Americans may hate having to shell out $2 or more per gallon at the gas pump, but they show no sign of wanting to give up their gas-guzzling sport-utility vehicles, which now account for one-fifth of all light vehicle sales. Last year, even in the midst of rising gas prices, SUV sales were up 9%, to 3.52 million units, in an overall car and truck market that contracted by 7%.
Detroit's solution to this dilemma: Rather than shift to making smaller, more fuel-efficient cars, like they did during the 1970s' energy crisis, U.S. auto makers plan to offer more fuel-efficient trucks and SUVs. Specifically, they're developing hybrid-electric versions of the gas guzzlers, with better, if still not great, fuel efficiency.
Hybrid electric vehicles, or HEVs, use a fuel-efficient gasoline engine, assisted by an electric motor. The motor and engine work together to power the car more efficiently than an internal combustion engine can alone -- and they don't have the limited driving range of all-electric cars.
OVERNIGHT CHARGE. Just two HEVs are on the market now -- both small cars offered by Japanese companies. The Honda Insight, a two-seater, boasts fuel economy of 61 miles per gallon in the city and 68 mpg on the highway, while Toyota's Prius is a four-seater that gets 52 mpg around town and 45 on the highway (the Prius uses the car's braking action to recharge its batteries, resulting in improved mileage in city driving vs. on the highway).
Until recently, Detroit figured alternative technologies might sell better than hybrids. General Motors (GM) introduced its EV1 all-electric car in 1999. But car buyers didn't bite, largely because its maximum driving range between recharges is about 95 miles -- and a recharge takes up to six hours. GM has discontinued the model.
This time around, Detroit wants to focus on its hot sellers, and that means trucks. By 2003, Ford Motor (F) is expected to roll out a hybrid-electric version of its Escape compact SUV to be followed by a hybrid offshoot of its popular Explorer. DaimlerChrysler (DCX) plans to introduce a hybrid Dodge Durango in 2003. And by 2004, GM is expected to make hybrid versions of its popular GMC Sierra and Chevrolet Silverado trucks. All three carmakers expect the hybrid SUVs to deliver 15% to 20% better mileage than equivalent conventional models.
GIVE 'EM HORSES. Hybrid cars also are being planned, but for now, only SUVs and trucks are scheduled for production. Trouble is, hybrid cars have been a tough sell. "We all say how much we want to keep the environment clean and we want to have environmentally friendly vehicles, but when it comes down to it, most Americans want horses under the hood," says Richard Hilgert, an analyst who covers the automotive industry for Fahnestock & Co.
Neither Honda nor Toyota are producing their HEV models profitably, and sales have been less than stellar. Honda has sold only around 5,400 Insights since the model was introduced in December, 1999. Toyota's Prius has fared somewhat better. Since its launched last July, 10,300 units have been sold. Still, Honda remains optimistic: "Our goal with the Insight is to make a profit within a couple of years," says spokesman Andy Boyd.
Some analysts think the key to selling more HEVs could be government tax breaks to offset their hefty price -- $2,000 to $4,000 more than a similarly equipped conventional models. Honda and other manufacturers have pushed for federal legislation to provide tax abatements of up to $4,000 for buyers of hybrid and other high-efficiency vehicles.
JUICY REBATE. Such legislation would have to be carefully structured, however, as Arizona learned from its experiment with tax abatements for fuel-efficient cars. The Grand Canyon State's program was badly flawed: Motorists would buy a gas-powered car or truck and spend $6,000 to $7,000 to convert the engine to run on alternative fuels, such as methanol, to become eligible for the rebate. But under the terms of the program, on a $40,000 vehicle, the buyer could receive roughly $18,000 to $20,000 back from the state -- three times what it cost to do the conversion.
And if the government decides to tighten gas-mileage standards, says Glenn Chin, equity analyst for Lehman Brothers, carmakers would become more likely to embrace HEVs. "There's all this talk about freezing or unfreezing the corporate average fuel-economy [CAFE] standards," he says. "The Big Three wouldn't look good if all they were making were trucks."
Passed by Congress in 1975, CAFE standards set milage requirements for cars and light trucks. An auto maker's entire lineup of passenger cars is required to have an average fuel economy of 27.5 mpg. For SUVs and other light trucks, average must be 20.7 mpg. In the mid-1990s, Congress froze CAFE standards at the levels set in the 1970s. But environmentalists are lobbying to have them raised (see BW Online, 5/15/01, "Put Trucks on a Tighter CAFE Diet").
SYNCHRONICITY? Detroit hasn't precluded other fuel-saving technologies. GM says it's close to unveiling a working model of a fuel-cell-powered vehicle, in which hydrogen and oxygen are combined to create electricity, which then powers a motor. These vehicles, which have virtually no emissions, could be on the market by 2005, according to the carmakers. But independent experts don't expect them in the showroom for at least a decade.
That leaves hybrid vehicles as the best consumer option for dramatically improving fuel efficiency. "A lot of people are trying hard [to bring hybrid vehicles to market] because they think the planets are lining up with regard to the cost of gasoline and the cost of owning and operating [an HEV]," says Terry Penney, Technology Manager for Advanced Vehicles at the National Renewable Energy Laboratory, an arm of the Energy Dept.
The difference is that until recently, owning a hybrid meant owning a small car. If prices stay high for the next year or so, as is highly likely, hybrids will be hitting the market in a lot more shapes and sizes -- especially extra large. By Alan Hughes in New York