Banners two meters tall outside Toyota Motor’s sprawling factory in Tsutsumi, Japan, scream “Hybrid,” the word emblazoned over an image of the earth. Inside, beneath signs reading “Yoi shina, yoi kangae” (“Good thinking, good products”), assemblers in blue jackets and white gloves turn out about 400 of Toyota’s newly designed Prius hybrid sedans every day.

Apart from the signage, it looks much like any other automotive factory floor-and that’s what’s remarkable. The Prius, which uses both a gasoline engine and an electric motor for propulsion, gets an average of 55 miles to the gallon-about double the mileage of a comparable gasoline car. What’s more, the latest model rolling off the factory floor at Tsutsumi doesn’t sacrifice power or comfort and sells for only about $1,000 more than a base model of Toyota’s mid-size sedan, the Camry.

And the Prius is only a preview of Toyota’s ambitious plans for the new hybrid technology. By the end of this year, the automaker plans to sell a luxury sport utility vehicle using the technology-a hybrid Lexus-in the United States. Within a decade, say Toyota executives, the gas-electric combination could be offered in every category of vehicle the automaker sells, from subcompacts to heavy-duty pickup trucks. “When Toyota’s SUVs hit the market, and people see what a really powerful hybrid electric vehicle can do, I think it’s going to rattle a few cages,” says former General Motors chairman Robert Stempel, who chairs Rochester Hills, MI-based technology developer Energy Conversion Devices.

Coming Clean

Drive beyond the cluster of auto plants around Tsutsumi and nearby Toyota City and into the hills north of Nagoya, and you find another Toyota plant-this one bereft of banners. At this factory, called Hirose, Toyota did something extraordinary for a carmaker: it built dedicated facilities to fabricate state-of-the-art semiconductor chips. Most carmakers are satisfied to buy off-the-shelf electronics or farm out electronics manufacture to suppliers. Toyota is doing everything in-house. Its high-tech chip plants churn out the power controllers that constitute the hybrid vehicle’s heart, making Hirose the centerpiece of a hybrid investment that some analysts peg at $1 billion.

The Hirose plant is off-limits to journalists, but the story of Toyota’s program is one that its architect-Takehisa Yaegashi, the unassuming engineer revered within Toyota as “the father of the hybrid”-is eager to tell. Drinking black coffee in a nondescript meeting room in Toyota’s offices in Tokyo, Yaegashi traces the origins of Toyota’s hybrid strategy back to the early 1970s, when the U.S. Congress set the first national limits on tailpipe emissions.

High-power vision: Takehisa Yaegashi, Toyota’s “father of the hybrid,” says the company has a six-year technological head start.

In 1971, Yaegashi was a 28-year-old mechanical engineer, two years out of Hokkaido University, when Toyota assigned him to its new clean-engine project. Over the next 20 years, he designed everything from exhaust-scrubbing catalytic converters to emission-reducing engine control systems. All this helped make Toyota’s fleet of cars one of the cleanest sold in the United States. (The cars in Toyota’s 2003 U.S. fleet get an average of 32.3 miles per gallon of gasoline, 3.6 miles more than GM’s cars. Toyota’s SUVs and light trucks, however, get an average of 21.9 miles to the gallon, only eight-tenths of a mile better than GM’s.)

But Toyota didn’t stop at innovative catalytic converters. By the early 1990s-even as Toyota followed the lead of U.S. automakers by making popular but fuel-guzzling SUVs-Toyota’s leaders prepared to redouble their efforts to clean up the automobile and make it more fuel efficient. “We saw two things happening at the same time: demand for cleaner air and demand for greater fuel savings,” recalls Yaegashi.

At the time, the solution seemed to be battery-powered electric vehicles. Toyota built electric versions of its small SUV, while GM test-marketed a sporty two-seater. But neither of these early electric vehicles ever made it to mass production; the batteries limited their range to barely 100 kilometers. Still, these experiments taught engineers an important lesson: you could make electric cars powerful, quiet, and peppy by using high-power electronics to manage the flow of electricity between the battery and the electric motors. As Stempel puts it, “The electronic revolution gave the engineers the tools they needed to make electric cars quite drivable. That broke open the logjam.”

Changing Lanes

Still, the batteries were a problem. Few consumers would buy cars that needed to be plugged in after less than an hour on the highway. So Toyota’s management switched gears and decided to exploit what it had learned to build a vehicle that would outperform traditional all-electric cars: the gasoline-electric hybrid.

The idea was to capture the best of gasoline and electric cars. At low speeds, where combustion engines are at their least efficient and most polluting, Toyota’s hybrid uses an electric motor instead. At higher speeds, where an electric motor lacks sufficient muscle, a small gas engine kicks in. The engine can directly spin the wheels or spin a generator to provide electricity. Hybrids also capture energy from another source: the brakes. Touch the brake pedal, and the electric motor switches roles and serves as a generator, transforming the car’s kinetic energy into electricity to recharge the batteries. All these tricks are possible because hybrids-unlike conventional cars-have high-power electronics and large batteries.

