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What's Driving Hybrid Cars

By Thane Peterson Toyota rocked the auto industry when reports surfaced out of Japan on July 5 that it plans to double worldwide production of its popular hybrid cars next year, to 500,000 units. A Toyota (TM) spokeswoman dismissed the report in the respected Japanese newspaper Asahi Shimbun as "speculation," but it certainly has currency in the auto industry.

Already, U.S. sales of Toyota's made-in-Japan Prius sedans, priced at around $23,000, are expected to double this year from last, to 100,000 units -- in many parts of the country dealers have waiting lists of customers clamoring to buy the car. And consumers in the U.S., the biggest market for hybrids, are just as eager to get their hands on Toyota's new models, such as hybrid versions of the Highlander and Lexus RX 400 sport-utility vehicles (out this year) and the Camry sedan (due out this fall and to be produced at a plant in Kentucky).

But if Toyota is dramatically boosting its production of hybrids again next year, it raises some big issues for consumers, to say nothing of competitors such as beleaguered General Motors (GM) and Ford (F), both of which are lagging behind in hybrids. Here are some of them:

Q: Is Toyota set to dominate the hybrid market?

A: Yes, at least in the near term. J.D. Power & Associates projects that 220,000 hybrid cars, SUVs, and pickup trucks will be sold in the U.S. this year, with Toyota accounting for 63.3% of the market, vs. 25% for Honda (with its Insight model and hybrid versions of the Civic and Accord sedans), and 9.4% for Ford (which has a hybrid version of its Escape SUV).

G.M., DaimlerChrysler (DCX), Nissan, Hyundai, and Ford all have big plans to come out with new hybrid models in the next two or three years. But if Toyota doubles its production next year, it will probably continue to dominate hybrid sales for the foreseeable future.

Q: Does Toyota's bold strategy have risks?

A: Of course. Hybrid sales are soaring, but they'll only account for only 0.5% of the U.S. passenger-car and light-truck market this year, rising to an estimated 3.5% by 2012, J.D. Power figures.

Even if sales of fuel-efficient vehicles soar, hybrids may not be the main beneficiary. European carmakers, for instance, are betting heavily on diesel-powered cars, which account for about half the European market. J.D. Power estimates that diesel sales in the U.S. will rise from 3% of the market this year to 7.5% by 2012.

And hybrids are expensive, partly because they require both electric and gasoline power systems. Indeed, Lindsay Brooke, a senior analyst at Farmington (Mich.)-based auto industry forecaster CSM Worldwide, figures gas prices need to top $3 per gallon for hybrids to really take off. "If fuel prices don't dramatically rise, Toyota will have to commit more resources to advertising and marketing these things," he predicts.

Q: How much more do hybridsost?

A: J.D. Power says so far this year, the hybrid version of the Toyota Camry has been selling for $23,510, vs. $20,575 for a conventional Camry. The hybrid Honda Civic has been going for $20,080, $4,270 more than a conventional Civic. And the hybrid Honda Accord for $30,786 -- $9,138 more than a conventional Accord. Ford's hybrid Ford Escape costs $30,178, $8,530 more than a conventional model. Of course, hybrid prices are likely to come down as sales rise and competition heats up.

Q: Won't savings on gasoline make up for the higher price?

A: Not necessarily, unless you own the hybrid for eight years or more and do a lot of in-town driving., an automotive Web site, estimates that taking into account the purchase price plus total cost of fueling, insuring, and maintaining the vehicle, owning a hybrid Escape will cost $3,429 more over five years than conventionally powered all-wheel drive model, a hybrid Accord $3,816 more than a V-6 model, and a Prius $5,283 more than a conventional Toyota Corrola LE.

Q: How can that be if gas prices are rising and hybrids get 60 mpg?

A: Obviously, hybrids will become a lot more attractive if gas prices continue to soar. But keep in mind that their mileage isn't as high as many people think. Because of politicking in Congress, Environmental Protection Agency mileage estimates overstate the fuel-efficiency of all cars and trucks, including hybrids.

Toyota figures that the second-generation Prius, the model on sale now, will average about 45 miles per gallon, 18% less than the government's estimate of 55 mpg. And some of the newer, peppy hybrids coming out don't do nearly as well. For instance, the EPA rates the Lexus RX 400 at 31 mpg in the city and 27 mpg on the highway (because hybrids shut off when you're idling in stop-and-start driving and recover energy that's normally lost in braking, they tend to get better mileage in the city than on the highway, the reverse of conventional cars).

Q: So, why do people buy them?

A: Surveys show that most buyers tend to be affluent and want to do their part in cleaning up the environment and reducing the nation's dependence on foreign oil, says Anthony Pratt, J.D. Power's manager of global powertrain forecasting.

Toyota and Honda hybrids are also very reliable and well-made. This year, the hybrid Accord is Consumer Reports' top pick among all family sedans, and the Prius had the highest owner-satisfaction rating of any model.

Plus, hybrids are quite chic. The Prius is a status symbol among Hollywood movie stars. Dustin Hoffman was one of the first buyers of the Lexus RX 400. Larry David drives a Prius in his HBO comedy hit Curb Your Enthusiasm.

Q: Why don't people just go out and buy small gas-powered cars like Toyota's Echo, which gets more than 35 mpg and only costs around $11,000?

A: Most Americans still prefer larger vehicles, partly because they tend to be safer. They also want their cars to jump when they punch the gas. Mike Gauthier, director of corporate technology in North America for Siemens VDO automotive, an arm of the German company, calculates that since 1986, the average oomph of U.S. passenger-car engines has jumped 67%, to 184 horsepower.

So, American hybrids will probably have to be relatively big and powerful to sell -- unless gas prices really spike. Peterson is a contributing correspondent for BusinessWeek Online

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