If you've been following the Honda Insight and Toyota Prius developments for any time, you've no doubt seen some of the negative comparisons and cutting remarks each company has made about their competitor's hybrid car.

One company will say something like 'ours is a real car; theirs is just a science experiment', and the other will respond with something like 'at least it didn't take us three years to get it right'.

It is unfortunate to see the two companies criticizing each other's hybrids, as  the Honda Insight and Toyota Prius are both fantastic cars.

Both the Insight and Prius are significant steps beyond what any other major automaker is offering, and yet are quite distinct cars from one another. While Toyota and Honda are spinning these differences as making one superior to the other, in truth these differences are a good thing. Different people look for different things in a car, and in order for hybrids to succeed, there needs to be this variety.

This revealing article sheds some light on the rivalry that has developed between the two companies, and helps to explain some of the negative comments we've seen them make.

September 21, /2000
The Wall Street Journal
Page A1
(Copyright (c) 2000, Dow Jones & Company, Inc.)

As Honda Chief Executive Hiroyuki Yoshino strolled through the Toyota display at this year's Detroit auto show, what caught his eye wasn't the roster of new Toyotas but a very familiar red race car.

The Toyota Motor Corp. name was clearly emblazoned on the side of the car. But there was no doubt: This was the machine that had been powered by Honda engines and serviced by Honda engineers, until just a year ago. It was the same machine used by race-team owner Chip Ganassi -- under the Honda Motor Co. flag -- before he orchestrated a sensational defection last year and named Toyota as his new engine supplier.

The Toyota display did tout the Ganassi team's four racing championships. What it didn't mention was that Honda was associated with all of those wins. Astounded, a fuming Mr. Yoshino had to be restrained by his subordinates as he began looking around for Toyota's president, Fujio Cho.

The race-car war is just one sign of the increasingly bitter rivalry developing between Toyota and Honda. Globally, Toyota towers over Honda, boasting auto output that is neck and neck with that of Ford Motor Co., General Motors Corp. and DaimlerChrysler AG. But in North America, Toyota and Honda are comparable in size, each controlling slightly less than 10% of the U.S. market. And as a wave of shrewd, edgy marketing helps Honda grow beyond its niche -- small cars for younger buyers -- Toyota is taking big steps to fight back.

Mostly a sedan and coupe maker, Honda entered the minivan and SUV market with a big splash in the mid-1990s, introducing popular vehicles in Japan such as the Step Wgn for young families and the S-MX for twentysomethings. In a popular television ad campaign, Honda used actors playing the Addams family to hammer home the idea that the Odyssey minivan is big enough to seat a large family. The company also positioned the S-MX as a make- out vehicle, launching a series of mellow TV commercials devoted to the theme of love.

While Toyota holds a commanding 40% of the Japanese market, its executives worry that their share will slide if young customers who prefer Hondas now continue to buy Hondas as they age. "Before, people drove Hondas when they're young, and they always came back to us when they grew older and came to their senses," says a Toyota managing director, Hiroyuki Watanabe. "Now they keep on driving Hondas." Honda poses a threat, Mr. Watanabe and others say, in part because Toyota didn't direct much attention in the early 1990s to that younger consumer market.

Toyota declared what amounted to an internal war on Honda in 1996, its executives say. That is the year that marketing data began showing a barrage of disturbing news. The median age of Toyota's customers for its flagship luxury cars was rising at a startling rate. It was getting to the point that "we would've had to sell Crowns and Mark IIs in the cemetery," says Tadaaki Jagawa, a Toyota executive vice president.

Toyota's market share in Japan, which was as high as 43.2% in the mid- 1980s, sank below 40% for the first time in 14 years. Honda, meanwhile, was experiencing runaway success with its new Odyssey minivan and sport- utility vehicles.

So Hiroshi Okuda, the chief at Toyota, set out to pull off one of the auto industry's most ambitious corporate makeovers. As CEO in the mid- 1990s, Mr. Okuda encouraged Toyota subordinates to lighten up. He lured champion race-car teams and drivers away from Honda, convinced that Honda's hipster image had been reinforced by the company's long association with professional car and motorcycle races.

