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Honda Insight Cracks Open Prius Stronghold — Can Startups Step In?

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The new Honda (s HMC) Insight has gone where no hybrid has gone before: It topped the charts for vehicle sales in Japan last month, vaulting from the 21st spot in March and beating out not only the Toyota (s TM) Prius, but also all the country’s usual top sellers (excluding minicars) the Associated Press reports. An updated version of the Prius with more power than the second-generation model is scheduled to roll out in Japan next week, and despite a $7.8 billion loss in the first three months of this year, Toyota is spending big on a new advertising campaign to snatch the crown.

So here we are at the kickoff of the first serious competition in the hybrid car market. Where are the opportunities for startups as new cracks develop in Toyota’s years-long green car stronghold?

This new level of competition means both Toyota and Honda are likely to feel growing pressure to innovate and drop prices. As a Toyota spokesperson tells the Wall Street Journal, the ongoing ad campaign — in which the company will invest something north of $58.3 million — is about the “mainstreaming of the product.” And in the mainstream car market, price has prime importance. Honda has already undercut the Prius with a $19,190 price tag, compared with the $22,000 Toyota has set for the gen-3 Prius (the same base price as the gen-2 model).

With battery packs representing one of the biggest production costs for hybrid and plug-in vehicles, the technology will be a core focus — for Honda, Toyota and other automakers vying for a sizable piece of the hybrid market (they’re betting it will expand beyond its current 2 percent share of light-vehicle sales). Hybrid vehicle batteries are also an area where venture capitalists are hoping startups like PowerGenix (working on a low-cost, high energy-density hybrid car battery with more than $31 million in venture capital) and A123Systems will be able to make some big plays. With a growing number of car companies looking to build battery supply into a lucrative sideline, acquisitions may be on the horizon. Companies racing to catch up with Toyota and Honda may be the most likely buyers, since Honda has already formed a joint venture with Japanese battery maker GS Yuasa and Toyota is one of few major automakers to produce its own batteries.

But pressure to innovate in the hybrid market won’t necessarily be all about the hardware. If hybrids and other cars embedded with electronic controls and more advanced computing power make their way into the mass market, opportunities could also arise for software. The Insight, for example, includes an “Eco-Assist” display on the dashboard that takes a cue from video games to help educate and encourage drivers to accelerate and decelerate for maximum fuel efficiency. As Wagner James Au explained in an Earth2Tech post about the feature earlier this year, “Like a role-playing game, the driver’s behavior is also tallied over time, and displayed symbolically — here, in the form of an ivy-ringed trophy achievement that a driver can gradually unlock with green-friendly driving. It’s sort of like Wii Fit, but for cars.” Depending on how much Honda decides to open that data, it could provide fodder for game developers, application platform providers and other industrious web entrepreneurs.