The Clay Model Freeze-15 Months to Go

Over the next few months, Uchiyamada worked closely with the styling studios, the artists of the industry, to design the Prius. Finally, in July 1996, Uchiyamada had a car to develop. Once a car style development process reaches this point, it is called a clay model freeze—though auto executives are notorious for making significant changes in the basic styling well after the so-called “freeze.” Not so at Toyota. Toyota stands out in sticking to its decision on the vehicle styling at clay model freeze. It goes through an unusual degree of “thoroughness in decision making” (nemawashi) to make a good decision at this point.

Uchiyamada, who had never led a new car development program, had just 17 months from the July decision date to produce the Prius. The actual design review and formal approval by the board was in September, so from that point there was really only 15 months. In addition to developing the technology, Toyota had to develop and prepare a new manufacturing process, create a new sales plan to sell the Prius, and even prepare the service organization to service the vehicle. In 1996 the auto industry standard for developing vehicles, particularly in the U.S., was five to six years. But as early as 1982, Japanese auto companies were developing vehicles in 48 months. So when U.S. auto companies heard that Toyota was on an 18-month development cycle—from clay model to start of production—they were in awe. But the 18-month cycle in Toyota was typical for a variation of an existing model—and the breakthrough Prius had only 15 months.

Toyota engineers worked slavishly, canceling all vacations, to engineer the body based on the clay model selected in July. In September they made a formal presentation to the board, which approved it. From then on, the development of the vehicle was a marathon race to reach Okuda’s target date of December 1997. In the mindset of Principle 10, Develop exceptional people and teams who follow your company’s philosophy, everyone understood they had to make personal sacrifices to work on this project that was so visibly important to the company and had such aggressive goals and timing targets. As an example, Takehisa Yaegashi was a senior manager who had supervised many engine development projects and was personally recruited by a board member to lead the hybrid engine team. When he agreed, he immediately went home, explained the situation to his wife, and moved into the company dormitory to get away from all distractions.

The development process did not always go smoothly. Itazaki (1999) provides an engaging blow-by-blow description of the process, the numerous problems encountered, and the creative and even courageous resolution of these problems. For example, the battery driving the motor portion of the hybrid was a continual problem. A key requirement was to make the battery as small as possible so that the Prius would not be viewed as a “battery carrier,” yet still have the power needed to meet the target of doubling the fuel efficiency of the car. In fact they needed to make the battery one-tenth the size of an electric vehicle battery. It turned out the battery was very sensitive to heat conditions and would shut down on hot days. It also shut down if the weather was too cold. Executives, including the president, were coming through on test drives, but the vehicle would shut down. A key part of the solution was to put the battery in the trunk, which was the most protected from heat and the easiest to keep cool. After struggling to resolve these and other battery-related problems, Toyota decided to start a joint venture company with Matsushita Electric called Panasonic EV Energy, with the idea of eventually selling the battery to other auto producers. Though Toyota felt a bit pushed into this partnership, it does not take partnerships lightly and took on the challenge characteristic of Principle 11: Respect your extended network of partners and suppliers by challenging them and helping them improve. Together, two corporate cultures managed to overcome their differences and blend into a viable, working company.

In 1997, one thousand Toyota engineers were feverishly working to make the December target for the start of mass production. But incredibly, Toyota still did not have a workable prototype. Normally, just before mass production, prototypes have been tested and work almost perfectly. In the case of the Prius, however, since R&D was being done simultaneously with product development, practically every new technical breakthrough required a new prototype car. And the new prototypes almost never ran properly the first time. This was very disturbing, as the young test engineers and production engineers had never seen a vehicle in such bad condition so close to launch. Senior engineers were feeling a sense of déjà vu from their early years at Toyota, when every vehicle launch program was like this.

Toyota president Okuda was not an engineer, but he was an exceptional manager and leader who understood how to motivate people. As December was approaching, he wanted to give the team a little push. The launch date for the Prius had been kept confidential and was known only inside the company. Conferring with Wada, they decided to make a public announcement in March. They knew that a public announcement would make it a matter of pride and social responsibility for Toyota’s engineers to deliver on time. Okuda, in his speech to the press, stated:

Toyota has developed a hybrid system that is an answer to the environmental problems of the 21st century. It achieves a fuel economy that is twice that of conventional cars of the same class, emitting half as much CO2. We would like to launch this car within this year.

Uchiyamada described to me his reaction:

In August 1995 I asked for more than three years for development. Mr. Okuda said we should launch at the end of 1997 and do your best. If it is impossible you can delay the launching time. So I said OK. But in the beginning of 1997 it was already publicly announced by Mr. Okuda that Toyota would come up with a hybrid. We had climbed the ladder and the ladder was taken out from under us. We actually worked 24 hours a day (two shifts), changing the people.

The Prius did launch on time. In fact, it launched in October 1997, two months ahead of the December target date, and the world’s first mass production hybrid car was offered to the Japanese market, soon to be followed by a U.S. launch. The price was subsidized by Toyota, at an amazingly low two million yen in Japan, not much more than a Corolla, but Okuda knew that, as volumes increased and cost reduction opportunities were identified, they could make money at that price. At launch the Prius took first place in the two most prestigious automotive competitions in Japan, winning both the coveted “Japan Car of the Year” and “RJC New Car of the Year.” Toyota was bombarded with inquires from potential customers and, the month after launch, orders for 3500 units had been received—over three times the monthly sales target. This was very unusual for a car costing two million yen and being sold at no discount. Worldwide sales since then have continued to grow, to over 120,000 units by early 2003. Toyota has 80 percent of the world hybrid market and has many hybrid vehicles in development.

Critics of Toyota’s heavy investment in Prius, estimated to be in the hundreds of millions to $1 billion, have questioned the return on investment. Koji Endo, an equity analyst of Credit Suisse First Boston in Tokyo estimates Toyota must sell 300,000 hybrids annually to pay off the investment. Toyota is not there yet. The second generation Prius came out in 2003 as a substantial improvement over the first in styling and fuel economy going from 48 mpg to 55 mpg. Advanced sales greatly exceeded expectations. And a hybrid version of the Lexus RX330 will only add to the sales and payback on investment.

But the goals of the Prius were farther-reaching than short-term profitability. One benefit for society was the opening of a mass market for more environment-friendly cars. A J.D. Power study late in 2002 found 60 percent of those surveyed in the U.S. would “definitely” or “strongly” consider buying a hybrid. J.D. Power forecasts demand to reach 500,000 per year by 2006 and to keep rising. For Toyota, a benefit was the development of young engineers who now understand what it takes to develop new technology (Principle 10: Develop exceptional people and teams who follow your company’s philosophy”). Toyota also developed new technical capabilities in hybrid engines through the Prius and is now selling key components to other manufacturers. Finally, it made fundamental innovations in its product development process that are being used for all vehicle development. By this measure, the returns on the Prius project are priceless and the investment is almost trivial. The importance of the Prius was the learning. Toyota employees knocked themselves out to do it their way, in house, and develop knowledge and new capabilities along the way.