The German Hybrids Are Coming

A new Mercedes sedan, due in the U.S. next year, is the first in a wave of high-end gas-electric models

Stuttgart - With a price tag topping $100,000, the new Mercedes-Benz S-Class hybrid isn't aimed at folks who can't afford $4-a-gallon gas. Rather, the car is the first in a series of new German models that let well-heeled customers appear green without giving up land-yacht amenities such as twin-powered sunroofs, vast leather seats, and a top speed of 150 miles per hour. "If we want to preserve the American way of driving, there's no alternative," says Klaus Meier, director of sales and marketing for Mercedes.

The new S-Class, unveiled on Sept. 11 and due in the U.S. a year from now, is the first of a wave of high-end German hybrids. BMW, Porsche, and Audi (VLKAY) are also promising gas-electric models, mostly SUVs, in the next two years. Why now, a decade after Toyota (TM) started selling the Prius? Concern about global warming has finally reached wealthy U.S. buyers. Sales of luxury cars have plummeted in the past year, with unit sales of the gasoline-powered S-Class in the U.S. dropping 27%, according to Autodata. The only top-end luxury models to register growth were Toyota's Lexus hybrids. "All of a sudden, premium buyers are asking, 'Is the car socially acceptable? Is it environmentally friendly?' " says Gregor Matthies, a partner at consultant Bain & Co. in Munich.

Can a hybrid Mercedes reverse the trend? Mercedes says the vehicle gets an impressive 30 mpg—30% better than a gasoline version of the same model, making it the most fuel-efficient big luxury car on the market. But, because of different methodologies, American regulators tend to assign lower mileage ratings than the Europeans. And at some point, U.S. buyers, like their European counterparts, may realize that modern diesel cars offer hybrid-like fuel economy—often for less money. Mercedes already sells a 30 mpg diesel S-Class in Europe that runs about $100,000. A diesel version of BMW's redesigned 7 series, being unveiled in late September, will get better mileage than the S-Class hybrid.

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Moreover, in the U.S., Mercedes faces the well-entrenched Lexus. The brand launched its first hybrid three years ago and can draw on Toyota's years of expertise. Unlike the S-Class, which uses battery power only to boost the gasoline engine, Lexus models can run solely on electricity. "To us, hybrid is not something we are adding on to the lineup—this is really who we are," says Karl Schlicht, who oversees Europe for Lexus.

Mercedes sales reps have their talking points, too. Their hybrid's biggest innovation is a compact battery that fits into the existing engine compartment rather than crimping trunk space as in Lexus models—possibly a selling point for uncompromising luxury buyers. And Mercedes tried to make the driving experience as much like a conventional S-Class as possible. At highway speeds, the two-ton car is eerily quiet, and shifting by the seven-speed automatic transmission is almost imperceptible. For drivers, the only obvious indication that they're behind the wheel of a hybrid is a light on the dashboard.

The number of S-Class buyers—28,000 worldwide in the first half of 2008, or less than 10% of Mercedes' total—is too small for the hybrid version to contribute much to a healthier planet. But even some skeptics say it's a start for Mercedes and the German auto industry. "The hybrid S-Class won't rescue the world," says Tomi Engel, an electric car expert at the Agency for Renewable Energy, a German trade group. "But we desperately need these [hybrid] technologies in Germany."

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