Prius: a Crystal Anniversary (15 years)

A few Prius-inclined websites noted last week that Dec 10, 2012 marked the 15th anniversary of the Prius’ introduction in Japan.  With the Prius (temporarily?) becoming the world’s 3rd-best-selling car brand in 2012, the anniversary probably deserves some reflection.  :)

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As near as I can figure, Malcolm Gladwell-type book chapters start with a vivid anecdote to prime readers’ imaginations before the writer unveils abstract and mundane statistics, usually cherry-picked to match the author’s political sensibilities. I’ll do the same here.  :)

I’ve visited Japan several times over the years, and remember seeing one Prius on a visit in summer 1998.  The car had launched the prior December, and even a non-automotive guy like me who was paying even less attention to cars because he couldn’t afford one, had heard about this new hybrid thingie.

Around 2005 or so, I saw about 80 of them roaming around Sendai.

And when we visited this year, there were three Prii just on my in-laws’ street, alone.

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As for the statistics, Prius vehicles are closing in on 3,000,000 cumulative sales, with Toyota having slotted its hybrid technology into another 2 million vehicles.

That’s nothing close to the almost 40-million sales of the Toyota Corolla, but it’s still a healthy number; and besides, the Corolla had a thirty-one year head start.  :)  The Model T Ford sold about 16.5 million over the years; I hope to see the Prius surpass it one of these decades!

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Prius critics’ “cheap oil” myopia

When the Prius first came out, I remember reading some automotive commentators pooh-poohing it, and commending the then-Big Three for focusing on higher-margin SUV’s.  Given that oil was cheap, and had stayed cheap for a long time, Detroit and its echo chamber may have concluded fuel efficiency wasn’t worth chasing.

Except of course that outside North America, foresighted governments’ fuel taxes meant that gas never really got all that cheap in the first place.

Computer chips might offer a good comparison.  If I’m not mistaken, Intel dominated the desktop/laptop market by offering speed, speed, and more speed.  As such, when efficiency eventually became important — which was when smartphones took off — they were left playing catch-up.

Other automakers’ fuel cell car designs weren’t hybridized either — which confused some of us fuel cell engineers at the time.  If you could shrink your most expensive component (the fuel cell) and add a cheaper subsystem (the hybrid drivetrain) instead, why wouldn’t you do that?

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Prius critics’ “development cost” myopia

Another knock against the Prius was that developing it was so expensive, Toyota must have been losing money on the vehicle, selling it as gimmicky, marketing loss leader.

Like any good urban legend, this one wrapped a poppy-seed of truth inside bowling-ball packaging.  First, many car companies lose money on small cars.  They just aren’t that profitable to manufacture: profit margins are slim.  According to Fortune, the very first shipment of Japanese Prius cars to the US, was indeed sold to the American division at a loss.

A keen business student might ask why car companies wouldn’t just stop manufacturing small cars.  I’ll bet the reason the reasons are many-fold.

– one, they want to “hook” buyers on the brand when they’re young (GM had a longtime strategy of pulling customers in with Pontiac or Chevy, upgrading them to the more expensive Buick or Oldsmobile cars as they got older, and then selling the upwardly mobile ones Cadillacs)

– two, if you only offer bigger cars, chances are only older people will be driving your cars — and there’s a risk that your brand becomes an “old-fogey” brand.  Like Oldsmobile was, until GM killed it!  They once ran an ad campaign based around the phrase “not your father’s Oldsmobile” — which probably reminded viewers that only people as old as their fathers, still drove Oldsmobiles

– three, carmakers like to offer a reasonably complete lineup, to meet a reasonably wide spectrum of customers.  In this era, it’s become a (false) truism that companies should stick to their core competencies, and that can be astonishingly short-sighted.  If McDonald’s had stuck to their core competencies, they’d’ve only ever offered milkshakes.  If Samsung had stuck to its core competencies, it would’ve stuck to noodles and sugar.  And if Toyota had stuck to its core competencies, it would still make looms – you know, the things which spin thread.  It is often a bad idea to venture into new territory, but you’ll never expand into new business segments if you always play defense!

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It’s true that Toyota spent about $1 billion developing the Prius, and that they probably didn’t recoup those development costs in their first few years of sales.

But of course, the world didn’t end in 1999.  And so, every year, Toyota has been able to amortize those development costs with more and more vehicle sales.  If you divide $1 billion by roughly 5,000,000 cars sold to date, that amortizes to a rather-manageable $200.

