Global Economics

Honda's Little Hybrid that Might


Despite the slick ad campaigns and celebrity endorsements for hybrid cars, industry buzz about this auto segment has dampened considerably in recent months. Some complain the gas-and-electric combination engines that power hybrid versions of the Lexus RX400h sedan or Honda's (HMC) Accord are really designed to ramp up engine performance and don't deliver much in the way of fuel efficiency.

Others gripe that the hefty sticker price attached to most hybrid models -- they typically cost $3,000 to $4,000 more than straight gasoline engines -- means their financial efficiency is nothing to shout about either (see BW Online, 3/10/06, "High Price of Hybrids").

So industry speculation that Honda may soon introduce an affordable subcompact hybrid with killer fuel efficiency has people paying close attention. It could constitute a breakthrough launch in a car segment in need of a credibility boost with the car-buying public. The Japanese auto maker may come forward with a hybrid version of its popular Fit subcompact in 2007, according to a recent report by the Nihon Keizai Shimbun (Nikkei), Japan's leading business daily. Honda declined to comment, but industry analysts are taking the report seriously.

HYPER ECONOMY. For one thing, a gas-electric version of the Fit -- or Jazz as it's called in Europe -- would likely deliver big-time on fuel efficiency. The straight gasoline-burning versions of the Fit, which will be introduced in the U.S. in April, offer a 1.5-liter engine, while in other markets, 1.2-liter and 1.3-liter versions are available. The Nikkei reports Honda is planning an even smaller 1-liter engine version for the hybrid, which should deliver fuel economy similar to the Toyota (TM) Prius: average 55 miles per gallon.

"This will be Honda's hyper-fuel economy option," says Kurt Sanger, an analyst at Macquarie Securities in Tokyo. That would certainly mark a change from some recent additions to the hybrid pantheon. The new Lexus GS450h hybrid, which goes on sale later this year, will sprint from 0 to 60 mph in about 5 seconds, but will have about half the fuel efficiency of the Prius. Similarly, Honda's top-of-the-range hybrid Accord, which commands a $3,000 premium, averages about 28 miles per gallon.

Perhaps more important, the hybrid version of the Fit won't be a budget buster. The Nikkei reckons it will cost around $11,800 in Japan -- just $1,700 more than a conventional Fit. That makes it considerably cheaper than Honda's new, larger Civic hybrid. That model went on sale in the U.S. last year for $21,000. (see BW Online, 9/15/05, "Civic Minded at Honda")

BUILD IT SIMPLE. Not only should that guarantee sales, it would also introduce a new class of buyer to hybrids. "For people looking for a compact and reasonable Honda car, the Civic might have become a bit too big and high class, but a hybrid Fit would broaden the popularity of hybrid cars," figures Osamu Kobayashi, chief analyst covering autos at Standard & Poor's.

How can Honda afford to make a hybrid at a reasonable price? A major reason: its hybrid systems are already less complex than Toyota's and use fewer components. For example, Honda's hybrid system needs about half the batteries and has only one electric motor, compared to Toyota's two. While that means Toyota's hybrid systems have more powerful, analysts say Honda's are cheaper to produce and smaller -- just what's needed for a subcompact.

The Nikkei adds that Honda is now planning to reduce price differences between gasoline and hybrids further by developing a smaller motor and battery. Still, Honda has a long way to go before it will grow into a real threat to Toyota in the hybrid segment.

TOYOTA'S FIELD. Indeed, until recently the company didn't seem that serious about trying. In January, Honda CEO Takeo Fukui appeared to play down the potential for hybrids. "There are better ways to achieve fuel efficiency than hybrids, which are really only effective in city driving with lots of stop and go," Fukui told BusinessWeek (see BW Online, 1/10/06, "Invasion of the Hybrids").

And Toyota's hybrid lead is daunting. Last year, Toyota sold 235,000 hybrids -- almost five times more than Honda. Plus, Toyota's $10 billion annual net profits mean it can invest more heavily in hybrid technology than smaller rival Honda. Analysts add that Toyota's close relationship with suppliers also gives it an edge.

TOP RANK. As if that weren't enough, other auto makers are also gearing up their hybrid offerings. General Motors (GM) will launch its first hybrid in 2007, while Ford (F) will have four hybrids on sale by 2008. Even Nissan (NSANY), whose CEO Carlos Ghosn is at best agnostic on hybrids, is launching a gas-electric version of the Altima later this year. Small surprise then, that J.D. Power estimates annual hybrid sales will grow 268% from 2005 levels, to 780,000 by 2012.

If the Fit does appear in hybrid form, Honda will at the very least add to its long-held reputation as one of the leading producers of fuel-sipping autos. "Honda doesn't get the acclaim and the free press that Toyota enjoys, but look at the fuel economy ranking tables as many years back as you want, and it's always at the top," says Macquarie's Sanger. This should convince the hybrid doubters, but it might take a little longer.


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