The Trouble with Hybrids

Consumers' passion for hybrid-engine cars may be tested as a wave of more attractively priced diesel-powered models hits showrooms

by Ian Rowley

It has been a trying week for those who think hybrid-engine cars are destined to be a mass-market phenomenon. First, on June 5, Honda (HMC) confirmed that the next generation of its Accord sedan won't feature a hybrid option. The current Accord hybrid, which went on sale in 2004, has sold only 25,000 units and just 6,100 last year. "Americans didn't accept the Accord hybrid," a spokesman for Honda told reporters.

Hybrid market leader Toyota (TM) continues to dominate the field and recently announced that it has sold more than 1 million gas-electric cars since first introducing the Prius in Japan in 1997. However, Toyota earlier this year had to start offering sales incentives on the Prius for the first time ever, to boost sales of the second-generation model (see BusinessWeek.com, 3/19/07, "Why Hybrids Are Such A Hard Sell").

On top of that, Britain's advertising watchdog earlier this month ordered to Toyota to pull ads for its hybrids for the second time in two weeks, ruling that some of its environmental claims were misleading. Nissan faces no such problems, but that's because it only recently launched its first hybrid car, a version of the Altima sedan that uses Toyota technology, and is now trying to catch up with its Japanese rivals.

The Diesel Specter

Of course, the setbacks don't suggest it's the end of the road for hybrids—it certainly isn't for hybrid pioneers like Toyota and Honda. But it's clear that the difficulties that automakers face in marketing their hybrid engines are still vast, despite the growing awareness of environmental issues.

What's more, with the specter of "clean" diesels looming on the horizon, hybrids may be an even harder sell in future. "Diesel's cost burden is lower than that of hybrids with similar fuel economy—even with the 'clean' technologies needed to meet tough U.S. emissions regulations," UBS (UBS) noted in a May 24 report.

That's one reason Honda is tweaking its strategy and dropping the Accord. It now plans to focus on hybrids for smaller models, and diesels for larger models, including the next-gen Accords, CR-V crossover sport-utility vehicles, and Odyssey minivans, where the cost benefit is most marked. Honda will keep the hybrid Civic and introduce an even smaller subcompact hybrid in 2009.

Americans Are Watching Fuel Economy

Still, it's clear Honda chose the wrong strategy with the Accord hybrid. The automaker gambled that U.S. consumers would prefer more power and a little more efficiency than go flat out for higher fuel economy. That meant the Accord hybrid had good performance, producing more horsepower and torque than the V6 Accord, but in miles-per-gallon terms it wasn't a match for other hybrids.

The Accord hybrid delivered just 27 miles per gallon, compared with 42 for the smaller Civic hybrid and 46 for Toyota's Prius. "Honda thought Americans weren't willing to sacrifice performance for economy, but the reality is Toyota found a niche that will," says Kurt Sanger, an analyst at Macquarie Securities in Tokyo.

Sales of the Accord may also have suffered because it's not a well-known "green brand" like the Prius. While it's clear everyone driving a Prius has impeccable environmental credentials, the Accord hybrid looks much like other Accords but costs $3,600 extra.

Honda must now hope it can do a better job of marketing its diesels. "Even if Honda may be right technologically, it may not be right commercially," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "It will take a while for consumers to realize the performance of new diesel engines."