By 1995 Toyota had unveiled its Prius concept car. Just two years later Toyota’s distributors in Japan were selling the Prius, as well as a hybrid bus. By 2001 they were selling a hybrid minivan and a luxury sedan in Japan (see “Car Culture,” sidebar). And in 2000, Toyota began selling an improved Prius in the United States, competing with a hybrid model from Honda Motor, the Insight compact sedan.

Tailgating

Catching up looks like a bumpy road for other automakers. Even Honda, probably Toyota’s most advanced hybrid competitor, has its work cut out, according to industry experts. “When it comes to engineering the system as a whole, I think Toyota has three, four years’ advantage over the others, even compared to Honda,” says Koji Endo, a Tokyo-based auto analyst for Credit Suisse First Boston. Honda’s models-which include a hybrid Insight and Civic, and an Accord due this year-have less electrical power and are more expensive to produce than Toyota’s, Endo says.

Detroit’s Big Three are farther behind. Over the last two years, GM, Ford, and DaimlerChrysler have scrapped or delayed half a dozen ambitious hybrid projects. “What they’re learning is that making this transition to electric drive technology is not going to be a piece of cake,” says Dan Sperling, director of the Institute of Transportation Studies at the University of California, Davis. “You can’t just say, ‘Okay, I’m going to build a hybrid car,’ buy the technology, and put it out there next year.”

Last year, Ford delayed the release of its debut hybrid: a version of its Escape SUV. John Kassakian, director of MIT’s Laboratory for Electromagnetic and Electronic Systems, which researches automotive electronics, says Ford is paying the price for its early attempts to shoehorn hybrid technology into existing vehicles. Unlike Toyota’s hybrid SUVs, for example, Ford’s four-wheel-drive Escape hybrids will not have electric motors on each axle, which Ford says would require costly retooling. “Modifying an existing vehicle looks on the surface to be the most efficient way of getting from point A to point B, but you don’t end up with a solution that’s optimized for cost and performance,” says Kassakian. Ford now says it will sell the SUV this year.

Still, the Big Three and other automakers’ decision to finally pursue gas-electric hybrids is itself notable. Until recently, GM considered its money better spent on fuel cell technology. It invested hundreds of millions of dollars in fuel cell R&D and rolled out a radical prototype fuel cell car that it has promised to mass-produce by 2010. “More-efficient petroleum-based vehicles alone will not solve our petroleum dependence problem. We believe long term you’ve got to get to energy sources beyond petroleum, and that’s why hydrogen is so attractive,” says Larry Burns, GM’s R&D vice president. But even Burns acknowledges that automakers need to master hybrids, too, if only for competitive reasons. “We don’t know for sure how big the hybrid segment will be-I don’t think anyone can predict that right now-but we want to give our customers the choice,” he says.

Fuel Cell Future

At Japan’s bustling Nagoya Motor Show late last year, Toyota showed off three concept cars. One was a metallic-blue SUV, another an open-topped, bone-white sports car. Both were gas-electric hybrids. But the spotlight finally fell on a metallic-blue hybrid sedan with a twist: it uses a fuel cell, not a gas engine.

Toyota calls it the Fine-N, and it uses many of the tricks that the company has learned from its gas-electric vehicles. “Clearly, the [hybrid] technologies that we’re pursuing-the motors, the power electronics, all the logic it takes, even the art of caring for the batteries-are essential elements of the fuel cell vehicle,” says Schaum, the former Chrysler chief engineer, now a vice president at electric-motor developer WaveCrest Laboratories of Dulles, VA. “You really have to master this before you are ready for the hydrogen economy.”

If he is right, Toyota’s early dominance of gas-electric hybrids could give it a strong head start toward the future. Every automaker is spending heavily on developing fuel cell cars, and Toyota is no exception-even as it races to dominate hybrids. If it winds up dominating fuel cells, too, it could rob Detroit of its last, best chance to regain its footing as a leader in automotive technology.

Still, no one at Toyota is forgetting today’s marketing realities. At Nagoya, Toyota’s presentation of its futuristic hybrids-to-hydrogen vision was accompanied by a standard industry touch. As if to suggest that advanced fuel-cell cars are ready for the mainstream, Toyota trotted out young women known as “show companions” to demonstrate the Fine-N prototype. On a spinning platform, a woman in a short skirt and high boots opened the car’s rear door, stepped into its rear seat, punched a button, and reclined out of view. It may be at the vanguard of advanced automotive technology, but Toyota hasn’t forgotten what sells cars.