest car we've ever had," says Jim
Press, president of TMS.
GOING MAINSTREAM - With success has come the
inevitable backlash. Critics complain that hybrids are inherently uneconomical
because the $3,000 or more the technology adds to the cost of the vehicle can't
be recouped with greater gas mileage; that they don't improve fuel efficiency
that much; and that some American models were being built more for performance
than to benefit the environment. Carlos Ghosn, CEO of Japanese rival Nissan, likes to poke fun at
Toyota's supposed social responsibility. "Some of our competitors say they
are doing things for the benefit of humanity," he says. "Well, we are
in a business, and we have a mission of creating value."
The knocks against hybrids
are all true. But what the critics didn't put a price on was the value of being
seen as eco-sensitive without giving up performance. "Does it save enough
money to pay for itself?" asks Press. "That's not the idea. What's
the true cost of a gallon of gas, if you factor in foreign aid, Middle Eastern
wars, and so on? The truth is on our side."
The most prominent convert
to the hybrid cause has been General Motors (Research) vice chairman Bob Lutz. As
recently as 2004, Lutz dismissed hybrids as "an interesting
curiosity," adding that they didn't make sense with gas at $1.50 a gallon.
(Besides, GM had its own powertrain of tomorrow: fuel cells.) A year later,
with gas heading to $2.50 a gallon, Lutz was backpedaling, admitting that GM
had missed the boat: "The manifest success of the Prius caused a rethink
on everybody's part." Now GM is bringing out hybrid pickup trucks, SUVs,
and buses. Other makers are also rushing to develop models. LordlyMercedes-Benz (Research) showed a
diesel-electric S-class at the Frankfurt auto show last fall. Ford (Research), which licenses Toyota
technology, has promised the capacity to build 250,000 hybrids by the end of
the decade. Even Ghosn is bringing hybrids to market under the Nissan brand.
Toyota is relentlessly
adapting hybrid technology to more models, with the goal of offering it in
every vehicle it makes. Last October the company invited a dozen journalists to
its test track outside Tokyo, in the shadow of Mount Fuji, to drive two future
hybrid vehicles. On a cold, rainy day, both cars performed flawlessly. The
hybrid Camry proved roomy yet thrifty, capable of achieving a combined city and
highway fuel economy of 40 miles per gallon. The silvery Lexus GS450h was quick
-- zero to 60 in 5.8 seconds -- and still got combined mileage in the high 20s.
If Toyota can continue to
reduce costs, and it most probably will, the potential for hybrids may be
nearly unlimited. With its huge head start, better technology, enormous scale,
and powerful will to make hybrids an everyday alternative to the internal
combustion engine -- a combination no other auto maker can match -- it's hard
to see Toyota not dominating the industry for years to come.
REPORTER ASSOCIATES Cindy
Kano, Joan Levinstein
Norb Leahy, Dunwoody
GA Tea Party Leader
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