"Detroit Is Missing The Boat"

Demand for hybrids is rising, but the Big Three are slow to get on board

Every decade or so, IT seems, a major new segment opens up in the U.S. auto market. Although Detroit has had its successes -- pioneering minivans in the 1980s and SUVs in the early 1990s -- other times, it is nowhere to be found. In the 1980s, it didn't see the move to small, high-quality cars such as the Honda (HMC ) Civic. Then, in the late '90s, it missed a turn as Japan developed carlike SUVs such as Toyota's (TM ) RAV4. Such miscalculations go a long way toward explaining Detroit's loss of U.S. market share, from 84% in 1978 to 61.6% today.

Now you can add hybrid gas-electric vehicles to that dubious roster. Ford's (F ) hybrid Escape, the first domestic vehicle to sport the high-mileage hybrid technology -- and the first hybrid SUV, period -- was due out this year. But problems perfecting the battery and software have delayed its debut until late next summer. As for its Motown rivals, GM (GM ) is giving hybrids short shrift while betting on the eventual benefits of hydrogen-powered cars. And DaimlerChrysler's (DCX ) cash-strapped Chrysler Group killed plans for a hybrid Durango SUV in mid-2002. Instead, it is counting on improved diesel engines. Both GM and Chrysler are more than a year away from introducing "mild" hybrid trucks, where an electric motor provides a smaller mileage boost. Says Mark Rikess, CEO of consultants Rikess Group in Burbank, Calif.: "Detroit is missing the boat."

Japanese carmakers, on the other hand, already have shipped their second wave of hybrids. An impressive follow-on to Toyota Motor Corp.'s Prius went on sale on Oct. 17. It's larger than the first Prius, and at $20,000 has booked strong advance sales. Honda Motor Co. is offering a hybrid version of its popular Civic. And Toyota's Lexus Div. will race Ford to market next summer with a hybrid SUV, the RX400H. If Toyota can build a mainstream following for the Prius and its hybrid RX400H -- and turn a profit -- it will hold a commanding lead in hybrid technology. "If Toyota succeeds," says a hybrid expert at a rival, "they're going to have a 10- to 15-year head start."

BUILDING BLOCK

So far, it's easy to see hybrids as a mere niche in the U.S. High costs and limited selection kept sales to 38,000 last year, out of 16.8 million total vehicle sales. Partly that's because consumers are still confused about the technology, in which a computer coordinates a gas engine with a battery-powered electric motor. But hybrids, which lower pollution and improve gas mileage, are growing in popularity. Ford CEO William C. Ford Jr. has said they could be 75% of the market in 25 years. J.D. Power & Associates Inc. is more circumspect, estimating sales of 500,000 within five years as hybrid systems are offered in already popular vehicles.

That still seems small -- until you consider that the technology needed for hybrids is a crucial building block in what just about everyone in the auto industry agrees is the ultimate goal: highly efficient hydrogen fuel-cell cars. Most auto experts think that fuel cells, which convert hydrogen to electricity to propel a car, will begin to replace gas-powered engines in 15 to 20 years. In the meantime, Toyota, Honda, and Ford hope to hone their electric-motor expertise through hybrids. Says Prabhakar Patil, Ford's chief engineer for hybrid technology: "Everything we do to make hybrids more efficient and affordable will translate directly into fuel-cell technology."

GM, however, believes it can bring fuel-cell cars to market by 2010. It's plowing more than $100 million a year into doing it. GM CEO G. Richard Wagoner Jr. argues that hybrids are too costly to sell at a profit and appeal to a small number of buyers. But critics say GM is setting itself up for a broad knowledge gap by leapfrogging over hybrids -- not to mention missing a major sales opportunity if hybrids take off. Says Jim Hall, vice-president of AutoPacific consultants: "It's really dangerous to assume that there will be only one technology in future cars."

Motown has only its love of big trucks to blame for being left behind in hybrids. While the Japanese were pioneering the technology in the mid-'90s -- largely in response to gas prices three times higher at home than in the U.S. -- Detroit was developing big pickups and SUVs. Those gas-guzzlers generated huge profits in ensuing years. With Washington reluctant to tighten fuel economy standards, there was little incentive to develop more efficient vehicles.

Detroit based much of its initial skepticism on the price differential of the first hybrids. Toyota faced a $10,000 loss on each original Prius. Yet it persevered, starting small in Japan, refining the technology, squeezing out costs, and licensing the system to others. Now Toyota says it has recovered its initial R&D investment and claims it will eventually turn a profit on the 36,000 Priuses it plans to sell annually in the U.S.

COSTLY DELAY

The exception to American skepticism has been Ford Motor Co. Led by CEO Ford, a dedicated environmentalist, the company announced in mid-2000 that the hybrid Escape, getting 40 mpg in city driving, would be the leading edge of a greener lineup. The company says it will follow with a hybrid version of its Futura sedan. But taming the technology has proven harder than expected. Says Ford: "As with any new technology, there have been challenges."

By the time the U.S. hybrids arrive, they may get shown up by Japan's third-generation vehicles. Toyota is keeping the RX's new technology under wraps, but its new Prius shows how a follow-up model can improve. Toyota boosted the $20,000 Prius' fuel economy by 15%, to 55 mpg, and cut emissions by 30% -- even as the car has grown.

The delay in the Escape already has been costly for Ford: It was one reason Bill Ford had to renege on a promise to boost SUV fuel economy by 25% by 2005. Yet despite the long-term stakes, some Ford execs don't think the financially struggling company should be competing in hybrids. Says a source close to Ford: "The majority of the country doesn't give a damn" about hybrids. CEO Ford vows to forge onward, though: "For an auto company with a global presence, you have to be involved in all areas of future engine technology."

But the world may not wait for U.S. carmakers. Detroit is once again playing catch-up in its race with Japan. That the exhaust it's sucking this time is so clean makes it all the more painful.

By Kathleen Kerwin, with David Welch, in Detroit

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