"Hybrids can be the ultimate weapon for Toyota," said Koji Endo, a Tokyo-based analyst at Advanced Research Japan. "We know that only pushing EVs and plug-in hybrids can't solve China's problems. Hybrids can be the game-changer."
Of the 315,500 Priuses sold globally last year, only about 1,400 went to China, fewer than the 1,600 pandas the World Wildlife Fund estimates are left in the world.
At the Beijing auto show, which opens to the public this week, Toyota's China head Hiroji Onishi said the automaker is considering sourcing hybrid parts and batteries locally for the Camry and Prius.
For now, the new Corolla and Levin compact cars unveiled at the show will be available as hybrids with locally made parts next year, according to the company.
The Toyota City, Japan-based automaker plans to introduce 15 new models for China by the end of 2017 as part of its goal to become the top Japanese automaker in the country and No. 3 among all car manufacturers.
"They've got to improve their situation in China," Edwin Merner, president of Atlantis Investment Research, which manages about $3 billion in assets, said of Toyota. "In many countries, they are the leader or one of the leaders, but in China they're almost second-tier."
In bringing cheaper, locally developed hybrids to China by next year, Toyota would be spared from the 25 per cent tariff that China levies on imports of key auto components, including hybrid system parts that go into the Prius.
The carmaker may receive an added boost if China's government rethinks its current stance of excluding conventional hybrids from government subsidies, though that would result in a significant about-face for policy makers, who have been "heads over heels" in promoting EVs, according to James Chao, a Shanghai-based director at IHS Automotive.
China's central government currently provides rebates of as much as 60,000 yuan ($9,600) - with some local governments providing matching grants - toward the purchase of all-electric passenger vehicles or plug-in hybrids.
Conventional hybrids, which run primarily on a gasoline engine with a backup battery, get a smaller subsidy of up to 3,000 yuan under a different category for energy-saving vehicles.
EV sales have lagged behind official targets despite state aid. Five years after China began promoting alternative energy- powered vehicles, about 70,000 are on its roads, compared with its target of reaching 500,000 by 2015. That's led the government to consider a slower exit for state financial support.
Boosting the number of environmentally friendly cars is taking on added urgency as air quality deteriorates, leading Premier Li Keqiang in March to declare "war" on pollution.
More cities are resorting to quotas on new vehicles, with the eastern city of Hangzhou the latest to cap the number of licence plates in a bid to control the rise in tailpipe emissions.
Vice Premier Ma Kai, the highest-ranking Chinese official overseeing energy issues, said last month the government will study and support subsidy policies for hybrids, and will "strongly support" hybrids that have "outstanding fuel-saving effect."
Ma commented about potential hybrid subsidies during a visit to Hunan Corun New Energy, which set up a new battery joint venture last year with Toyota in Changshu, according to a statement on its website.
Even so, extending subsidies to hybrid vehicles remains a sensitive topic because the chief beneficiaries would probably be Japanese manufacturers like Toyota, which are leaders in the technology, according to Ashvin Chotai, managing director of Intelligence Automotive Asia.
"China and Japan is always a cat-and-mouse game and they're never going to take any steps that openly and blatantly benefit Japanese carmakers," said Chotai, who's based in London.
Periodic bouts of tension between Asia's two largest economies have spilled over to the auto industry. In 2012, nationwide protests against Japan's purchase of a group of islands also claimed by China triggered nationwide protests and boycotts against Japanese brands.
Japanese automakers have since recovered as tensions faded, with Toyota predicting record China sales of 1.1 million units this year and planning further expansion.
In the forests of Changshu, about 85 kilometres from Shanghai, Toyota has a China R&D centre equipped with a test track that simulates the country's sometimes rough roads with banks and sideways grooves. Streams and ponds surround the pavement to absorb the area's frequent rainfall.
Inside, an army of 320 engineers toil on test machines akin to what Toyota uses in Japan, pumping electric current in and out of battery packs to test their performance, while China- sourced metals are evaluated for their strength using electronic microscopes.
The company says its goal is to eventually have 100 per cent of materials procured locally for hybrids built in the country.
"Energy-saving vehicles like the hybrid vehicle will have to become more affordable," Soichiro Okudaira, head of the R&D center, told reporters yesterday. "We would like to start the localisation so that hybrid vehicles will be accepted in China."
- Bloomberg
