Hybrid gas-electric cars have been all the rage of late. But those enviro-friendly cars will soon be making room on the highway for a new set of green wheels. The next generation of superclean diesel engines are about to challenge hybrid technology for a share of America's burgeoning green-vehicle market, with the first cars from Mercedes Benz (DCX) and Volkswagen hitting the U.S. market this year. Right behind them are other German auto makers with their own versions of clean diesel as well as such marketing-savvy Japanese as Nissan (NSANY) and Honda (HMC).
How environmentally friendly and fuel efficient will these cars be? What will they be like to drive? And how well will American auto buyers, long averse to diesel, warm up to the new push? BusinessWeek Senior European Correspondent Gail Edmondson spoke with Al Bedwell, senior manager at J.D. Power Forecasting in Oxford, Britain, about the prospects for success of clean-diesel cars. Edited excerpts of their conversation follow:
Why does J.D. Power believe that diesels will grab a much larger share of the market than hybrids for fuel-efficient cars? The problem with hybrid cars is they have an expensive power train. Hybrids have two engines connected by an expensive electronic kit. They're likely to always cost more than a clean diesel power train. Once consumers add up the costs and benefits for hybrid cars, they aren't likely to do as well over the long term. There will always be people willing to pay more for an environmentally friendly car. But people who are constrained by costs and still want a fuel-efficient car will opt for clean diesel.
When will sales of diesel outstrip those of hybrids. If you include the heavy-duty pickup sector, diesel already outsells hybrid in the U.S. Total sales of diesel vehicles last year in the U.S. was 549,000, vs. only 250,000 for hybrids. Diesel needs to win in the light-truck and passenger-car sector. That's the battleground.
Right now, California and New York refuse to register new diesel cars because they don't meet emission regulations. Will that change with the newer generation diesels? If clean-diesel cars fulfill their requirements, they have to give it a chance. The regulations that take effect in 2009 say diesel has to burn as clean as gasoline. California also has targets for carbon dioxide exhaust emissions -- and there's no better off-the-shelf solution for CO2 reduction than diesel. If Mercedes shows its clean-diesel technology is better at reducing carbon dioxide and they meet the requirements on particulates and nitrogen oxides, how can California ignore it?
How much more will clean-diesel cars cost than comparable gas models? In the premium segment, they will be nearly the same, since the margins for a premium car are so much greater. For smaller cars, the difference will be higher. In Europe, a Ford Focus diesel costs 5% to 7% more than the Focus with a gas engine. In the U.S., a small diesel will cost 5% to 10% more, including all the special exhaust equipment.
Will Americans really embrace diesel cars if the cost of U.S. diesel fuel remains slightly higher than that of gasoline? Europeans at least enjoy savings with diesel, which costs less at the pump than gasoline. The U.K. offers an interesting example, since diesel costs about 3% to 5% more than gasoline at the filling station. Britain was pretty anti-diesel up to five years ago. But diesel vehicles have grown rapidly to 40% of new car sales, up from about 15% in 2000.
In the past when diesel cars burned a dirtier fuel, consumers needed a big economic incentive to buy diesel. Now, with diesel that's as nice as gas, you don't need low diesel prices to sell cars. And if you get 25% to 35% better gas mileage, you're still gaining quite a lot of savings.
And will the oil companies play their part and offer enough clean diesel to the U.S. market? We have spoken with the oil companies, and they tell us they can supply enough low-sulfur diesel to meet U.S. demand.
There's the possibility of bio-diesel too. That's a win-win situation. Biodiesel is added directly into the diesel, and that can change the economic equation again. The emissions becomes even better, since bio fuels are carbon-neutral.
Will the Japanese also jump on the diesel bandwagon? Honda will come to the U.S., but it's not clear when. They have one of the best compact-diesel engines in the world. Toyota (TM) will offer both hybrid and diesel -- they don't see it as an either-or choice. They have to do both. They have to have diesel engines.
How hard will it be to overcome the negative image of diesel in U.S. car buyers' minds? Americans' consciousness for diesel cars hasn't yet been pierced. There's still a big marketing job to be done. But we think we've been a bit conservative in our forecast. A changing image and infrastructure for diesel could accelerate the trend.
When do you think diesel car sales will really take off in the U.S.? What will be the breakthrough year? It's still a bit premature, because the federal law that requires the oil companies to switch to clean diesel fuel at the filling stations only takes effect in September. We think diesel car sales will really take off in 2008.
Will GM (GM) and Ford (F) be caught flat-footed if clean diesel cars introduced by the Europeans and Japanese become popular? Ford and GM both have compact small diesel engines in their European subsidiaries and 6-liter diesel engines for heavy pickups. But they have nothing in the middle. It will take them three years to develop. Ford needs a diesel engine for its F-Series pickup to get big diesel volume.
Edmondson is a senior correspondent in BusinessWeek's Frankfurt bureau
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