It's easy to see why Toyota's image as an environmentally friendly auto maker has gotten a bit scuffed up of late. The Japanese carmaker's recent focus on bigger, faster autos has made it an easy target for green groups.


At the North American International Auto Show in January, for instance, Toyota (TM ) unveiled the all-new Tundra (see BusinessWeek.com, 01/30/07, "First Drive: 2007 Toyota Tundra") pickup, its biggest truck ever, and the FT-HS, a 400-horsepower concept car that uses the company's hybrid system to help propel it from 0-60 in four seconds. Small surprise, then, that environmentalists were complaining that it was more about performance for Toyota than ecology.

New versions of the Highlander and Sequoia sport-utility vehicles, meanwhile, will also be bigger and heavier than their predecessors. "That's not terribly green," says Kurt Sanger, an analyst at Macquarie Securities in Tokyo. "Toyota's fuel economy remains relatively good, but it's not getting better with the new products" (see BusinessWeek.com, 2/7/07, "Going Young at Chicago Auto Show").

LI-ION IN THE STREETS Yet Toyota should soon be giving the environmental lobby something to cheer about. In an interview with BusinessWeek on Feb. 16, Chief Executive Katsuaki Watanabe confirmed that Toyota's third-generation hybrid cars, due out in late 2008 or early 2009, will use lithium-ion batteries. Lighter and more powerful than the current nickel metal hydride packs, the new batteries will help make for more fuel-efficient hybrids. "We will change the battery from nickel hydride to the lithium battery," the CEO said during a rare one-on-one interview at the company's headquarters in Toyota City. Toyota officials say it's the first time Watanabe had confirmed the change of cells (see BusinessWeek.com, 2/22/07, "Talking with Toyota's Top Man").

While widely expected, some had wondered whether Toyota's li-ions would be available in time for its new hybrid system. Watanabe, who occasionally visits the site where the batteries are being developed, has no doubts: "We can develop the battery in time," he says.

It's not just the batteries that will be better. The rest of Toyota's next-generation hybrid systems will also be a big step up from what's on the road today. "We are now aiming at reducing, by half, both size and cost of the third-generation hybrid system," saysWatanabe. That should go some way to bringing the price of hybrids closer to regular gasoline cars.

MORE HYBRID MODELS On performance, Toyota is more circumspect. Watanabe says the company isn't ready to reveal data on the extent to which performance and fuel efficiency will improve. Analysts suspect Toyota will lean more towards bettering the latter. "There will be a greater benefit for consumers who are really serious about fuel efficiency," says Koichi Sugimoto, an analyst at Merrill Lynch (MER ) in Tokyo. He reckons fuel economy could increase by 20% to 30%.

If that proves correct, it should assuage the green lobby, which has complained that Toyota's hybrids—like the Lexus RX 400h (see BusinessWeek.com, 3/8/06, "Hybrid Heaven in a Lexus ") and Toyota Highlander SUVs—don't have much better fuel economy than the gasoline-only versions.

Longer term, Watanabe reiterates that he believes hybrid sales could reach 1 million a year by the early part of next decade. At the Detroit show, Toyota North America chief Jim Press told reporters the company is looking to boost hybrid sales by 50% in 2007, to between 250,000 and 300,000.

To ramp up sales, Toyota will increase the number of hybrids on the market. Reports in Japan suggest the company plans to offer a hybrid version of any model that sells more than 100,000 units a year (see BusinessWeek.com, 4/3/06, "Toyota Winning the Hybrid Race"). "We're considering what sort of hybrid system can be applied to many types of hybrid vehicles," says Watanabe. But for hybrid sales to reach seven figures "we will probably have to double the number of models with a hybrid system installed." Applying hybrid systems to diesel and other alternative fuels is also under consideration.

SAFETY MATTERS If Toyota can achieve its goal of rolling out li-ion powered hybrids in double-quick time, it will widen its lead over other many auto makers. To catch up, the Big Three U.S. carmakers have asked Washington to subsidize advanced battery research to the tune of $500 million, spread over five years. General Motors (GM ), meanwhile, has asked Johnson Controls-Saft Advanced Power Solutions, a joint venture between automotive-systems manufacturer Johnson Controls (JCI ) and Paris-based Saft, and Cobasys, a joint venture between Chevron (CVX ) and Energy Conversion Devices (ENER ), to develop li-ions.

Still, Toyota should be wary of rushing. For one thing, its li-ions will need to be durable in order to win over buyers. "You don't want a hybrid car, which you already pay more for up front, where you have to replace the battery after a few years," says Macquarie's Sanger.

Then there's the safety issue. Last year, Sony (SNE ) took a $430 million charge after li-ion powered laptops caught fire (see BusinessWeek.com, 9/20/06, "Battery Woes Spark Few Concerns Among Auto Makers"). In cars, where the risks are greater, avoiding fires is even more important. "We're making sure that the problem can be avoided." says Watanabe. "These difficulties must be reflected in the design."