Mr. Okuda pushed product planners and engineers to match every popular Honda model with a corresponding Toyota clone. The company launched a shower of stylish and offbeat small cars with names like Fun Cargo, Vitz and Altezza. A newly created 30-person division called Virtual Venture Co. in Tokyo was charged with specifically marketing to youth. The division came out with a funky small car, called Will Vi, which Mr. Okuda likened to a pumpkin.

Traditionally tame advertising also gave way to funkier campaigns, such as a series of television ads featuring a computer-animated tot, "Dancing Baby," wriggling around a small SUV. It became one of the most recognized car ad campaigns in Japan, according to CM Databank, a Tokyo-based advertising-research company.

Honda executives say Toyota's aggressive moves don't concern them, arguing that their giant rival will have difficulty emulating Honda's unique culture. "All Toyota is doing is aping us and letting their money talk," says Ken Hashimoto, a senior Honda R&D executive.

But if there is one thing Honda worries about, it's Toyota's cash hoard, 2.2 trillion yen ($20.5 billion) as of March 31, 2000. Given enough time, Honda executives fear that Toyota may approximate enough of Honda's youthful appeal to constitute a real problem.

Some of Honda's fears are already playing out. Toyota, in spite of its often-ridiculed "country boy" image, has been proving that it can successfully woo young car buyers, thanks to designers such as Takao Minai. Mr. Minai languished for a long time in Toyota's hierarchical culture but had a sudden leap in responsibilities two years ago. Under Mr. Okuda's guidance, the ponytailed 36-year-old amateur video jockey took charge of developing a dream car for male twentysomethings. Based on a sketch by another young designer, the 11-member team designed a small car shaped like a really clunky box. Toyota dubbed it "bB," short for black Box.

Toyota management encouraged Mr. Minai and his colleagues to be irreverent. Instead of a formal presentation on the bB's design, Mr. Minai treated the executives to a video he created. It included jarring images of a glaring mohawked teen, a glittering bB with hot-rod flames, and hip-hop music in the background.

Toyota executives are known for nitpicking on designs, making them more and more conservative along the way. But the bB team was given the green light with few changes. "Finally, you feel like you're in an environment where you can be a little playful," Mr. Minai says.

Consumers such as Atsushi Maeda, a 27-year-old Tokyo resident who for a long time dismissed Toyota as an "old man's brand," are warming up to the bB. The bB's design was "so unlike Toyota," says Mr. Maeda, who recently joined a bB owners' fan club.

Customers like him are now multiplying, and have made the bB, priced at between 1.3 million yen and 1.6 million yen, an instant hit in Japan. Toyota wants to make a chain of its newly revamped dealers, called "Netz" -- German for network -- that would be filled with bB-like vehicles. Eventually, "with Netz alone, we want to win against all of Honda," says Katsuyuki Kamio, a Toyota director in charge of the Netz operations. In the first eight months this year, the latest figures available, the Netz sold 297,247 cars in Japan, compared with Honda's 290,362.

Honda believes that in the longer term, its best defense against Toyota is to beat it to the marketplace with new products. To do that, Honda has been trying to increase its manufacturing flexibility and hone its ability to develop vehicles unique to North America, Europe and Asia. In Japan, partly to counter Toyota's rapid-fire launches, Honda will shower the market with 20 new or revamped models over three years. The same tactic helped Honda weather a challenge from Yamaha Motor Co. two decades ago when Honda bombarded the market with new motorcycles at a mind-numbing speed of one a week.

Toyota is also bent on chiseling away at another Honda edge: its image as environmentally responsible. In 1996, Mr. Okuda, according to senior Toyota executives, decided to elevate "green" propulsion technology to its core long-term strategy. In a year, Toyota introduced an electric-gasoline hybrid called Prius, which sent Honda engineers scrambling for a comeback. Discouraged by its high costs, Honda had earlier given up a hybrid system, and it had nothing to counter with when Toyota launched the Prius in Japan in December 1997. The move "jolted us," admits Takeo Fukui, head of Honda's R&D arm in Japan.

