Hybrids or Diesels? Probably Both


By David Welch Auto shows come and go in a funny rhythm: Some years, they're all about glitzy new designs and cool concepts. Other years, the travails of one or two car companies, or upheaval in the auto industry, seem to overshadow everything. This year's Frankfurt Auto Show definitely falls in the second category.

Even as important cars like the redesigned Mercedes S Class flagship sedan, all-new Honda Civic, and Audi Q7 -- the brand's first SUV -- sit gleaming under bright lights (see slide show "Hot Wheels from Frankfurt"), all anyone wants to talk about at the show, which opens on Sept. 15, is what's the best way to get improved fuel economy.

Small wonder. U.S. gasoline prices have shot up over $3 a gallon since Hurricane Katrina devastated the Gulf Coast. Oil prices rose $2, to more than $64 a barrel, on Sept. 14. That has auto makers from Stuttgart to Detroit to Tokyo debating the merits and drawbacks of diesel engines and hybrid vehicles. Japanese and U.S. auto makers favor building more hybrids for the American car market. Europeans are pitching diesel.

THE COMING THING. The consensus? It might not be a bad idea for carmakers to go headlong into developing both technologies. European companies, which put diesel engines in half of the cars they sell, are getting on the hybrid bandwagon. And Japanese companies know they can't compete globally without diesel.

"The European market is different, because we have diesel and smaller cars," says GM-Europe Chairman Frederick "Fritz" Henderson, but he adds, "customers, as they learn more about them, will want hybrids."

BMW turned heads last week when the Munich-based carmaker struck a deal with GM (GM) and DaimlerChrysler (DCX) to jointly develop hybrid-electric cars. BMW has long sold diesels and has been working on a hydrogen-burning engine for years, but now the company admits it needs hybrids.

"We have to accept that for part of the market, especially congested areas, hybrids have an advantage," says BMW Chairman Helmut Panke. "Within five years, every manufacturer will have a hybrid," he predicts.

CROSSING OVER. Not to be outdone, fellow German carmaker Audi showed off its Q7 SUV with a hybrid concept version, though Audio has no plans to build it yet. Audi of America Executive Vice-President Johan de Nysschen said in Frankfurt that Audi, which is Volkswagen's upscale brand, is mulling three new diesels for the U.S. market, where the fuel is mostly an afterthought among car buyers. He's thinking about a 4-cylinder diesel in the A4 and a V-6 for the A6 sedan and the Q7. Said de Nysschen: "There's a very serious study under way."

And Toyota (TM), the industry's hybrid king, is adding diesel-powered Lexus cars to its European lineup. Even though Toyota is pushing hybrids, the company knows it will take time for Europeans to embrace the technology when they already have diesel cars packing cities in every major market. Right now, Toyota sells diesel engines in just 36% of its cars. "We have a long way to go," says Takis Athanasopoulos, executive vice-president of Toyota Motor Marketing Europe.

With gasoline prices so high, some carmakers are now betting that diesel will find a firmer toehold in the U.S. Volkswagen sells a diesel version of every model it offers in America. And Chrysler has launched a diesel-powered Jeep Liberty. Chrysler CEO Thomas LaSorda says he has sold 6,000 of them this year, with a goal of boosting production by 60% in the coming months.

INTERESTING WRINKLE. The differences stack up like this: Diesel cars add $1,000 to $3,000 to a vehicle's sticker price but boost fuel economy by 30% to 40%. They tend to run faster than most hybrids on the market. But today's diesels emit oxides of nitrogen -- or NOx, a component of smog -- and carcinogenic soot.

Hybrids are much cleaner. But they can add as much as $5,000 to a car's price, compared to a conventional gasoline-powered car. Hybrids like Toyota's Prius are rated at 55 miles per gallon, but in real-world driving haven't delivered much more than 45 mpg.

Engineers will need to boost fuel economy and driving speed to make these alternatives more appealing to the mass market. And here's the hybrid vs. diesel debate has an interesting wrinkle: Hybrids get their best fuel economy in city driving, while diesel gets the same improvement to efficiency whether the car is puttering along in traffic or cruising on the highway.

SMOKE SCREEN. When it comes to overall fuel economy for larger cars, diesel is probably the better option. The Mercedes E 320 diesel, for example, gets about 30 mpg, vs. 22 mpg for the gas-powered car. It's a big roomy sedan that runs faster than the gasoline version.

So why isn't America becoming a diesel nation? GM Vice-Chairman Robert Lutz is concerned that by 2008, clean-air regulations will make diesels very difficult to sell. Already, green regs in California, New York, and three other Northeast states are too stringent for anyone to sell today's diesels. Over the next three years, Lutz says, diesel carmakers will have to deploy special technology to scrub emissions of NOx and soot down to minimal levels.

The equipment costs several thousand dollars a car. Plus, the preferred technology for reducing NOx emissions has technical challenges. The system uses urea to filter out NOx. But the filtering only works if the car's owner keeps the tank close to full most of the time.

GOING MAINSTREAM? Besides, the U.S. Environmental Protection Agency has reservations about leaving clean air up to drivers' personal responsibility. "The technology is unproven," Lutz says. "By the time you get diesel particulate filters and meet [NOx regulations] you no longer have a cost advantage over hybrids," he adds.

That's why hybrids still have the edge in the U.S. -- and why Toyota hopes they'll gain ground in Europe, too. The Japanese carmaker has sold 20,000 Priuses in Europe through August, more than double sales during all of last year. "That means theehicle now has mainstream acceptance," says Toyota's Athanasopoulus.

A bit of an overstatement, perhaps. But hybrids are going to become a reality in Europe. And that will makes life tough on every car company. Not only will they have to keep trying to develop the latest, coolest models. Now they'll also have to factor in three different engine types to juggle when planning future cars. The winners will corner new market share. The losers will be left choking on exhaust.

With Gail Edmondson in Frankfurt

Welch is BusinessWeek's Detroit bureau chief


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