Are Hybrid Sales Running Out of Gas?

High fuel prices created a buzz around the efficient vehicles. But as consumers do the math, the cars are becoming a tougher sell

Every car company hopes for hit models that are in high demand, and long windows of time in which it doesn't have to offer sales incentives. Hybrid cars and SUVs have been among that exclusive club. But auto makers investing in the vehicles are seeing some cracks in consumer demand as more people question hybrids' financial payback.

Seventeen hybrid-electric models will be available in the U.S. by the end of this year, and J.D. Power has forecasted that sales will reach 260,000 units, or 1.5% of all auto sales. But if hybrid sales hit that level, it won't be without a lot more marketing and sales incentives than they have received so far.

HYBRID HYPE.

In recent weeks, Ford Motor (F) has begun offering 0% financing on the Escape Hybrid in the key markets of California and Washington, D.C. Meanwhile, Toyota (TM) has been offering national sales incentives such as lease deals, discount financing, and cash to move its Highlander SUV hybrid. The Toyota Prius, which has virtually defined the hybrid market, remains the strongest seller and incentive-free.

Honda has also struggled in this area. The Accord hybrid has not sold well, and sales of the Honda Civic hybrid have been up and down with gas prices over the last few months. As a result, some auto makers are looking anew at how they market hybrids, how they style and package the vehicles, and even how they train dealers to sell them.

What's the problem? At least part of the issue is regional. California is not a strong market for domestic brands, including Ford. And in Virginia, the HOV-lane privileges for hybrid vehicles -- which helped sell the vehicles to those commuting from the Commonwealth into the nation's capital -- are set to expire in July. In California, neither the Escape nor the Highlander hybrid are eligible for HOV lanes with a sole occupant.

GREEN MACHINES?

Ford spokesman Dan Bedore also points out that the Escape hybrid suffers from comparisons to the gas-only version. Car buyers are looking at the price of a standard gas-only Escape, which carries more than $2,000 in discounts, and comparing that to an Escape hybrid, which has no incentives and costs at least $3,500 more. "That makes the price walk for the hybrid a difficult proposition for a lot of people," says Bedore.

The Toyota Highlander, meanwhile, sells for about $9,000 more than the average transaction price of the gas-only version of the SUV. According to Edmunds.com, the average incentive on a Highlander hybrid is $1,100.

Ford hopes a high-profile marketing campaign for the Escape hybrid will help move the SUVs off dealer lots faster. The auto maker recently launched splashy TV and print ads for the Hybrid Escape featuring Kermit the Frog. It will spend an estimated $15 million-plus on the effort, and it even ran one of the spots during the Super Bowl (see BW Online, 1/9/06, "Ford's Reflex Features New Solar System ).

ESCAPE PLAN.

Last year, Ford barely advertised the Escape hybrid, rationalizing that since it was only building 20,000 units, it could sell its inventory without it. "That was a mistake," CEO Bill Ford said recently. "We should have been advertising it to let people know the leadership we were taking with hybrids and SUVs." (See BW Online, 1/12/06, "Bill Ford on Turning the Corner

.")

This year, Escape hybrid sales are below expectations so far. Ford reported it only sold about 2,000 of them in January and February combined, well below its capacity and goal on a monthly basis.

By 2010, Ford plans to produce as many as 250,000 hybrids a year, including versions of the Ford Fusion and Mercury Milan. And a more aggressive hybrid rollout than either GM (GM) and Chrysler ( 2 Next Page

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