Eyeing a Chance to Pass

"Toyota is the Tiger Woods of flexibility and efficiency; they've got everybody a few strokes behind," said Ron Harbour, head of Harbour Consulting, publishers of an annual auto industry productivity report. "Often, it's nothing that makes you sit back and go 'wow.' They're little things, thousands of little things that add up to a huge advantage."

In this city, which was built on Toyota's success -- and remains its single largest production center in the world -- its five factories are located within 50 miles of most of the company's parts suppliers. That has reduced transportation costs and improved efficiency by allowing Toyota to place smaller orders for parts needed to fill existing orders.

It helps the company keep inventories to an absolute minimum. That is particularly true in Japan, Toyota's single largest market. Car buyers here generally do not visit vast dealerships with hundreds of vehicles on the lot. Instead, Japanese consumers enter small, stylish showrooms and place custom orders -- allowing Toyota and other Japanese automakers to more accurately build what they know they can sell.

Such a system has long been viewed as unworkable in the United States, with its kick-the-wheel, drive-home-the-same-day culture of auto buying. But with the Prius, Toyota has exported a more Japanese way of buying cars to the United States, with vehicles available almost exclusively through custom orders.

Analysts say the Prius marks an inventive milestone for Toyota. Although it accounts for only a tiny fraction of the record 9 million vehicles Toyota expects to produce this year, the Prius was an atypical risk for a company that has become more known for quality and consistency than innovation.

Toyota has been toying with hybrid engines for the past 20 years. But the company began to seriously pursue a mass-producible hybrid in 1993. Ogiso, 45 years old and now the chief engineer on the third-generation Prius still under development, said the edict came from Eiji Toyoda, the patriarch of the Toyota family who headed the company until 1994.

Ogiso said Toyoda had grown increasingly concerned that gas-engine auto manufacturing would eventually become a sunset industry given the limits of global oil supplies and increasing pressure to curb emissions. Focused more on a long-term advantage than the short-term gains that U.S. automakers are under pressure from Wall Street to produce, Toyota put hundreds of engineers to work on creating a new engine that would double average gas mileage and cut emissions by 80 percent. Conventional engines were quickly ruled out. "We found that the only way to achieve that goal was building a whole new type of car," Ogiso said.

After overcoming a series of hurdles -- early versions overheated or were impractical to mass produce -- Toyota engineers finally came up with a gas-electric engine that could recharge itself while on the road. Toyota unveiled the car in Japan 1997 and the United States in 2000.

In the United States, an unconventional car called for unconventional marketing, and Toyota began selling the Prius via the Internet to generate a buzz. It worked. Hollywood celebrities, including Cameron Diaz and Leonardo DiCaprio, stepped in, scooping up the eco-friendly car in which even the floor mats are made from recyclable sugar cane.

The Prius hit a vein of gold. Despite a premium price, sales vastly outpaced Toyota's expectations. The car sold 107,897 units in the United States in 2005 -- about double the 2004 volume. Toyota quickly rolled out other hybrid models, including Lexus and Highlander versions, selling 235,000 worldwide in 2005, up from 134,000 a year earlier.

Some credit the success of the Prius to lucky timing -- sales took off just as gas prices were skyrocketing. But many who initially scoffed at the idea -- including General Motors and Ford -- have become true believers. Both companies have rolled out hybrids of their own.

But Toyota is banking on staying one step ahead.

"We knew were on the right path," Ogiso said. "And we were."

Special correspondent Akiko Yamamoto contributed to this report.