So Mr. Fukui quickly re-started the hybrid project. His goal was to beat Toyota to the U.S. and other overseas markets. In late 1999, Honda launched the Insight -- a hybrid that gets 61 to 70 miles per gallon depending on driving conditions -- almost simultaneously in Japan, Europe and the U.S. Toyota matched the Honda hybrid in the U.S. only in July of this year, unveiling a version of its Prius, a 45- to 51-mpg sedan.

Toyota executives consider their slower entry into the U.S. market as no particular setback. They deem the two-seat Insight "a gimmicky rush job" to catch up with Toyota, says Toyota's Mr. Jagawa -- a claim Mr. Fukui partly concedes. Mr. Fukui says Honda wanted to make the Insight a family sedan with four seats but ran out of time while focusing on delivering a big number in fuel economy to top the Prius's performance.

The Insight, with an all-aluminum body and other pricey technologies, is also so expensive that Honda is, ironically, holding back on its marketing push to keep sales from taking off, says one Honda official.

Honda is planning to unleash a blizzard of new products to contain Toyota's push, including a four-seater Civic hybrid that the company is rushing to deliver to the U.S., Japan and other markets by next year. It wants to expand the hybrid system rapidly to other models. Honda R&D executive Mr. Hashimoto says he believes about 1.5 million U.S. customers, or 10% of the market, may buy electric-gasoline hybrids as early as 2005 as long as they don't pose any additional financial burden to consumers.

Of all Toyota's attacks, what infuriates Honda executives most is the way its rival has outfoxed them on the race circuit. Toyota began racing in America's CART (Championship Auto Racing Teams) series in 1996, its first foray into the top echelon of American motor sports. One key objective, says Tsutomu Tomita, the Toyota director in charge of racing, is to gain the kind of youthful image that has helped Honda so powerfully. Yet, for their first four years, Toyota-powered engines conked out race after race, blowing the engines, spewing smoke, spilling oil and sometimes dropping broken parts on the track, interrupting the races. Drivers and their teams complained Toyota engines were a danger to their safety and told Toyota to put diapers on its engines so that its cars wouldn't spill on the racetrack. The board that runs the sport told Toyota to go back to the drawing boards and retest its powertrains. Spectators moaned Toyota was making the race boring.

Once a laughingstock, this year Toyota engines suddenly began shining. In June a Toyota-powered car won a race in Milwaukee, giving Toyota its first victory in 78 races. Toyota's Mr. Tomita says that the company came up with several modifications in engine technology. After 17 races this season, Toyota now ranks as the third engine supplier behind Ford and Honda.

Honda concedes that improved engines have helped Toyota on the racetrack. But it also says Toyota got a huge boost from the new team of champion drivers it stole from Honda: the team owned by Chip Ganassi, which racked up 30 wins in a total of 72 races with Honda engines from 1996 to 1999. Mr. Ganassi says he received compensation in the range of "$3 to $5 million" for switching to Toyota -- an unusual development in the low-key and generally small-bucks CART world. Toyota's Mr. Tomita confirms that Toyota paid Mr. Ganassi but won't specify details. Mr. Ganassi says that he felt the future is more secure with Toyota as an engine supplier. "Comparatively speaking, Honda just doesn't have the resources that Toyota has," he says.

Once the Ganassi team began using its engines, Toyota quickly launched a TV ad campaign that irritated Honda. Like the Detroit auto show display, Toyota billed the Ganassi team as its own four-time CART champion team, without mentioning that all those four times the team was driving Honda- powered machines. "The ads are absolutely misleading; we would never resort to a stunt like that," says Mr. Fukui. "We have pride."

On a recent Saturday as he watched Paul Tracy race one of the Honda- powered cars in a preliminary session to take the pole position in Sunday's final, Mr. Fukui boasted that Honda won't yield its leadership position in racing to Toyota. "We have to pound them down now," Mr. Fukui said, "before they get all encouraged."