Asia's automotive innovations started with the Japanese, specifically Toyota and its revolutionary Toyota Production System. TPS successfully assaulted global manufacturing and is now an established benchmark. Complementing and continuing that watershed is Asia's transition in auto making from a fast-follower to an innovation leader. Once again, Toyota Motor Corp. is out in front, this time forging a path to commercially viable hybrid passenger vehicles. $1 Billion Commitment Toyota's journey began in the early 1930s, when founder Kiichiro Toyoda determined to develop "a Japanese car for the public made using the brains and skills of Japanese people." In April 1936 production of the Toyota Model AA began. Today Toyota's journey continues with the second-generation 2004 Prius hybrid. At last November's Tokyo Auto Show, Fujio Cho, Toyota's president, cited the underlying significance of the Prius: "Toyota believes that without a high level of environmental response, the automobile has no future." Conceptually, it is a long way from the Model AA to the Prius. Toyota freely admits to its past adaptation cues from the Airflow styling of Chrysler's DeSoto and designing an engine inspired by Chevy's venerable OHV in-line six. (You can see a reconstruction at the company's Nagoya, Japan, automobile museum.) With the Prius, the company is seriously challenging the competitive landscape with its belief in the potential of hybrid technology. "With the 21st century being referred to as the century of the environment, two crucial issues facing the world are initiatives to aid global environmental preservation and energy security," says Cho. In "The Japan That Can Say No/Why Japan Will Be First Among Equals" (1992, Touchstone Books, Shintaro Ishihara), former Sony Chairman Akio Morita pointed out that for an industry to be successful, it must have three kinds of creativity: creativity to make inventions, creativity in product planning and production, and creativity in marketing. The Prius is the latest evidence that Toyota satisfies all three criteria, says manufacturing consultant Daniel P. Conrad, ASD International Inc., Rochester Hills, Mich. To interpret the special significance of the 2004 Prius, first consider that the model is not a research experiment but a second-generation commercial design. Automotive analysts estimate the Toyota hybrid initiative represents an R&D investment exceeding $1 billion since the commitment was made in the early 1990s. First showing for the concept was at Tokyo's 1995 auto show, although Toyota insiders say the idea was born in 1975. Starring the "Toyota Hybrid System," the concept teamed an internal combustion engine with an electric motor and battery. Self-charging, the system requires no connection to an external power source. In December 1997, the Prius launched in the Japanese market, followed by the U.S. introduction in August 2000. While the concept's detractors note that only 15,556 sold in the United States in the first year, they may be unaware of Toyota's historic strength of purpose. (Toyota's actual sales goal was 15,000 vehicles.) Toyota has never been deterred by small beginnings. For example, in 1957, the first full year of Toyota's U.S. sales, only 287 Toyopets were sold. But in 1997, 1998, 1999, 2000 and 2002, the Toyota Camry was the No. 1 selling car in America. Don Esmond, senior vice president and general manager of Toyota Motor Sales, initially targeted a sales volume of 36,000 for the first full sales year of the second-generation Prius. That has since been revised to 47,000 units. Continuing To Improve The hybrid's second-generation improvements are notable in performance, fuel efficiency and room. While last year's Prius did 0-60 mph in a lethargic 12.5 seconds, the 2004 needs only 10 seconds. Fuel economy now reaches 59 miles per gallon in the city and 51 on the highway. The vehicle is now 113% more efficient than the average for its size. The wheelbase is nearly 6 inches longer than the 2003 model, and interior volume has grown from 101 cubic feet to 112.3. Small wonder that automotive reporters at last month's North American International Auto Show chose the Prius as the 2004 North American Car of the Year. (Runners up: Mazda's RX-8 rotary-engined sport coupe and the Cadillac XLR.) Other Asian automakers are helping to drive the gas-electric hybrid vehicle market segment. Japan's Honda Motor Co. already offers two gas-electric hybrids: the Insight coupe and a Civic four-door sedan. Nissan, in an effort to catch up, is licensing Toyota technology. Clearly, in hybrids, Toyota is ahead of the pack, claims Dave Hermance, executive engineer for environmental engineering, Toyota's Technical Center, Los Angeles. He says Toyota vehicles with hybrid power plants are being marketed in the U.S., Canada, Pacific Rim countries, Australia as well as Japan. Toyota