Make Vrooom For The Hybrids

By Daren Fonda

One of the bewildering questions in the auto industry is how high gas prices would have to climb before Americans dump their gas guzzlers for more fuel-efficient cars. The issue comes to a head every time prices spike at the pump, whether because of turmoil in the Middle East, a lack of refinery capacity or old-fashioned opportunism in anticipation of a surge in demand. That's the scene now, with oil futures hitting record levels and gas prices averaging nearly $2 per gal. nationwide just as the summer driving season kicks off. If you just spent $75 to fill up your Chevy Suburban, you might even be one of those folks swearing they're gonna dump the hog for more of a fuel sipper.

If so, you're in luck. A fleet of fuel-efficient hybrid and clean-diesel models is arriving at dealerships over the next few months--and they aren't your typical tin-box green machines. Automakers are delivering what seemed unthinkable just a few years ago--midsize cars and SUVs with the horsepower, performance and size that Americans expect, plus improved fuel economy. Hybrid cars are propelled by a combination of a gas engine and an electric motor--a complicated technology that still draws blank stares, even though hybrids have been on the market for nearly five years. The latest versions, however, might be summed up by Ford's motto for its first hybrid SUV, an Escape, due in August: "No Compromise" (see review).

Ford's rivals are sending similar signals. Chrysler is coming out with a diesel Jeep Liberty this summer, equipped with a four-cylinder 2.8-liter engine that the company claims will perform like a V6, with a 25% improvement in fuel economy (it will be sold in only 45 states because of antismog restrictions on diesel passenger vehicles). Lexus plans to deliver a hybrid version of its luxury RX330 SUV, the 400h, this fall. And Honda says by year's end it will sell a hybrid edition of its V6 Accord that will outperform the standard version in fuel economy and pickup. "We want to sell it on the basis of advanced technology and performance," says Honda spokesman Andy Boyd. That's a novel pitch for a hybrid. Only two years ago, such cars were small and underpowered and, with their oddball designs, seemed destined to appeal mainly to environmentalists, technology buffs and Hollywood stars, who won p.r. points for driving them.

Will hybrids go mainstream? Detroit economists are skeptical, arguing that it would take $4-per-gal. gas to significantly shift new-car buyers toward hybrids or other more fuel-efficient cars. The new hybrids will probably be priced a few thousand dollars above their conventional cousins; about $2,500 is typical now. (The Federal Government is offering a $1,500 tax deduction this year.) It's unclear whether consumers will want to spend the extra bucks if the fuel savings turn out to be minimal. But there's reason to believe that gas prices may not fall after the traditional summer spike, and oil-industry experts say we could be in for permanently higher prices if a surge in demand, notably from India's and China's hot economies, outstrips supplies.

At the moment, $2-per-gal. gas has sent the sale of hybrids zooming like a roadster. April was Honda's best month for its hybrid Civic (3,341 sold), and that followed a record-setting March. Toyota has a 20,000-order backlog for its critically acclaimed Prius and predicts a 50% sales increase over last year, to 50,000 units. All told, hybrid sales are expected to more than double this year, to 100,000. That's a tiny fraction of the U.S. market for new-vehicle sales, forecast to be around 17 million this year. But it's still good business. Some Honda and Toyota dealers say customers are paying several thousand dollars more than the sticker price for a hybrid now. "If we could get all we could sell, it would be our best-selling model," says Steve Curtis, a sales manager at Landers Toyota in Little Rock, Ark. A typical scene at a dealership: folks come in, see the Prius, notice its EPA fuel-economy rating, take it for a spin and get hooked. But in reality, drivers rarely achieve the advertised 55 m.p.g. in combined city-highway driving; 43 m.p.g. is more like it. (The discrepancy results from EPA testing methods.) So far, that doesn't seem to be crimping demand.

