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Gentlemen, Start Your Hybrids


Detroit's Big Three auto makers can be fierce rivals in the marketplace. But when it comes to holding the line on improvements in fuel efficiency, they've always been comrades-in-arms. All have battled tougher fuel-economy regulations. They have dragged their heels when it comes to developing gas-sipping technologies such as gasoline-electric hybrid cars.

Now Ford Motor Co., which has long espoused a green philosophy, is finally getting serious. Chairman and CEO William C. Ford Jr. drove the new 34-mile-per-gallon Escape sport-utility vehicle around Manhattan in mid-April to show off its performance. The company will start selling the hybrid Escape late this summer, and Ford says it will roll out two others by 2007. "We think the importance of fuel economy will only increase," Ford says. "We will push for more hybrids."

Ford's newfound resolve to deliver more hybrids has split the industry into two camps. Ford, Honda Motor, and Toyota Motor are betting that these vehicles -- which combine an electric motor with a conventional engine -- are the best way to save gas, clean up emissions, and meet government regulations. But the industry's three other big players -- General Motors, DaimlerChrysler, and Nissan Motor -- aren't so enamored. All plan limited hybrid rollouts but question whether there's sufficient demand to justify billion-dollar investments and higher sticker prices. More important, they're putting money into other technologies, such as hydrogen- or diesel-powered cars, that they think will prove a better alternative to today's gasoline-powered engines. Says GM Vice-Chairman Robert A. Lutz: "I frankly do not view hybrids as the future transportation solution."

Both sides are making calculated gambles. Toyota, Honda, and Ford are betting billions that hybrids will sell briskly enough to eventually turn a profit. They also think hybrids will help them acquire the knowhow needed to develop the industry's holy grail: the hydrogen-powered cars that many expect in a decade or two. "Progress [toward hydrogen] is slower than people realized," says James E. Press, executive vice-president and COO of Toyota Motor Sales USA. "We're in favor of the hybrid because it works today."

Opponents argue that hybrids are nothing more than a pricey interim solution. GM, for one, fears spending money better devoted to developing hydrogen fuel cells, while European manufacturers such as DaimlerChrysler, Volkswagen, and BMW figure the advantages of a new generation of cleaner diesel cars now sold in Europe will outweigh those of hybrids in the next several years. Later this year, Daimler will launch a diesel-electric hybrid version of its Dodge Ram pickup and a diesel Jeep Liberty and Mercedes E-class. But the diesel market will only take off if the U.S. cleans up the sulfur-laden fuel sold here and if consumers are prepared to cough up an extra $1000 to $3,000 for a diesel model. Longer-term, Daimler is counting on hydrogen fuel cells while BMW is betting on combustion engines that burn hydrogen; it has announced plans to launch a 745 sedan that uses both hydrogen and gasoline in four years.

For now, price is an issue. Hybrids cost $2,500 to $4,000 more than a conventional car. At current gas prices of $1.79 a gallon, a driver whose vehicle gets the national average of 24 miles per gallon would spend a little less than $1,200 a year to drive 15,000 miles. Hybrids get roughly 40 mpg, so that driver would save just $600 a year at the pump. Since Americans show no signs of dumping gas-guzzling SUVs and luxury cars, some execs argue there isn't enough demand given those added costs. "A lot of companies deliver eco-friendly cars that are not profitable," says Nissan CEO Carlos Ghosn. "Is it a good business? It is not."

BUILT-IN DEVELOPMENT COSTS

Don't tell Bill Ford. He claims that, even accounting for development costs, the Escape hybrid will make money as volumes pick up because the company is building a hybrid version of the conventional Escape. Since Ford sells 170,000 Escapes a year, development costs for all but the hybrid system are already paid for. Even so, Ford admits, "the early returns" for the hybrid Escape "are not great."

Toyota originally took a different tack. It built its pioneering Prius hybrid from scratch because it was easier than cramming new technology into an existing vehicle. But Toyota says the car, launched in the U.S. in 2000, only made money in its final model year, not counting development costs. To boost the profitability of the second-generation Prius, launched in 2003, Toyota designed it to share parts with other models. It is also loading the Prius with high-margin gadgets.

Now Toyota, like Ford, is making hybrids from existing vehicles. First will be the Lexus RX 400h, the 30-plus-mpg luxury SUV with V-8 power that goes on sale this fall. Toyota is eager to build hybrid SUVs so it can sell more big, powerful vehicles without running afoul of federal mileage standards. Toyota is counting on performance and lots of accessories to draw buyers in. And in this slice of the market, that might be enough. Says Eric Noble, president of the Car Lab, an auto-consulting firm in Santa Ana, Calif.: "Luxury buyers don't give a rip about paying another few thousand dollars."

The government could give hybrids a boost this year. A federal tax deduction for hybrid buyers -- $1,500 this year -- is being phased out, to a $500 tax break in 2006. But several bills before Congress would offer tax credits of $750 to $4,000 on hybrids. The better the fuel economy, the higher the credit. The provisions have bipartisan support and would probably pass if they come to a vote this year, says Kateri Callahan, president of the Alliance to Save Energy. That kind of credit would "move the market," Callahan says.

If hybrids take off, the carmakers that have been slow to market could find themselves late to the party. GM will put the system into its large SUVs and pickups, but not before 2007. Nissan's first hybrid won't arrive until 2006. Meanwhile, Ford, Toyota, and Honda will be selling more hybrids -- and they'll be well ahead of rivals in amortizing the heavy investment costs. By David Welch, with Kathleen Kerwin, in Detroit, Gail Edmonson in Frankfurt, and John Carey in Washington


Later, Baby
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