has other hybrid products that are still confined to the Japanese market. In the U.S., Toyota's fall introductions (2005 models) will include hybrid power plants for two sport utility models, the Lexus RX 330 and the Toyota Highlander. Hermance says those two hybrids also will be introduced in the Japanese market under different model names. At the moment, Toyota markets a variety of hybrids in Japan. Hybrid power plants similar to the Prius are in two small delivery vans, the Estima and the Alphard. Other hybrid variations are found in other Toyota models such as the Crown. Toyota's earliest hybrid research, dating back to 1975, involved gas turbine power plants. The management directive, says Hermance, was to "find the power plant variant that will keep us sustainable during the 21st century." The stated goal: "reduce our footprint on the environment by reducing energy consumption . . . greenhouse gas emission rate and . . . smog emission rate." Toyota's initial strategy was to introduce the Prius in Japan, where gasoline was selling for more than $4 per gallon. The U.S. version, with more power and acceleration, entered the U.S. market in mid-2000 as a 2001 model. Sales increased to more than 20,000 for 2002. With the 2004 redesign, the Prius becomes a midsized vehicle with mainstream performance characteristics. Summing up, Hermance says the model is bigger and faster, with better fuel economy despite a 100-pound weight gain due to the 12% increase of interior volume. Curb weight is 2,890 pounds. The hood and trunk are aluminum, but Hermance says the balance of the vehicle represents a conventional steel design. By diminishing front and rear overhangs, interior volume is emphasized with minimal overall size increases. While the vehicle has no parts commonality with other Toyota vehicles, Toyota's production system enables it to be built on a line in Japan's Toyota City with other Toyota vehicles -- the U.S. version of the Camry and the Lexus ES-330. Eventually, cost of the Prius could be lowered as other models begin to share the platform architecture. Hermance says one planned performance improvement will actually depend on making the Prius components even more unique. He's referring to the engine. "At the moment the engine design is a conventional Otto cycle configuration adapted to operate as an Atkinson cycle engine. We figure that specifically designing the power plant for the Atkinson cycle will result in a substantial gain in fuel efficiency. " The Marketing Challenge Educating consumers is Toyota's major challenge with the Prius, says Hermance. "We still have to emphasize that hybrids don't have to be plugged in." Another issue is recovering the premium cost. "It's much easier with Japan's gasoline prices at $4 per gallon versus $1.50 in the U.S." Also in the U.S. there is the tendency of not looking beyond the initial purchase price. "Operating cost savings are not properly regarded." Part of that education is communicating the message that vehicle fuel economy offers multiple benefits. "These include fuel cost and conservation benefits as well as emissions control. Every gallon of gas burned releases 20 pounds of carbon dioxide into the atmosphere. The general public still lags in appreciating the global warming significance of that. That needs a clearly elucidated national energy policy." Is the Prius an investment crapshoot for Toyota? Hermance says there is a good business case for the car and yes, the product is profitable. Industry consensus is indicated by plans of Nissan, Ford, GM, and others to compete in the hybrid market. For Toyota, the Prius indicates another agenda item -- the relevance of hybrid technology to Toyota's view of the global fuel cell future. "Toyota does not consider hybrid technology to be a bridging technology simply to see us through until the widespread adoption of the fuel cell vehicle, which has been called the ultimate eco-car," Cho says. "But rather, we see hybrid technology as a core technology that will lead the way in the 21st century as we seek to address issues of environmental performance and energy utilization." Hermance says most of the components that are added to a vehicle to make it a hybrid gasoline/electric vehicle will be critical components of a future fuel cell product. Hermance predicts that fuel cell vehicles, at least initially, will be hybrids. "The fuel cells themselves will be expensive, and designers will not want to incorporate extra fuel cells to meet peak acceleration requirements." Toyota's logic: "Since all fuel cell vehicles will be driven electrically, it would be a travesty not to capture the kinetic braking energy and use it to augment the power produced by the fuel cells," says Hermance. "And all of the work that we do now will make us ready for the fuel cell future." Meanwhile, Hermance says, there will be a wide