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Car sales heat up, but the Prius?

Car sales were improving for Toyota. But Japan's disaster and subsequent production woes may limit car sales, especially of Toyota's hot-selling Prius.

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Workers walk between newly assembled Prius hybrid vehicles near Toyota Motor Corp's plant in Toyota, central Japan, in this Feb. 9, 2010, file photo. Japanese auto makers, led by Toyota Motor Co are struggling to restart production amid a shortage of parts and workers, and must now worry about a profit-sapping surge in the yen after Japan's biggest earthquake. A shortage of parts could slow production and reduce car sales, especially of the Toyota Prius.

Yuriko Nakao/Reuters/File

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By Phil LeBeau, CNBC Correspondent

Amid all the bad news coming out of Japan and the earthquake/tsunami devastation, it's the impact on Toyota's Prius production that is very intriguing. A week ago, the Prius was poised to drive Toyota to greater profits in a world of rising gas prices. Today, there are growing concerns the gas/electric hybrid will be in short supply for weeks or months right when auto sales are heating up.

As of now, Toyota has suspended production at its plants in Japan as it assesses how much supply lines, production and distribution are hurt by the earthquake/tsunami devastation. A big question is how much production of EV batteries will suffer at the plant operated by Toyota and Panasonic near Sendai, Japan. The plant cranks out 200,000 EV batteries annually. The longer it's down, the more it creates a problem for Toyota.

The Prius is a huge car for Toyota in Japan and in the U.S. — so big that a few years back Toyota planned to start Prius production at a new plant in Mississippi. Those plans were put on hold when the recession hit. If that plant were up and running right now, Toyota would be able to lean on that facility to supply Prius' to the U.S. - unfortunately for Toyota, the Prius hybrids are only built in Japan.

There's already a fairly tight supply for the Prius, and the longer it takes Toyota to get production of the gas/electric going, the more it hurts Toyota. How much will sales be hurt? If Prius production is limited for a few days or a week and a half, Toyota can weather the impact. But if production slows down for an extended period of time, Toyota dealers will have a tougher time holding on to potential buyers. Will those buyers start looking around at other hybrids or fuel efficient models made by Toyota competitors?

All of this comes when the Prius is in the sweet spot of the market. It is the dominant gas/electric hybrid in a world of rising gas prices. Sales were up 70% in February and should be strong this spring, provided there's a steady supply in Toyota showrooms.

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