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A Tale of Two Countries

While Japanese corporations invest in the future by developing and commercializing hybrid cars, American car manufacturers are scrambling to catch up.
 
 
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The most telling similarity between Japan and the United States is not our shared addiction to baseball, but our shared dependency on imported oil for our survival.

Roused to action by the first Gulf War and memories of the destructive impacts of the oil shocks of 1973 and 1979, both the Japanese and American governments made a major reduction in oil imports a matter of national security and national urgency. Both launched major initiatives to accomplish this goal. Both focused on the transportation sector, by far the largest consumer of petroleum.

And there the similarities end. For although the public sectors in both countries formulated similar strategies and supported them with comparable levels of funding, the private sectors responded in starkly different fashion to their respective governments' challenge.

In Japan, the private sector willingly agreed to carry out the public directive. Their corporations publicly -- and perhaps more importantly -- privately assumed responsibility for achieving the public goal. U.S. corporations willingly accepting almost $1 billion in public money; but privately, upper management never embraced the public goals and spent much of their time successfully opposing efforts by the government to mandate higher efficiency standards.

This tale of two countries is instructive.

In the U.S., the centerpiece of its effort to improve automotive efficiency was the Partnership for a New Generation of Vehicles (PNGV), a $120 million a year, seven-year program launched in 1993.

In Japan, the centerpiece was the Popularization Plan, launched in 1994. Both programs focused on developing and commercializing a new type of automobile, the hybrid car. A hybrid car is propelled by both an electric motor and an internal combustion engine. Such a configuration promised to improve fuel efficiencies by 50-150 percent.

PNGV funds were available only to American companies. Recipients agreed to unveil a concept car by 2000, a preproduction prototype by 2004 and be in full production by 2010. All three, Ford, GM and DaimlerChrysler introduced concept cars in early 2000. And there development stopped. Why? Because the American car companies refused to commercialize a car they would initially lose money on, even if the losses would be temporary.

Daimler/Chrysler, for example, announced in 2000 that it would not commercialize its diesel hybrid (ESX3) because it cost $7,500 more to make than their comparable gasoline powered car, a Dodge Intrepid. As late as April 2002 General Motors' CEO and President G. Richard Wagoner Jr. told Business Week, "How will the economics of hybrids ever match that of the internal combustion engine? We can't afford to subsidize them."

Japanese corporations adopted a different mindset that encouraged a more farsighted strategy. The Honda Insight, Honda's first hybrid car, sold for about $6,500 below cost when first introduced. Toyota initially was losing as much as $16,000 per car on its first-generation Prius. But as Hisao Suzuki, president of Honda's European R&D Division answered when asked why they would sell a car at a loss, "We are investing in the future."

In 1997 Toyota launched its money-losing hybrid with a production capacity of 1,000 per month. In December 1997 Business Week sorrowfully surveyed the entries in a recent car show. "While Toyota launched the world's first production hybrid gasoline and electric car, General Motors countered with a big new Cadillac and Chrysler showed off its gas-guzzling Dodge Viper muscle car." Detroit pooh-poohed the Japanese companies' achievements. "I don't see six months difference in anything that's being done," harrumphed GM Chairman John F. Smith Jr. As Business Week reported, "the only difference, say the Big Three, is that Japanese manufacturers are willing to accept huge losses."

Despite its losses, in 1999 Toyota announced it would introduce the Prius to the North American market in mid-2000, "shocking the domestic auto industry" according to industry observer David Chao.

More than 35,000 Honda and Toyota hybrids were sold in 2002. Customer satisfaction was high. In September 2003 Toyota introduced the second-generation Prius. The sales price is the same as the previous Prius. Yet the new Prius boasts 15 percent more interior space (making it comparable to a Camry rather than a Corolla). It also gets better mileage, achieving a remarkable 50 miles per gallon. That is about 50 percent more than a comparable American model.

This year Toyota announced that it is making a profit on each Prius. A few weeks after making that announcement, the Prius was declared Car of the Year by Motor Trend magazine, one of the industry's most coveted awards.

First month sales of the new Prius in Japan were 17,000 and in the United States there were 10,000 pre-orders. Toyota expects to sell 100,000 hybrid vehicles this year and perhaps 350,000 by 2006.

American car manufacturers are scrambling to catch up with the Japanese. They've discovered they are years, not months behind. In late 2002 Ford announced it would be introducing a hybrid in the fall of 2003. In late 2003 Ford announced it was postponing introduction until late 2004. GM declared it would introduce a hybrid pickup in 2004. In late 2003 it announced it was delaying introduction of a full hybrid until 2007. Dodge had said it would introduce a hybrid Ram Contractor in 2005. In late 2003 Daimler/Chrysler canceled its plans to build a hybrid SUV.

This is all very embarrassing to this native-born American. I'm convinced that American engineers are the equals of their Japanese counterparts. It is American CEOs who are not the equal of their Japanese equivalents.

Regrettably, we not only let these CEOs get away with their negligence, we reward them for it. In a remarkable reward for irresponsible behavior, the White House and Congress enacted tax incentives such that the owner of a Hummer, which gets less than 10 miles per gallon, receives a tax deduction of $34,000. The deduction for an efficient hybrid car that gets over 50 miles per gallon is $4,000.

For every 100,000 SUVs sold this year, American taxpayers will be paying a subsidy of some $1 billion. Revealingly, that's about the same amount of money the federal government spent in the 1990s to encourage American car companies to build hybrid cars. It's also about the same amount we are spending each week to keep our troops in oil-rich Iraq.

Next fall Toyota will introduce its first hybrid SUV. It will get about 40 miles per gallon, maybe twice that of a comparably sized SUV. Meanwhile the American car companies successfully convinced Congress not to raise the fuel efficiency standard for SUVs by two miles per gallon.

This year Toyota is the most profitable car manufacturer in the world. In contrast, in November Standard & Poor's downgraded Ford Motor Company's credit rating to BBB-, one notch above a junk rating. The month before, it had downgraded Daimler/Chrysler to BBB.

Today imports supply over half our oil, up from a third in 1973. Secretary of Energy Spencer Abraham recently informed Congress that by 2020 almost two-thirds of our oil could be imported.

In the 1990s we had a chance to break this deadly downward spiral. The governments of both Japan and the United States embraced policies to do so. But only in Japan did the private sector assume that responsibility and accept that commitment. Years from now will we remember the 1990s as our Decade of Infamy?

Editor's Note: This is Part I of a two-part series. Next week the author compares the dramatically different ways in which private sectors in Japan and the U.S. have responded to the public's desires and needs for solar power.