An American Prius?

Japanese automakers have crushed the Big Three with their hybrids. Here’s how U.S. carmakers could catch up.

Toyota chief engineer Yoshikazu Tanaka with a hybrid car

When it comes to hybrids, the heavyweight tussle between American and Japanese automakers appears to be a hopeless mismatch. Toyota introduced its gas-electric hybrids in 1997 (when regular was $1.18 per gallon), and in June announced its 1 millionth hybrid sale. In the first eight months of this year, Toyota sold 189,945 hybrids in the United States, with Honda notching a respectable 24,000. As for the Americans? Don’t ask. Ford doesn’t break out sales of Escape and Mercury Mariner hybrids. At General Motors, hybrids—like long-promised market-share gains—are mostly concepts.

Toyota clearly stole a march on its slow-footed U.S. rivals and shut them out of a hot new market, much as Apple crushed its competitors with the ubiquitous iPod. But the iPod, and the broader innovation it represents—making huge quantities of music and video portable—has created a small entrepreneurial ecosystem. There’s a large and growing aftermarket of iPod holders, speakers, car mounts, and headphones, developed and sold by companies not run by Steve Jobs. In the same way, the big idea behind the success of Japanese-made hybrids—the proposition that electric batteries can displace gasoline as fuel—has its own coattails. Across the United States, enterprises big and small are developing souped-up batteries, plug-in kits, and technology that hold the potential to turn cars from gas guzzlers into power generators.

In 2001, when hybrids were barely on the radar screen, Dave Vieau co-founded A123Systems in Watertown, Mass., to build lithium-ion batteries, which can store and deliver more energy than traditional batteries. The first application was in power tools. “But at the end of 2002, we saw hybrids as an opportunity that could be interesting,” he says. A123Systems has raised $102 million in venture capital, and about half of its 800 employees are working on hybrid-related projects. “We can improve the energy density, accelerate more quickly, and all without taking up too much space.” Translation: A 45 mpg hybrid can now get up to 125 mpg. Today, about three dozen vehicles equipped with A123Systems cells are prowling the cul-de-sacs of chichi suburbs.

Hybrids Plus Inc., founded last year in Boulder, Colo., lashes together up to 1,200 lithium-ion cells the size of D batteries into pumped-up battery systems that can be charged in wall outlets. “In daily usage, we’re seeing numbers as high as 137 miles per gallon,” says CEO Carl Lawrence. Even with their Rocky Mountain-high cost—refitting a Prius can cost $24,000—the conversions are drawing interest from wealthy techies who gain psychological satisfaction from using less gas. (This is Boulder, after all.) The 15-person company has completed six conversions and should finish an additional 20 this year.

Widespread use of plug-in hybrids would be good news for utilities, which could sell the juice at night during periods of low demand. EnergyCS, a 13-person engineering shop in Monrovia, Calif., is developing an electronic and software system that would allow plug-in hybrids to charge batteries efficiently. One of its clients: the giant utility Pacific Gas & Electric. In April, PG&E used a hybrid to demonstrate an application of V2G technology. V2G isn’t a category on Craigslist. It stands for vehicle-to-grid: In addition to drawing power from the energy system, hybrids can theoretically provide the power stored in their batteries to the electrical grid. Should V2G come to fruition, on a sweltering August day, you could run your air conditioner off your Ford Escape.

Naturally, cost is an issue. It takes 64 years of gas savings to pay off the extra investment a Hybrids Plus conversion entails. But these entrepreneurial initiatives function as demonstration projects for risk-averse big companies, which know how to reduce costs through mass production. In August, A123Systems signed a deal with GM to help develop a fuel cell for the Chevy Volt. GM believes a plug-in hybrid like the Volt, which could be in showrooms by 2009, could render the average daily commute—about 40 miles—gas-free. Such efforts could ultimately lead American firms to create what would have been unthinkable a few years ago—a car not powered with fossil fuels. As we speak, at Google’s headquarters in Silicon Valley—where a massive solar-generating installation went live in June—four Priuses converted to plug-ins are being recharged by the sun.

The technology isn’t fully competitive with gas-powered vehicles. Many of the startups in the space will likely fail. And there are also questions about how well these innovations—brilliant in the lab—will work in the real world on a mass scale. Of course, that’s exactly what U.S. automakers said about hybrid vehicles themselves—1 million sales ago.

This article also appears in the Oct. 1 issue of Newsweek.