Lifestyle

Why Hybrids Are Such a Hard Sell


Despite their growing popularity, they still haven't crossed over to the mainstream. Many buyers simply aren't willing to pay the premium

Given all the buzz about hybrids, not to mention the greening of the citizenry, you'd think they would be easy to sell. They're not. After growing nicely through much of 2006, hybrid sales began to slow early this year. The gasoline-electric vehicles now make up 1.8% of all vehicle sales, says Edmunds.com, down from a peak of 2.1% in October.

One major reason is that hybrids typically cost $3,000-plus more than conventional cars. As a result, automakers in recent weeks have been slashing prices. Less than a year ago, Toyota dealers got full price for the Prius. Now you can immediately lease one for a slim $219 a month. Ford Motor Co. (F) is also cutting the price of the latest version of its Escape hybrid. In fact, in February, carmakers spent an average of $1,500 on incentives per hybrid, says Edmunds—triple what they laid out in January.

The discounting helped the likes of Toyota Motor Corp. (TM) and Ford post decent sales in February, but, as the Big Three know all too well, ladling out incentives is no way to make decent profits. Making matters worse, just as hybrid sales start slowing, automakers are gearing up to launch a slew of new models. At least 30 hybrids will hit the market in the next 20 months. That will bring the number to more than 40, up from 12 today, says Boston research firm Global Insight. "Now that the automakers have tapped the early adopters, they're going after the mass market," says Jesse Toprak, an Edmunds analyst. "For consumers, the answer is often no."

Tailing Off

A few years ago, automakers decided to put hybrid technology in regular models. The hope was to move beyond the geek chic of the Prius and win over everyone else. Hybrid would be another option, like, say, navigation. If enough people bought hybrids, carmakers figured, they would achieve sufficient economies of scale to eliminate the big premium over conventional models.

That hasn't happened. And some models have suffered badly. Honda Motor Co. (HMC) sold 70% fewer hybrid Accords in 2006; Toyota has sold 24% fewer Lexus RX 400h sport-utility vehicles so far this year. The fuel savings are simply too puny to offset the hybrid premium. With gas at $2.50 a gallon, it would take 10 years to recoup the extra $3,000 cost of the Accord hybrid.

Honda and Toyota are trying to have it both ways: putting the technology in regular models while coming up with new hybrid-only cars that, like the Prius, confer instant über-greenness. Lexus is considering one, and Honda plans a subcompact.

Getting prices down—and not by discounting—is the long-term solution. That means finding a way to make the cars more cheaply. Batteries account for about half the hybrid premium. But cheaper lithium ion cells won't appear for several years. Cutting costs further requires achieving those elusive economies of scale, which means building and selling more hybrids. That's Toyota's strategy; it hopes to sell 160,000 Priuses this year, up from 107,000 in 2006.

Pulling that off will require deft marketing, especially since the government this fall will start requiring a more accurate measure of fuel economy. The Prius' claimed 55 mpg will likely drop to a less compelling 46 mpg. Both Toyota and Ford are planning major advertising campaigns. And discounts on all hybrids are here to stay for a while.

Look closely and you can see the automakers hedging their bets. Toyota is pushing into diesel. Ditto for Honda, which may not build a new hybrid Accord. Nissan (NSANY) is waiting to see how its hybrid Altima does before putting the technology into other vehicles. Honda's planning chief for North America, Dan Bonawitz, likely speaks for most of his counterparts when he says: "There won't be a giant surge in hybrid sales unless there's an oil crisis."

Welch is BusinessWeek's Detroit bureau chief.

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