Enthusiasm and Confusion

Despite growing sales, auto execs say the HEV market share will stay low through 2012. One problem: consumers are unsure about hybrids' benefits

U.S. hybrid sales are strong, and consumer surveys show strong likelihood of continued market uptake. J.D. Power and Associates reports that U.S. hybrid electric vehicle sales volumes are anticipated to grow by 268% between 2005 and 2012. Hybrid sales will increase to 780,000 vehicles in 2012, up from 212,000 in 2005, according to the most recent update of the automotive industry analysis firm's Automotive Forecasting Services. The hybrid electric vehicle market has grown from two models and fewer than 10,000 vehicles sold in 2000 to 11 models in 2005.

Hybrid-Electric Vehicle Outlook

Despite the large increase in sales volume, however, the report says hybrid vehicles will remain a small portion of the overall market, growing from 1.3% of U.S. light-vehicle sales in 2005 to 4.2% market share by 2012.

"Future growth will be the result of more vehicle manufacturers entering the hybrid electric market and a greater number of hybrid models," says Anthony Pratt, senior manager of global powertrain forecasting at J.D. Power and Associates. "There are currently only 11 hybrid models available in the U.S. market, and by 2012 that number could increase to 52 models." Many of those vehicles will be in segments that currently do not have hybrid offerings, Pratt adds.

"Consumers tend to purchase within the vehicle segment that best suits their lifestyle," says Pratt. "When hybrids were first introduced in the United States, they were only available in subcompact cars that were not practical for all vehicle buyers. This trend changed with the introduction of the Ford Escape in late 2004, and we anticipate this trend will continue in the future. By 2012, consumers will have the opportunity to purchase a hybrid vehicle in nearly all segments, including full-size pickups, minivans, and luxury cars."

What's driving hybrid sales?

Automotive executives see a trend over the next five years of consumers seeking fuel-efficient low-cost cars and hybrids rather than SUVs and luxury cars, according to the results of an annual global survey of automotive leaders representing companies in North America, Great Britain, France, Germany, Sweden, India, China, Korea, and Japan by KPMG LLP, the U.S. audit, tax, and advisory firm.

The survey, based on interviews with 140 senior executives at vehicle manufacturers and automotive suppliers around the globe, found that auto executives believe that quality and fuel efficiency will be the top two criteria consumers will use in deciding which car to buy. "Automotive leaders are cognizant of the lasting impact of rising gas prices on the minds of consumers," says Betsy Meter, audit partner in KPMG's automotive practice. "The focus right now is on producing fuel-efficient vehicles that will meet consumer demand."

In the KPMG survey, auto executives were asked their opinions on a number of categories of vehicles over the next five years -- they ranked hybrid cars number one (88%) and low-cost cars second (79%). Hybrids and low-cost cars ranked significantly above all other categories, although 59% of the executives anticipate that cars overall will increase, with 48% saying they believe that crossover vehicles will increase.

Sales of larger vehicles, such as SUVs, are already on the decline for some automakers, and most auto executives participating in the KPMG survey say they believe that sales of larger, less fuel-efficient vehicles will decline over the next five years. For luxury vehicles, only 35% of automotive executives predict an increase in sales, and just 36% say they expect sales of SUVs to increase. The executives are slightly more optimistic on minivans, with 40% expecting an increase of sales in this segment. Only 24% expect pickup trucks to increase market share in the next five years.

In breaking the categories down into a regional view, North American executives were more likely see a rise in hybrids and low-cost cars in the next five years. Executives in both Europe and Asia were more optimistic on the sale of larger vehicles, such as minivans and SUVs, and Asian respondents are more optimistic about luxury vehicles and pickup trucks, compared with their North American and European peers.

Quality and fuel efficiency may outweigh extra hybrid cost

KPMG's Meter says that while there are regional differences, one common theme emerges: "Consumers worldwide are now on the same page. They desire a good-quality, fuel-efficient car."

Asked what consumers will look for most in a new car, 87% of the executives in the KPMG survey say that car buyers will base their purchase decision on quality, while 84% say fuel efficiency. These factors ranked much higher than affordability (68%) and significantly higher than sales incentives (47%). "The rise in gas prices due to Hurricane Katrina left a lasting impression on the minds of consumers," says Meter. "There is a limit as to what U.S. consumers are willing to spend on fuel."

In the KPMG survey, 45% of the executives say that a sizable proportion of American consumers would begin to move away from less fuel-efficient vehicles if gasoline prices rose to between $3 and $3.50 a gallon. Another 20% say consumers would shift to more fuel-efficient vehicles if gas prices stayed in the $2.75 to $3.00 range.

Results from a poll of car buyers by Maritz Research's Automotive Research Group confirms consumer interest in hybrids, reports the Toledo, OH-based consumer satisfaction research firm. Not only is hybrid interest growing in the U.S., but interest in new diesel engine alternatives is weak.

The Maritz poll results show that consumers who are strongly considering hybrid technology for their next vehicle purchase nearly doubled from 2004 to 2005. Among 1,009 adult owners and drivers of vehicles surveyed, the number of people who say they are strongly considering a hybrid for their next vehicle jumped to 29% from 17% within one year.

Reducing fuel costs was cited by 97% of the respondents who said they would consider buying a hybrid. Other factors include:

• Traveling more miles between fill-ups (79%)

• Reducing pollution (78%)

• Reducing Americans' dependence on foreign oil (74.5%)

• Receiving tax credits (55%)

• Better engine performance (27%)

• The enjoyment of having the latest technology (19%).

"The volatility of gas prices is changing buyers' decision-making," says David Ensing, director of research and development for Maritz's Automotive Research Group. "Although many question whether buyers will reap enough savings in fuel costs to offset the higher cost of the new powertrain, a growing number of consumers are betting that it will." The survey indicates that while many consumers are becoming more interested in hybrids, there is still a lack of awareness with some about the technology and its benefits. Of the respondents who say they would not consider a hybrid (13%), nearly half say they don't know enough about hybrids to feel comfortable buying one.

But it appears that consumers are expecting hybrid prices to follow the downward path of many new technologies. Of the 87% of people who would give equal or more consideration to buying a hybrid vehicle, nearly 85% are willing to pay more for the hybrid compared to a traditionally powered vehicle, a 5% decline from 2004. The median additional amount they are willing to pay for the technology remained the same from 2004 to 2005 at approximately $2,000.

Hybrid vs. diesel

Despite the attention given to a new generation of "clean diesel" engines as an alternative to gasoline engines, vehicles equipped with diesel engines have been received with little enthusiasm by consumers. Nearly 60% of the respondents say they would not consider a diesel-fueled vehicle on their next purchase. Of those who would not consider a diesel vehicle, 70% cite reasons of noise and smell, 56% don't see the advantages, and 45% believe diesels produce too much pollution. Price and availability of diesel fuel, however, did not emerge as relevant issues in the lack of endorsement.

The results of this poll were compared to a similar Maritz poll of 1,014 adult owners and drivers of vehicles conducted in August 2004. The U.S. average price for regular gasoline in August 2004 and 2005, respectively, was $1.85 per gallon and $2.58 per gallon.

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