More maddeningly, as the Fortune article explains, $1 billion is about the average development cost for a brand new car — any brand new car!  Toyota would’ve spent that money anyways.  When you consider that they developed a vehicle with new propulsion technology for roughly-normal development cost, that’s a great deal!

Sadly, the Chevy Volt comes up against the same ridiculous criticism.  A recent Reuters story claimed that GM lost about $49,000 per Volt sold, mainly by assuming the Mayan Calendar was right and none would be sold past December 2012.

As GM has explained they turn a profit on every vehicle; and over time, they’re certainly going to sell enough cars to recoup their $1.2 billion development cost.  (Again, this development cost is in the same ballpark as for any other gasmobile.)

I hope the and expect the Volt to continue enjoying success (the Volt has about 75% EV market share in Canada as I write this) and imagine that GM will eventually spread the general technology to other vehicles, as Toyota has done.

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IP thoughts

One added factor which wound up reducing the Prius’ development costs is that Toyota licensed the technology to Ford and Nissan.  I don’t think the terms have ever been made public, but in other industries I think it’s common to settle on a roughly 1 % royalty.  (That’s what Apple agreed to pay Nokia last year.)  Again, this would have reduced Toyota’s net outlay.

It’s also worth noting that Ford invented their own hybrid system independently… only to discover at time-of-filing, when they’d designed the optimum hybrid system and were unfurling their flag, that a Toyota flag was already there.  Ford’s licensing arrangement was done to avoid a lawsuit, not to obtain know-how.

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Since the Prius development started in about 1994 and patents now last twenty years from time-of-filing, we’ll have an interesting situation in the next few years where Toyota’s first hybrid patents expire.  As such, it’ll be interesting to see if other automakers start introducing more hybrids of their own in coming years. Especially among car companies in the developing world, who might not have the budgets of their developed-world competitors.

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Moving forward

Toyota’s devotion to hybrids was probably a contributing factor to its being slow on the uptake with plug-in and electric vehicles.  If you dominate your market, you’ll be spending your time making improvements on your existing product, instead of rooting around for the next big thing, as your competitors will necessarily do (because it gets frustrating fighting over table scraps of market share).

Even on the hybrid side, it looks like Toyota is starting to get tough competition from Ford’s recently unveiled C-Max Hybrid and Plug-in (Ford predicts they’ll be peeling away a lot of would-be Prius V buyers).

So it’ll be interesting to see Toyota’s response with the next-generation Prius, rumored to be going from 50 mpg to 60 mpg on the US EPA fuel efficiency test cycle.  Which admittedly, only loosely correlates to what most people actually achieve.  ;)

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While plug-in vehicles are (rightly) getting a lot of attention as the probable new automotive frontier, it’ll also be interesting to see if GM maintains its position as the world’s leading EV maker.  (GM leading an eco-category!  I never thought I’d see the day…)

The EV sector is still young, but GM certainly has consumer “mindshare”.  Multi-year ad campaigns followed by highly successful product roll-outs, will do that.  :)

Toyota seems to have designed the Plug-in Prius with a smaller battery than its competitors, wanting to keep battery costs reasonable.  In one of those funny twists, government rebates tend to be bigger for cars with bigger batteries… thus negating the up-front cost advantage Toyota aimed for, relative to its competitors!

Company spokespersons repeatedly noted words to the effect that the market for $40,000 cars is a lot smaller than for $30,000 ones.  Of course, if government rebates knock that $40,000 car into the mid-$30’s, the equation changes.  :)

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And lastly, in local (British Columbia) plug-in vehicle news, the Province’s recently-released round of subsidies for another 145 EV quick-charging stations was announced recently.  Leading the way were those well-known granolaphiles at … WalMart (!!) which committed to building 28 stations around the Province: two per store.

So if I can praise GM for their EV leadership (despite the terrible things they’ve done in the past), I suppose it’s incumbent on me to praise WalMart for their EV infrastructure leadership (despite the terrible things they’ve continue to do, through the present).  The bedfellows of environmental politics, I suppose.  :)

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Comments

  • Justin Ritchie (@jritch)  On December 18, 2012 at 3:00 pm

    With cheap, low-carbon electricity generation, BC is a prime location for major EV growth. Hope you are enjoying yours!

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