The Toyota Motor Corp. name was clearly emblazoned on the side of the car.But there was no doubt: This was the machine that had been used by race-teamowner Chip Ganassi-under the Honda Motor Co. flag-before he orchestrated asensational defection last year and named Toyota as his new enginesupplier.

The Toyota display did tout the Ganassi team's four racing championships.What it didn't mention was that Honda was associated with all of those wins.

Astounded, a fuming Mr Yoshino had to be restrained by his subordinates ashe began looking around for Toyota's president, Mr Fujio Cho.

The race-car war is just one sign of the increasingly bitter rivalrydeveloping between Toyota and Honda. Globally, Toyota towers over Honda,boasting auto output that is neck and neck with that of Ford Motor Co.,General Motors Corp. and DaimlerChrysler AG. But in North America, Toyotaand Honda are comparable in size, each controlling slightly less than 10 percent of the US market. And as a wave of shrewd, edgy marketing helps Hondagrow beyond its niche-small cars for younger buyers-Toyota is taking bigsteps to fight back.

Mostly a sedan and coupe maker, Honda entered the minivan and sports-utilityvehicle market with a big splash in the mid-1990s, introducing popularvehicles in Japan such as the Step Wgn for young families and the S-MX for20-somethings.

While Toyota holds a commanding 40 per cent of the Japanese market, itsexecutives worried that their share would slide if young customers whoprefer Hondas now continued to buy Hondas as they aged. Honda poses athreat, say Mr Hiroyuki Watanabe, a Toyota managing director and others, inpart because Toyota didn't direct much attention in the early 1990s to thatyounger consumer market.

Toyota declared what amounted to an internal war on Honda in 1996, itsexecutives say. That is the year that marketing data began showing a barrageof disturbing news. The median age of Toyota's customers for its flagshipluxury cars was rising at a startling rate. It was getting to the point that"we would've had to sell Crowns and Mark IIs in the cemetery", says MrTadaaki Jagawa, a Toyota executive vice-president.

Toyota's market share in Japan, which was as high as 43.2 per cent in themid-1980s, sank below 40 per cent for the first time in 14 years. Honda,meanwhile, was experiencing runaway success with its new Odyssey minivan andsport-utility vehicles.

So Mr Hiroshi Okuda, the chief at Toyota, set out to pull off one of theauto industry's most ambitious corporate makeovers. As CEO in the mid-1990s,Mr Okuda encouraged Toyota subordinates to lighten up. He lured championrace-car teams and drivers away from Honda, convinced that Honda's hipsterimage had been reinforced by the company's long association withprofessional car and motorcycle races.

Mr Okuda pushed product planners and engineers to match every popular Hondamodel with a corresponding Toyota clone. The company launched a shower ofstylish and offbeat small cars with names like Fun Cargo, Vitz andAltezza.

A newly created 30-person division called Virtual Venture Co. inTokyo was charged with specifically marketing to youth. The division cameout with a funky small car, called Will Vi, which Mr Okuda likened to apumpkin.

Honda executives say Toyota's aggressive moves don't concern them, arguingthat their giant rival will have difficulty emulating Honda's uniqueculture. "All Toyota is doing is aping us and letting their money talk,"says Mr Ken Hashimoto, a senior Honda R&D executive.

But if there is one thing about which Honda worries, it's Toyota's cashhoard, 2.2 trillion yen ($20.64 billion) as of March 31. Given enough time,Honda executives fear that Toyota may approximate enough of Honda's youthfulappeal to constitute a real problem.

Some of Honda's fears are already playing out. Toyota, in spite of itsoften-ridiculed "country boy" image, has been proving that it cansuccessfully woo young car buyers, thanks to designers such as Takao Minai.

Mr Minai languished for a long time in Toyota's hierarchical culture, buthad a sudden leap in responsibilities two years ago. Under Mr Okuda'sguidance, the pony-tailed 36-year-old amateur video jockey took charge ofdeveloping a dream car for male 20-somethings. Based on a sketch by anotheryoung designer, the 11-member team designed a small car shaped like a reallyclunky box. Toyota dubbed it `bB', short for black Box. Toyota managementencouraged Mr Minai and his colleagues to be irreverent.

Consumers such as Mr Atsushi Maeda, a 27-year-old Tokyo resident who for along time dismissed Toyota as an "old man's brand", are warming up to thebB, priced at between 1.3 million yen and 1.6 million yen. The bB's designwas "so unlike Toyota", says Mr Maeda, who recently joined a bB owners' fanclub.

Honda believes that in the longer term, its best defence against Toyota isto beat it to the marketplace with new products. To do that, Honda has beentrying to increase its manufacturing flexibility and hone its ability todevelop vehicles unique to North America, Europe and Asia. In Japan, partlyto counter Toyota's rapid-fire launches, Honda will shower the market with20 new or revamped models over three years. The same tactic helped Hondaweather a challenge from Yamaha Motor Co. two decades ago when Hondabombarded the market with new motorcycle models at a mind-numbing speed ofone a week.

Toyota is also bent on chiselling away at another Honda edge: its image asenvironmentally responsible. In 1996, Mr Okuda, according to senior Toyotaexecutives, decided to elevate "green" propulsion technology to its corelong-term strategy. In a year, Toyota introduced an electric-gasoline hybridcalled Prius, which sent Honda engineers scrambling for a comeback.

Discouraged by its high costs, Honda had earlier given up a hybrid system,and it had nothing to counter with when Toyota launched the Prius in Japanin December 1997. The move "jolted us", admits Mr Takeo Fukui, head ofHonda's R&D arm in Japan.

So Mr Fukui quickly re-started the hybrid project. His goal was to beatToyota to the US and other overseas markets. In late 1999, Honda launchedthe Insight-a hybrid that gets 26-29 km per litre, depending on drivingconditions-almost simultaneously in Japan, Europe and the US. Toyota matchedthe Honda hybrid only in July of this year, unveiling a version of itsPrius, a 19-21 km per litre sedan.

Honda is planning to unleash a blizzard of new products to contain Toyota'spush, including a four-seater Civic hybrid that the company is rushing todeliver to the US, Japan and other markets by next year. It wants to expandthe hybrid system rapidly to other models. Honda R&D executive Mr Hashimotosays he believes about 1.5 million US customers, or 10 per cent of themarket, may buy electric-gasoline hybrids as early as 2005 as long as theydon't pose any additional financial burden to consumers.

The Asian Wall Street Journal