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Toyota: The Birth of the Prius
The world's most admired automaker had to overcome punishing deadlines, skeptical dealers, finicky batteries, and its own risk-averse culture to bring its hybrid to market.
By Alex Taylor III
February 21, 2006: 10:32 AM EST


New York (FORTUNE Magazine) – In late 1995, six months after Toyota decided to move forward with its revolutionary hybrid, the Prius, and two years before the car was supposed to go into production in Japan, the engineers working on the project had a problem. A big problem.

The first prototypes wouldn't start. "On the computer the hybrid power system worked very well," says Satoshi Ogiso, the team's chief power train engineer. "But simulation is different from seeing if the actual part can work." It took Ogiso and his team more than a month to fix the software and electrical problems that kept the Prius stationary. Then, when they finally got it started, the car motored only a few hundred yards down the test track before coming to a stop.


The Prius is Toyota's hottest-selling U.S. car

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It's hard to imagine Toyota (Research), with its aura of invincibility, running into such trouble. But the story of how it brought the Prius to market -- a tale of technological potholes, impossible demands, and multiple miscalculations -- reveals how a great company can overcome huge obstacles to make the improbable seem inevitable. The gas-electric auto represents only a tiny fraction of the nine million cars and trucks the Japanese company will produce this year. But it is the first vehicle to provide a serious alternative to the internal combustion engine since the Stanley Steamer ran out of steam in 1924. It has become an automotive landmark: a car for the future, designed for a world of scarce oil and surplus greenhouse gases.

For all its success as a high-quality manufacturer, before the Prius, Toyota had never been much of a pioneer. It was known as a "fast follower," a risk-averse company in which process -- the famous Toyota lean production system -- trumped product. Indeed, Toyota, based in rural Aichi prefecture, 200 miles from Tokyo, enjoys depicting itself as a slow-moving company of simple country farmers. But as interviews with company executives in Japan and the U.S. make clear, Toyota is capable of breaking its own rules when it needs to. In rushing the Prius to market, it abandoned its traditional consensus management, as executives resorted to such unusual practices (at least for Toyota) of setting targets and enforcing deadlines that many considered unattainable.

Toyota's push into hybrids is only going to accelerate. Although the Prius first came to life under Hiroshi Okuda and Fujio Cho, Toyota's two previous presidents, new boss Katsuaki Watanabe wants hybrids to become the automotive mainstream. Watanabe, 64, who became the company's top executive last June, has the deferential air of a longtime family retainer. But he is intent on continuing Toyota's explosive growth of the past five years, in which worldwide production rose by nearly half. In an interview earlier this year at company headquarters in Toyota City, he stressed that a key part of his strategy is making hybrids more affordable for consumers. "We need to improve the production engineering and develop better technology in batteries, motors, and inverters," he said. "My quest is to produce a third-generation Prius quickly and cheaply." By early in the next decade he expects Toyota to be selling one million hybrids a year.

Since no other automaker can even approach that quantity, Toyota is way out in front -- an unusual place for a fast follower. "Is Toyota a conservative company?" asks Jeffrey Liker, an engineering professor at the University of Michigan and author of The Toyota Way. "Yes. Does it seem to be very plodding and slow to make changes? Yes. Is it innovative? Remarkably so. Go slow, build on the past, and thoroughly consider all implications of decisions, yet move aggressively to beat the competition to market with exceptional products." If he's right, Toyota is becoming a double threat: the world's finest manufacturer and a truly great innovator. The story of the Prius suggests that he is.

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