The Eco Cars

As Detroit stalls, Japan drives in with appealing new hybrid models

It was a scene that could have served as a heartwarming advertisement for clean-air consciousness. A nervous young customer picks up her new car: a sleek, 65-mile-per-gallon, ultra-low-emission Honda Insight. As she glides away from the dealership, a throng of onlookers gathers to wish her well and applaud her noble intentions.

But Jennie Sharf, 29, is the first to admit that helping out the environment was far down the list when she made the big decision to plunk down 20 grand for her new wheels. Sure, as one of the first generation of so-called hybrid cars powered by both a tiny gasoline engine and an electric motor, the Insight uses technology that promises to help clean the environment and revolutionize the auto industry. Sharf's motivation, however, was far less lofty: She loves the look and feel of the curvy car. As for helping the environment, "that's a bonus, but it takes a backseat to the coolness factor," says Sharf, a wireless-phone designer. "I was looking for something that I could find in a parking lot without having a Styrofoam ball on the antenna."

Cool and environmentally correct? Now, consumers can have both. With Japanese auto makers leading the push, the auto industry has launched its first alternative-fuel vehicles to the mass market. The timing couldn't be better. As gas prices surge past $2 per gallon in some parts of the U.S., the Insight, and Toyota Motor Corp.'s $20,000, five-passenger Prius--making its American debut this month--promise to save about $500 a year on fuel, compared with, say, a Honda Civic. Plus, the hybrids' advanced engines easily beat stringent emissions ratings in smog-conscious California. An Insight, for example, generates roughly half the carbon dioxide and other greenhouse gases of small cars such as the Toyota Corolla or Ford Focus.

PLAYING CATCH-UP. In the next couple of years, the Japanese auto makers plan to kick their eco-car effort into high gear by selling adaptations of current-model cars and sport-utility vehicles equipped with hybrid power trains. Honda Motor Co. plans to sell a hybrid Civic in Japan next year, followed by a U.S. launch probably in 2002. Toyota is considering a minivan and an SUV within three years.

Where's Detroit? Playing catch-up again. For years, U.S. car executives fought environmentalists' efforts to toughen federal gas-mileage rules and resisted California regulators' attempts to mandate cleaner cars. Now, thanks to their increasing tilt toward big SUVs and pickup trucks, U.S. manufacturers are being squeezed by regulations and by competitors who have found a way to sell environmentalism. After borrowing from future allowances to meet federal fuel-economy standards, Ford Motor Co. now must boost mileage in its fleet if it's to avoid millions of dollars in fines. That's a big reason why Ford recently trumpeted plans to boost by 25% the fuel economy of its SUVs, mostly by improving the efficiency of their gas engines and making new models lighter and more aerodynamic. "By volunteering to get ahead of potential legislation, we've done more for the environment than having 600,000 hybrid electric vehicles on the road every year," says Ford CEO Jacques A. Nasser.

HYBRID PICKUPS. Still, Ford, GM, and DaimlerChrysler are all scrambling to match Honda and Toyota. In 2003, Ford plans to introduce a gas-and-electric version of its new Escape SUV that would get 40 mpg, nearly twice the mileage of the gas-powered model. A Ford insider says the company hopes eventually to sell as many as 20,000 of the hybrid version annually. General Motors Corp., after devoting much of its clean-car efforts to its EV1 electric car, just announced it will sell a 20-mpg hybrid version of its hot-selling Chevrolet Silverado and GMC Sierra pickup trucks in 2004. And DaimlerChrysler is working on a hybrid Durango SUV.

American car executives mostly view hybrids as an interim technology that will capture only a small slice of the overall car market. GM says gas engines can still be squeezed for a 30% boost in fuel efficiency. Executives point out that Honda and Toyota lose money on each Insight or Prius they sell. Detroit is betting that by the time its hybrids arrive, the technology will be more popular and Washington will push it with tax incentives. DaimlerChrysler says it could sell 80,000 hybrid Durangos if the government turbo-charges the market with tax incentives.

That seems a distant prospect in today's political climate. Meanwhile, critics say, the popularity of the Honda and Toyota cars makes it seem that U.S. auto makers are fumbling a huge opportunity. "Detroit has missed the American auto market in the past, and there's a good possibility they can miss it on this one," says Robert F. Bennett (R-Utah), chair of the Senate high-technology task force. Adds Bennett, who recently bought an Insight: "I would much have preferred to buy an American car if there'd been one."

Hybrids may turn out to be much more than just a stop-gap solution. Ultimately, the goal is to make cars that run on fuel cells requiring not one drop of gas, only hydrogen. But carmakers are learning valuable lessons with hybrid cars' electric systems, which will likely find their way into those next-generation vehicles. "Any company that doesn't have a hybrid misses out on learning the technology as well as consumer reaction," says Firoz Rasul, CEO and president of Ballard Power Systems Inc., a Burnaby, B.C., company that's working on fuel cells with Ford and DaimlerChrysler.

