Friday, 3 December 2010

Japan's Smaller Car Makers Look to Undercut Hybrids

TOKYO—As Japan's big auto makers ramp up production of environmentally friendly hybrids and electric cars, some smaller competitors are betting that a new wave of ultra-efficient gasoline-engine cars will appeal to customers unwilling to pay a premium for green motoring.

Bloomberg News

Honda Motor's Fit hybrid car is unveiled during its launch in Tokyo.

Instead of investing heavily to develop hybrids and plug-in cars—such as the Leaf being unveiled in Japan on Friday by Nissan MotorCo.—Mazda Motor Corp. and Daihatsu MotorCo. are rolling out new-generation gasoline-powered cars boasting enhanced fuel economy and cheaper price tags. It's a gambit that some analysts say could pay off in the near term—as long as gas prices stay low.

Back in 1997, when Toyota Motor Corp. unveiled the world's first mass-market hybrid, the auto maker trumpeted the first generation Prius's fuel economy of 28 kilometers per liter. Next year, Mazda plans to launch a comparatively inexpensive compact car it says will run for 30 kilometers on a liter of gas—without the help of electric motors.

"Gasoline prices are relatively stable. They are neither cheap nor expensive," said Koji Endo, analyst at Tokyo-based independent research Advanced Research Japan, referring to pump prices now about 29% below records. "In this environment, electric vehicles or hybrids won't likely become the top popular models immediately...There is a chance in the short-term" that compact cars could beat some hybrids.

German and Japanese car makers, such as Volkswagen AG and Toyota, have long set the pace for the industry on introducing fuel-saving technologies. For Mazda and Daihatsu, analysts say the new, high-efficiency compacts could offer a way to make up ground while operating with research-and-development budgets that are between less than one-tenth and one-fifth of such spending by Japan's 'big three'—Toyota, Nissan and Honda Motor Co.


With shares of about 4.4% and 13% respectively of Japan's market for new cars, Mazda and Daihatsu are firmly stuck in the big three's shadow at home. But the pair aim to tap overseas markets with plans to introduce their new technologies in North America, Europe and other markets in the coming years.

In Japan, hybrid car sales more than tripled last year from the previous year, driven by the red-hot remodeled Toyota Prius and also helped by government buying incentives. In contrast, the overall market saw 9.3% sales decline as budget-conscious consumers, concerned about the fate of Japan's then-recessionary economy, reined in spending. Still, hybrids accounted for just 7.8% of the whole market in 2009, or 347,729 vehicles in total.

Mazda, Japan's fifth-biggest car maker by sales volume, said in October that it will market its redesigned gasoline-engine Demio compact in the first half of next year in Japan. The Demio is set to become one of the most fuel-efficient gasoline cars in the country with a fuel-economy rating of 30 kilometers per liter.

That's less than the 38 kilometers per liter that Toyota's latest Prius model gets, but it matches other hybrids, including the recently launched new version of Honda's Fit hybrid.

And Mazda plans to undercut the price of hybrids such as the Fit, according to Mazda Chief Executive Takashi Yamanouchi. "We will probably have to set the prices [for the new Demio] lower" than the bottom price of the Fit hybrid of 1.59 million yen ($18,890), Mr. Yamanouchi said.

How will the big three respond? Not with any radical moves, analysts say: Operating margins on lower-priced compact cars are wafer-thin, and the business model for the new-generation cars is entirely dependent on one factor beyond the control of any auto maker on the planet—gasoline prices. And the likes of Goldman Sachs expect crude oil futures to bubble up to $101 over the next 12 months on the New York Mercantile Exchange, from the recent levels around $84.

Nissan Chief Operating Officer Toshiyuki Shiga agrees that there is no single technology to meet all customer requests. Asked in October about the potential competitiveness of the company's Micra compact—offering 26 kilometers per liter with a price tag of around 1.2 million yen—Mr. Shiga said those who often drive in the city probably prefer hybrids.

Still, there will soon be another potential rival from Daihatsu. Japan's seventh-largest car maker is developing a minicar based on a concept vehicle called 'e:S' unveiled at last year's Tokyo auto show. The 660-cubic-centimeter gasoline engine car will be as fuel-efficient as the new Mazda Demio, and will hit the domestic market next year.

Just as the big guns dip into their R&D coffers to develop more advanced electric systems for their hybrid cars, they are also aiming to improve the efficiency of the conventional engine side of the hybrid systems.

Toyota, for instance, said last month that it will begin sales of its first compact hybrid that can drive more than 40 kilometers per liter by the end of 2012. And by early 2012, it plans to sell the plug-in version of the Prius hybrid, whose prototype can run 57 kilometers per liter.

Write to Yoshio Takahashi at