Hybrid price war pits new Prius vs. Insight

OYAMA, Japan (AP) — Toyota’s chief engineer, Akihiko Otsuka, chose curvy Fuji Speedway near Mount Fuji to show off the smooth handling of the prototype of the remodeled Prius hybrid, set to reach showrooms in May.

While 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, he 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.

“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’s Prius, the global top-seller in hybrids with a cumulative 1.2 million sold since its 1997 debut, 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 Co.’s 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 remodeled third-generation Prius sells for $22,000 in the U.S. and 2.3 million yen ($23,000) in Japan. Bigger and with a more powerful engine than the current model, it would have been expected to bear a higher price tag.

Hybrids offer savings at the gas pump because of 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 was considering pricing the new model lower than the current model, but he declined to disclose the price. The stronger yen has made price-slashing difficult in the U.S. But he also said Toyota was well aware it wasn’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., which would make for a more affordable addition to Toyota’s lineup.

The Nikkei, Japan’s major business daily, reported 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.

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.

Ford Motor Co. will soon release its Fusion hybrid, a midsize sedan. German automakers Daimler AG and BMW AG also are planning hybrids, although as luxury cars likely to cost more than the Prius or Insight.

The battle among hybrids comes amid a steep drop in auto demand that has hit Japan’s top brands hard. Toyota is expecting a 350 billion yen ($3.67 billion) loss for the fiscal year through March — its first such yearly red ink since 1950. Honda is forecasting an 87 percent fall in profit.

Still, there has been speculation in the Japanese media that Toyota would not only set the new Prius price lower than initially expected (about 2 million yen), but that it will also continue to sell the current Prius, matching Insight’s price. It would be an unusual move in the industry, where old models are discontinued. Toyota declined comment on the reports.

“The popularity of hybrids is going to pick up momentum very quickly because of their low prices,” said Yasuaki Iwamoto, analyst with Okasan Securities Co., who added that the price war will also cut into profit margins from hybrids, already slimmer than those from regular vehicles.

Toyota has cut costs to make its hybrid system by 20 to 35 percent, Otsuka said. To keep the starting price tag low, frills and perks for the new Prius will likely be offered as options, according to Toyota.

Norio Ano, a Honda official overseeing Insight’s development, said further cost-cutting and leaner production would be needed at Honda, if Prius is going to be priced close to the Insight.

“We will have to go back to scratch and review all our procedures from step one,” he said. “It’s hats off to Toyota if they can make it work as a business at the prices being reported.”