At General Motors, company executives are once again deflecting charges that the firm is missing out on a hot new market and will have to play catch-up. GM has for years been publicly dismissive of hybrid cars. In January, vice chairman Bob Lutz described hybrids as "an interesting curiosity" and said, "We will make some," but added that they didn't make much sense with gasoline at $1.50 per gal. Gas prices are up 30% since then, but GM officials insist their strategy has not changed. The focus is still on delivering hybrid versions of SUVs and pickups while devoting the bulk of GM's future-power-train research into a commercially viable hydrogen-fuel-cell vehicle, which the company says is on track for 2010. (Ford was slow, too, having to license some technology from Toyota for its hybrid Escape.)

GM executives are now playing up their hybrid efforts and racing to retool assembly lines in order to crank out up to 1 million hybrids by 2007. The company delivered a mild-hybrid version of its full-size Chevy Silverado pickup to Miami-Dade County's government fleet last month, and plans to make the vehicles available to consumers this fall. Over the next few weeks, GM says, it will deliver 234 hybrid buses to the city of Seattle. GM executive Larry Burns claims that those buses will provide the fuel savings of 8,000 hybrid cars on the road.

Automakers have strong incentives not to ramp up hybrid production too quickly. Hybrids are technologically complex and costly and require the retraining of service technicians. Toyota and Honda insist they make money from each sale, but those profits are meager compared with what they earn from conventional cars and light trucks, especially their luxury brands. The Big Three--Ford, GM and Chrysler--are even more reliant on SUVs and big pickups for profits, and if hybrids eat into sales of conventional models, the industry would be maiming a critical cash cow. So while auto executives talk of a greener future of hybrids and hydrogen-fuel-cell vehicles, they continue luring customers to gas guzzlers loaded with powerful engines, luxury amenities and gadgetry and moving them off the lot with generous incentives.

That's what Wall Street wants to see (aside from those rebates). But the Street is rumbling that automakers may be saddled with a glut of heavy metal at the precise moment that consumers want more economical cars. "I get a sense that nobody is panicking about this, and that makes me a little nervous," says Steve Girsky, senior automotive analyst at Morgan Stanley. It has happened before. In the 1970s, when gas prices soared, the Big Three were caught flat-footed with large, fuel-hungry cars, allowing Honda, Nissan and Toyota to swoop in and grab market share. If it happens again, the pain will be shared by Japanese manufacturers. Toyota is planning to ramp up production of its full-size pickup, the Tundra, with a plant under construction in San Antonio, Texas. And Nissan just bet on a line of full-size SUVs and pickups being built at a new factory in Canton, Miss.

The latest sales trends don't augur well for such vehicles. Sales of some full-size SUVs, such as the Ford Excursion and Expedition and Lincoln Navigator, fell during the first four months of the year, with a sharp drop in April, while sales of GM's mighty Hummer H2 tanked 25%. Smaller SUVs and crossover models are gaining momentum. "The mix is shifting down, and that's something we haven't seen in quite a while," Girsky says. GM plans to temporarily halt assembly lines at an SUV plant near Oklahoma City, Okla., this week--one of the few times that rising SUV inventories have triggered such a closure. Nonetheless, GM officials insist the company is equipped to handle a spike in demand for more fuel-efficient vehicles. GM aims to build its hybrids on the same assembly lines as its standard light trucks, giving it more flexibility to change the production mix as buying patterns shift.

Hybrids have plenty of detractors. Critics point out that after paying the extra cash for one, say a $2,500 premium for a hybrid Civic, it will take about a decade to recoup that amount at the pump (at 15,000 miles a year and with gas at $2 per gal.). They claim that if fuel economy becomes an even more important consideration, there are already plenty of fuel-efficient cars and smaller SUVs that are less complex and easier to fix than hybrids.

What can't easily be discounted is the coolness factor. As hybrids with the looks, luxury and power of conventional cars emerge, consumers may snap them up. Ryan Brown, 25, a computer consultant from Arlington, Va., just dumped his hot car--an Audi TT roadster--for a Prius. He fell in love with the Prius' technology, peppiness and design. But he is having one problem. The Prius runs silently on electric power at low speeds, and that can be spooky. "Driving it in a parking garage, people don't hear me coming. You don't want to honk, but folks are shocked." --With reporting by Steve Barnes/Little Rock and Joseph R. Szczesny/Detroit

With reporting by Steve Barnes/Little Rock and Joseph R. Szczesny/Detroit