range of hybrid power trains available in Toyota's lineup. He says hybrid technology has progressed to the point where selecting that type of power train requires no sacrifices in terms of vehicle performance. "It merely has to be something that you want to do." As a motivator, Toyota is planning to give sport utility buyers performance hybrids that will pare fuel consumption by 50%. Definitely, the market for hybrids is evolving. "The second-generation Prius is attracting more than the environmentally conscious techno-friendly buyers," says Hermance. "With the 2003 model year, we began seeing hybrids beginning to attract mainstream buyers, what the marketing folks call 'the early majority' -- the first half of the curve, not just the first 10%." Because the Prius is a $20,000 car, the age demographic does not represent entry-level buyers. But Hermance does not discount the influence of the younger set. "The college-age folks are highly aware of the full scope of reasons to buy a hybrid vehicle." Adding The 'Wow'! Innovation out of Asia is going beyond alternative-power designs. Until recently, vehicles from Asian companies rarely elicited more than a yawn style-wise. Buyers would freely admit that they bought them for quality and value, not style. But that's changing. Consider Nissan and the reincarnation of its 240Z sports car heritage as the classy, attention-getting 350Z. The new Z is only one well-received example of how the regime of CEO Carlos Ghosn has revitalized the company with styling. "When he came on board in 1999, he maintained that styling had to be at the same level as engineering," says San Diego-based Tom Semple, president, Nissan Design, North America. "Until then, I think our company was more driven by the engineering side and less by what the product looked like or what kind of image it might present to the outside." Semple remembers how Ghosn emphasized the new styling focus: "There's no problem at a car company that can't be solved by a great product." Semple says that the new styling strategy signifies a new day for Nissan. "The styling says we're a brand new company -- it speaks for the energy and resourcefulness of the corporation." Semple is clearly pleased with the car's price point. "We were able to make a super high quality sports car at a very affordable price in comparison to German and other cars in its class." On that value issue, "Road & Track" magazine concludes: "With performance on a level of sports cars costing almost twice as much, the 350Z is truly a bargain." Styling accolades are equally applicable to the Z's Infinity G35 sibling. Other Nissan noteworthies include the company's hot utility wagons (the Murano and the Infinity FX), the Maxima sedan and the impressively macho Titan pickup. Can there be any doubt that great design is fundamental to the success of any organization? Also high on the "wow" index is how expertly Mazda Motor Corp. has packaged often conflicting, but desirable attributes in the rebirth of its rotary-engined sports coupe in the U.S. market. For starters, not only is the RX-8 a four passenger coupe, but gasp! it has two center opening rear doors that can be opened once the front door is opened. Don't let the idea of a four-passenger, four-door architecture lead to erroneous conclusions. Styling, handling and performance uphold the sports appeal of its predecessor, the RX-7, the two-passenger sports coupe that was discontinued in the U.S. after the 1995 model. With six speeds and a redline approaching 9,000 rpm, "Road & Track" cites the RX-8's 0-60 mph time of 5.9 seconds versus 5.8 for the two-passenger 350Z sport coupe. In the words of Mazda's current marketing campaign: Zoom-Zoom! Another example of "wow" strategies comes from the audacious marketing plans of Korea-based Kia Motors Corp. It entered the U.S. market in 1994 as Kia Motors America Inc., Irvine, Calif. Now, a million U.S. sales later, Kia is moving up. It is aggressively pursuing the large car segment with its new Amanti. The marketing target: the customers now being served by the Toyota Avalon, Buick LeSabre and Chrysler Concorde. The strategy: distinctive styling and functionality supported by a very affordable price and an extended warranty, says Irvine, Calif.-based Peter M. Butterfield, president and CEO. He says Accord, Camry or Taurus drivers will be able to move up to greater size, luxury and functionality without having to pay more. Butterfield says Kia's position is analogous to the Japanese players in the 1960s and 1970s. "Their pricing was more competitive than American pricing. But over the last 25 years they have put themselves in a position where they're premium priced because of quality and value." Kia's challenge is to establish that same brand image. Butterfield says he hopes to emulate the Toyota-Honda examples, including growing involved with hybrids.