Toyota facing $1 billion hit over California law

Success breeds harsher requirement to sell zero-emission cars

by Alan Ohnsman

Bloomberg

Toyota Motor Corp., ranked as the U.S. market’s most fuel-efficient automaker, may have to spend more than $1 billion to meet California’s requirement for zero-emission cars.

Toyota and Honda Motor Co. have the biggest market share in the state and therefore starting with 2012 models must also sell the most vehicles that don’t pollute, according to California law. The rule requires that 3 percent of unit sales over a three-year period must be nonpolluting models.

California’s requirement for plug-ins and zero-pollution models applies only to companies that sell at least 60,000 vehicles a year in the state. General Motors Corp. and Chrysler LLC’s bankruptcies may cut into their sales in California, thereby reducing the costs of compliance.

“The targets of the rule initially would have been GM, Ford and Chrysler because of all their trucks, not Honda and Toyota, which are kind of the environmental darlings,” said Jim Hossack, an analyst at consulting firm AutoPacific Inc. “It’s ironic those two companies could take the biggest hit.”

Toyota sold 24.1 percent of new autos in the state in the first quarter of 2009, ahead of Honda’s 12.9 percent market share, according to the California New Car Dealers Association. Ford Motor Co. was third with a 12.1 percent share, followed by Nissan Motor Co. at 10.9 percent and GM at 10.4 percent.

“If you’re only discussing the cost of batteries and other components, a $1 billion cost for Toyota may be a stretch,” said Brett Smith, an advanced-vehicle analyst at the Center for Automotive Research.

“Add in all the things needed to support these vehicles — service, dealer training, marketing, warranties, new manufacturing equipment to get them into production, and that number sounds reasonable,” Smith said.

The state, which buys about 12 percent of all new autos sold in the U.S., requires the sale of advanced technology models because of persistent air pollution problems. Carmakers must sell a combined 7,500 hydrogen fuel-cell or battery-electric vehicles and more than 60,000 plug-in hybrids in model years 2012 through 2014, said Anna Gromis, an air pollution specialist with California’s Air Resources Board.

“There’s going to be a large cost premium for this technology,” said John Hanson, a spokesman for Toyota’s U.S. sales unit. He declined comment on the $1 billion estimate. “We don’t know yet how many consumers are going to be willing to pay the added cost plug-in vehicles carry.”

Toyota’s California market share means it may need to sell more than 16,000 plug-in hybrids and all-electric models over the three-year period, based on a Bloomberg calculation. Carmakers can comply by selling some plug-ins in states such as New York and Massachusetts that follow California’s pollution rules.

A company failing to meet California rules can potentially be barred from selling any vehicles there.

Lithium-ion batteries needed for plug-ins with at least 16 km of all-electric driving may add $8,000 to a vehicle’s cost, said Menahem Anderman, president of consulting firm Advanced Automotive Batteries. How long they will last is unknown, said Anderman, whose research is used by Toyota, Honda, GM and other carmakers.

Currently, the only electric car sold in the U.S. is Tesla Motors Inc.’s Roadster, which goes for $109,000.

Automakers’ plans for a range of cars powered solely by lithium-ion batteries and plug-in hybrids that run on battery power alone for short distances until a gasoline engine kicks in also coincide with California’s rules.

These include GM’s $40,000 plug-in Chevrolet Volt due late next year; Nissan’s plan to sell battery-only cars starting in 2010; and Toyota’s aim to offer both a plug-in Prius hybrid and a tiny all-electric car that’s due in 2012. Ford plans a battery-only Focus compact due in 2011.

Honda already sells small numbers of zero-emission hydrogen fuel-cell sedans in California to meet state rules. While President Takeo Fukui said in April the company may also add plug-in hybrids, Honda hasn’t announced details of such a plan.

Honda has favored electric vehicles powered by hydrogen over batteries because it believes they offer a better combination of low emissions and range, said Ben Knight, vice president of the company’s U.S. research unit.

“We see potential for battery vehicles for short intracity use,” Knight said May 27. “If it’s that broader level of mobility most of us really appreciate and utilize, the fuel cell has that broad functionality and capability.”

Knight declined to discuss the added expense for Honda to meet California’s advanced vehicle rules.

Toyota said this month that U.S. demand for plug-ins may be much smaller than advocates suggest. Bill Reinert, Toyota’s U.S. national manager for advanced technology, told a National Academy of Sciences panel in Washington on May 18 that the market for such vehicles may be 50,000 units a year at most and as few as 3,500.

“If at the end of the day the market says ‘we don’t want these cars,’ we may have to take a look the requirements,” Gromis said. “We have confidence that they will be accepted.”