The first thing consumers find out when they test-drive the new eco-cars is that they're not overpriced experiments, as are the high-maintenance electric cars the industry has sold in tiny numbers over the past five years. The humbling experience with electrics taught car marketers that if they want to sell alternative-fuel cars in big numbers, they can't just appeal to affluent Sierra Club members eager to make a green statement. "The Prius is a real car," says James Hall, managing director of AutoPacific, an auto consulting firm in Tustin, Calif.

NO PLUG. Since most hybrids use an electric motor to assist a small traditional gasoline engine, they come close to matching the pickup and power of conventional cars. They have a striking high-tech look. Batteries are shrinking to take up less space. And drivers don't have to find a special plug to recharge, since hybrids refill their batteries by drawing power off the gas engine or from the energy of forward motion that's transferred to the battery as the car slows down.

Already, sales are off to a strong start. Honda sold 1,600 Insight two-seaters in the U.S. from January through June--four times more than the total sales of GM'S EV1 in its three years on the market. Honda expects to sell 7,000 to 8,000 Insights this year, twice its original estimate. Toyota has sold 35,000 Priuses in Japan since 1997. "They'll sell 12,000 [in the U.S.], no problem," says Rod Lache, auto-industry analyst with Deutsche Bank Securities Inc. in New York.

That's still tiny compared with overall U.S. car and truck sales, which should hit about 17 million this year. And for now, there is no sign that consumers are ditching SUVs for compact hybrid cars. But if hybrid technology can be applied to existing and new models in a way that gives them "mass appeal in a variety of vehicles," they could make up 20% of the market in 10 years, says Christopher W. Cedergren, an analyst with Nextrend in Thousand Oaks, Calif. Gloats Robert Bienenfeld, Honda's marketing manager for the Insight: "When our competition comes out with their first hybrid, we'll be coming out with our second or third."

The Insight, with its distinctive low-slung rear end, already is drawing attention on the road. Its sleek lines, no doubt, are a big part of what lures prospective buyers eager for a test drive. But it's the surprising performance and convenience that persuades them to pull out the checkbook. "A lot of people don't understand that you don't have to plug in the car," says Ernest Bastien, vehicle operations manager for Toyota Motor Sales USA Inc. The Insight can go 700 miles on a tank of gas, and the Prius can make it 500 miles. That sure beats GM's EV1, which has to spend hours hooked up to a special device after just 130 miles. "These cars work, and electrics don't," says Insight owner John E. Johnson of Ann Arbor, Mich. Chris Jenkins of Ypsilanti, Mich., has a vanity license plate on his Insight that reads: "NO PLUG."

It's no surprise that Japanese auto companies jumped on eco technology so eagerly. High gas prices and choking smog in their home market provide stronger consumer demand. Now, Honda and Toyota want to move beyond showcase cars. They plan to offer hybrid options with several high-volume models within five years. Already, Toyota has designed the Corolla compact and Camry midsize cars to carry such systems. "We'll get to the point where, in the same way that you choose a 4-cylinder engine, a 6-cylinder, and a V8, you can choose between an internal-combustion engine, an eco-car, and eventually fuel cells," says James E. Press, president of Toyota Motor Sales USA.

AT A LOSS. In the U.S., meanwhile, a love of burly trucks, mega-horsepower, and fully loaded luxury have made alternative drive systems less attractive to customers--so far. Delivering that kind of performance with hybrid engines still comes at a huge expense: With their specialized batteries and electrical systems, hybrids sell at a loss in the U.S. Analysts estimate that Honda loses $8,000 every time it sells an Insight. A spokesman says Honda expects to break even "in a couple of years" on the Insight, possibly by leveraging its development costs with a hybrid Civic. Toyota has admitted that it is losing money on the Prius, and Ford claims its hybrid Escape will break even only by selling at a $3,000 premium to gas-only models. "At some point, these things have to be economically viable," says Bernard Robertson, senior vice-president of engineering technologies at Chrysler.

That day may arrive sooner than U.S. execs expected. True, the industry has succeeded for six years in holding off any changes to the federal fuel-economy standards for cars and trucks--20.7 mpg for minivans and light trucks and 27 mpg for cars. But with every SUV that replaces a small car, auto makers' fuel-economy averages slip closer to the red zone. The Big Three already would be paying millions in fines if not for loopholes. Starting in 2004, the federal Clean Air Act will require across-the-board improvements in emissions. California appears to be moving forward with tough requirements that 10% of a manufacturer's sales be zero-emission vehicles in three years. For now, four hybrids count as one zero-emissions vehicle.

