The new Prius: Toyota prepares for battle

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Toyota's third-generation Prius, released Monday, represents the latest incarnation of the automaker's iconic green machine, the first hybrid on the market. However, even as it prepares to take its place in showrooms, the Prius faces a serious challenge from another Japanese automaker.

There's a tendency to view hybrid auto sales through hippie-colored lenses, as if the ecologically-conscious nature of the beast somehow suggests a live-and-let-live mentality. However, it's worth noting that the two hybrid leaders, Toyota (TM) and Honda (HMC), are intense competitors and hardened veterans of cutthroat competition. Ultimately, even on this greenest of battlegrounds, the old technique of undercutting market share still packs a punch.

Toyota has set an impressive sales target of 10,000 Priuses (Prii? Priapi?) per month. This is twice as high as the goal that Honda has set for its Insight hybrid; however, given that Honda sold 10,481 Insights in April, this number is, perhaps, not as ambitious as it sounds at first flush.

In order to reach this goal, Toyota has drastically lowered prices on its Priuses. The new car will debut at 2.05 million yen; while still more expensive than the Insight, this represents a massive drop from the last Prius, which began at 2.33 million yen. At the same time, the automaker is dropping the price on the 2009 Prius to 1.89 million yen, which is the same price as the Insight.

The pricing game is potentially dangerous. Toyota originally planned to sell the new Prius for approximately 300,000 yen more than the 2009 model, an increase that reflects some of the significant engineering improvements of the new car. The 2010 Prius has a 1.8 liter engine, which is larger than the previous model, and gets 50 miles per gallon, almost a 10 percent increase in efficiency. It also has special models designed for handicapped drivers and fleet purchasers.

Some analysts have been outspoken in their criticism of the new pricing model. Takaki Nakanishi, an analyst for JP Morgan, noted that hybrids have lower profit margins than other cars, and that Toyota's new pricing policy puts even greater pressure on the company. Similarly, Honda's CEO Takeo Fukui was contemptuous of his competitor's seemingly arbitrary decision to drop the price so aggressively: "You can't just suddenly change your pricing policy [...] they're not going to last long with that strategy."

While Toyota's gambit seems shortsighted, at least on the surface, it also demonstrates a deep awareness of the future of the automotive industry. With the growing realization that petroleum is a limited resource, hybrids and other fuel-sipping vehicles are increasingly becoming the showcases that car manufacturers use to highlight their technological advances. In this context, although hybrids still comprise a modest amount of market share, they have an outsized importance when it comes to capturing the public imagination. Thus, even though Volkswagen is challenging Toyota to be the top-selling automaker in the world, the Japanese automaker's biggest competition may be the Insight, Honda's little green behomoth.

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