Prius hybrid aimed small, stood tall

Low-volume plan brought 400,000 sales, prestige

Toyota executives insist they never expected the hybrid Toyota Prius to be the success it has become.

"It wasn't pitched to be a home run. It wasn't supposed to be high-volume," says Bill Reinert, national manager of Toyota's advanced technology vehicle group. "We wanted it as advanced as possible, and sell 25,000 to 30,000 a year, and test the market."

Instead, the Prius, with its EPA combined city/highway fuel economy rating of 55 mpg, today virtually owns the market for hybrid models in the United States. More than 400,000 Priuses have been sold since 2000, most of them in the past three years.

The Prius originally was not supposed to be a hybrid-powered car. In 1993, Toyota's honorary chairman, Eiji Toyoda, created the G21 committee, with the mission of designing a global car for the 21st century. It would be a highly efficient, smartly packaged vehicle. Only after nearly a year of study did the idea of an alternative-fuel powertrain surface.

When the first-generation Prius started on the drawing board in the mid-1990s, it was virtually an experiment, a relatively modest effort to be seen "doing something" about the environment, says Chris Hostetter, 52, Toyota vice president of advanced product strategy and product planning.

GOAL WAS A 10-CITY NICHE

"We wanted an image for doing something but worried about being able to sell enough to make it worthwhile," Hostetter says. "We felt it would be a metro-market play in 10 cities."

Quite often when Toyota executives say such things, it's obvious they're just keeping a politically correct low profile. But in the case of the Prius, the company really did have low expectations — or to put it another way, Toyota genuinely underestimated eventual demand.

"It's almost like a corporate inferiority complex," says Reinert, 60. "We don't realize how good our products are. We think we're right, but we don't have the confidence.

"In planning the Prius, there weren't many nights when I didn't get home and I'd be thinking, 'What am I saying here?' We're talking hundreds of millions of dollars."

Sales of the first-generation Prius, which was launched in the United States in the fall of 2000, were modest but up to expectations, the company says. The Prius debuted in Japan in 1997, but it took three years for product planners to make accommodations for U.S. buyers.

"The first Prius couldn't even fit a baby stroller in the trunk," Reinert says.

U.S. sales were 5,562 units in 2000. In its first full year, 2001, sales totaled 15,556.

Toyota veteran Jim Press, now co-president of Chrysler, said annual production for the United States was scheduled to top out at only 20,000 units. Toyota achieved that in 2002, with sales of 20,119.

NO MARKETING MONEY

There was next to no marketing campaign to introduce the car and essentially no conventional advertising.

"It was a grass-roots philosophy because we had no money to market it," Hostetter says. "We couldn't even get money to put an ad in the newspaper on Earth Day. So we did things like family loaners, focus groups, media briefs. We were worried about resale value and whether the batteries would work."

Press said that when Toyota's U.S. team first saw the Prius, it didn't particularly want the car, despite the fact it was designed in California at Toyota's Calty Design Research Inc.

"The reaction of the American staff was, 'It's underpowered, it's got skinny wheels, it's got this funny look.' And the Japanese kept saying, 'This is the car,' " Press said in an interview before he left Toyota.

Members of Toyota's U.S. dealer council went to Japan and saw the early design concept around 1993, Press said. "The dealers got it like that," he said, snapping his fingers. "They said even if it didn't have the hybrid powertrain, people would buy that car ... that the car will become an image leader."

The original Prius scarcely caught on outside Southern California.

Planning for the second-generation Prius was already under way even as the original was being launched. Most important on the to-do list was that the redesigned car make more accommodations for U.S. buyers.

"We had a comprehensive set of planning ideas: more interior volume, increased acceleration, increased fuel economy, increased on-road performance, increased usability of interior. And we wanted more features," Reinert says.

'OUR PORSCHE 911'

One thing was certain: The styling needed to remain unique.

"Prius had to be different and iconic and polarizing, an icebreaker for hybrids," Reinert says. "It's our Porsche 911. It can never be copied."

The redesign, launched in October 2003, was a big improvement in size, performance and function. The new car's wheelbase was nearly 6 inches longer. It was still no sports car, but at 10.5 seconds going from 0 to 60, it was close to three seconds faster. And it had more interior space — all at the base price as the model it replaced.

Three other factors combined to raise the car's profile and make the much-improved, second-generation Prius a nationwide star:

1. A high-profile appearance at Oscar Night in 2003 (see story, below).

2. Permission to drive the Prius solo in restricted High Occupancy Vehicle lanes in California.

3. Gasoline prices topping $2 per gallon, then $3 per gallon, nationally, starting in 2004.

The spike in gasoline prices was perfect timing, Hostetter says. Within weeks of launching the second-generation Prius, Toyota made the first of several announcements that it would increase production to meet demand.

Scott Nathanson, a spokesman for the Union of Concerned Scientists, says the transition from the first-generation Prius to the second was brilliant because the new model greatly expanded the market for hybrid technology.

"They went from a car engineered for a highly specialized niche, talking exclusively to the insider crowd that only wanted the best-of-the-best fuel economy — even if that meant sacrificing on room, on cargo room, etc. — to something that was really revolutionary," Nathanson says.

"It allowed them to break out of that microniche of best-of-the-best fuel economy, to people willing to pay a premium to be 'green' without having to make a big sacrifice."

MORE HYBRIDS

Because of the success of the Prius, Toyota also offers hybrid versions of the Highlander SUV and Camry sedan. Lexus offers hybrid versions of the RX sport wagon and the GS and LS sedans.

Toyota executives say nearly every Toyota model will have a hybrid variant by early next decade. The company sees it becoming no different from choosing between a four-cylinder or a V-6 on the options chart at the dealership.

This year Toyota and Lexus expect to sell more than 250,000 hybrids combined, even though competing models have flopped. The Honda Accord Hybrid will be withdrawn after the 2007 model year.

One potential downside to the success of the Prius is that consumers may assume that anything called a "hybrid" qualifies as environmentally friendly, even though that can be a dubious claim, says Nathanson.

He took Toyota to task for producing what he called "muscle hybrids" such as the Lexus LS 600h L, which has a V-8 gasoline engine teamed with an electric motor. He says the net effect is to use the electric motor to give the gasoline engine a "power boost."

Instead, he says, Toyota should use its hybrid synergy drive to shrink gasoline engines, yet produce the same amount of power.

"Toyota is building this 'green' reputation, yet it also actively lobbies against higher fuel economy standards," Nathanson says. "Toyota is reaching a point where it will become obvious whether Toyota's 'green' reputation is about making money exclusively or about making money while improving the environment."

Along with other, more conventional-appearing hybrids, the Prius has cemented the reputation of the Toyota and Lexus brands as technical innovators.

Besides its signature high-mileage, low-emission hybrid powertrain, the Prius has novel features such as a continuously variable transmission and regenerative brakes, which recapture energy when stopping.

The Prius also remains the only hybrid on the market with a body style not shared with a conventionally powered twin, and that helps explain its appeal to the environmentally aware.

"It's different from anything out there," says Mary Nickerson, 51, national manager for advanced technology vehicle marketing.

"Two- and 3-year-olds can point out, 'Look, Mom, there's a Prius!' There are not a lot of vehicles that are unique enough to do that."

You can reach Jim Henry at autonews@crain.com.