That's why Detroit is suddenly trying to clean up its big bruisers. Ford's plan would lift its SUV fuel-economy average to 23 mpg. About a third of the improvement comes from the 22-mpg Escape that will soon hit the market. Three years later, the hybrid Escape will offer the same interior space and acceleration as the V6-powered model, while getting 40 mpg in the city. DaimlerChrysler says a hybrid Durango would get 20% better fuel economy and be just as brawny as the gas-powered V8 version. And GM's hybrid Silverado and Sierra pickups will boost mileage by an estimated 15%. Says GM Vice-Chairman Harry J. Pearce: "Because full-size pickups are significant fuel users, you get the biggest bang for your buck."

Detroit has lobbied heavily for federal incentives to boost development of alternative-fuel technologies, but it can't rely on a handout. If anything, the mood in Washington has swung the other way. Take the "super car" project, for instance. Five years and $1.25 billion after Vice-President Al Gore and Big Three auto chiefs committed to developing clean-burning cars capable of 80 mpg, the program has little to show. The House and Senate recently voted to cut funding in half. Representative John E. Sununu (R-N.H.), who led the charge to slash the project, says the success of the Insight and Prius demonstrates why subsidies won't work. "It may well be precisely because the federal government has been subsidizing certain areas of innovation that we're behind the Japanese," he says.

Carmakers did learn one valuable marketing lesson with electrics: Only the most committed environmentalists were willing to pay extra or give up driving conveniences to make a clean-air statement. That's backed up by recent studies. Most of the 28,000 car buyers surveyed by AutoPacific said they wouldn't alter driving habits until gas hits at least $2.10 per gallon. "Very few people would be willing to pay even $500 extra for a clean vehicle," says George C. Peterson, president of AutoPacific.

ALUMINUM FOIL. Price hasn't been the only problem with electric cars. Although GM quickly attracted a hard-core group of enthusiasts with its launch of the EV1 in 1996, that entire first generation was recalled last fall because of problems with the charging socket. The owners were given leases on new EV1s. Honda pulled its EV-Plus from the market last year but still has more than 300 on the road.

Executives admit they never intended to sell many electrics. GM offered its EV1 only for lease at some Saturn dealerships, and customers had to submit to two days of interviews and instruction before driving off with a car. A spokesman says GM wanted to make sure lessees knew what they were getting into. Margaret Cheng, a 53-year-old systems planner for a Southern California power company, recalls an hour-long interview in which an EV1 specialist stressed all the drawbacks before letting her drive off. "It's amazing that some of us were persistent enough to get the car," Cheng says.

Hybrids are far from perfect. To boost performance, the Insight relies on an all-aluminum body that weighs just 1,800 pounds, half the bulk of the average family sedan. The car holds up in crash testing but makes for an expensive trip to the body shop. Some Insight owners say they live in fear of not just collisions but also door dings and hail. Anna Eley of Atlanta says her husband got in a parking-lot accident with a Cadillac DeVille while driving her silver Insight. Both cars were going slower than 15 mph. The DeVille drove off with a busted grille while the Insight was totaled, says Eley.

New as they are, Hybrids may be replaced by a far more promising technology. The industry has pumped billions into developing fuel cells, which extract electrons from the chemical reaction between hydrogen and oxygen. The exhaust is clean water, and the electric power results in a quieter ride than any gasoline engine.

Fuel cells appear much closer than they were five years ago--but don't hold your breath. Most execs don't expect mass-market vehicles for 10 years. DaimlerChrysler is probably furthest along. It committed $1 billion to fuel-cell development and has a working version of its Mercedes A-Class subcompact that it plans to start selling in Europe in four years. Honda has spent $500 million to develop fuel-cell cars and wants to have them ready in three years. But it has no current plans to go to market. Ditto for Toyota and GM. "I really don't see significant volumes--in the hundreds of thousands of cars--until the end of the decade," says Lawrence D. Burns, GM's vice-president for research and development.

Even that assumes steady progress on a whole range of daunting technical issues. Supplying hydrogen fuel, for instance, is no easy trick. The two preferred methods are to store methanol aboard the car and draw hydrogen from the methanol or to store the hydrogen itself. Methanol can be pumped from existing gas stations. But the onboard hardware to strip out hydrogen from methanol would add $1,500 in vehicle costs and create maintenance challenges. And hydrogen has to be stored under heavy pressure or at very low temperatures.

Still, if hybrids really catch on--if the technology becomes just another option, such as antilock brakes--they could speed the day that the industry ditches fossil fuels altogether. "As we pursue the Holy Grail, existing technology is getting cleaner," says Ford Chairman William C. Ford Jr. The trick is to put clean technology into the cool cars and trucks that buyers crave. If auto makers can do that, more buyers like Jennie Sharf will take an interest in green vehicles without ever thinking about what is or isn't sputtering out the tailpipe.

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