Hybrids alter economics for carmakers, owners

John W. Schoen Senior Producer • Profile • E-mail

With gasoline prices stuck well above $2 a gallon, and sales of gas-guzzling sport utility vehicles declining, this would seem to be prime time for fuel-efficient hybrids. Dealers report that traffic to showrooms has picked up, and manufacturers are prepping more models to meet demand. And as hybrids begin moving into the mainstream, they are changing the way cars are designed, sold, made and repaired.

Although U.S. sales of hybrid vehicles roughly doubled in 2005, they still make up a tiny fraction of new car sales. From less than 10,000 sold in 2000, hybrid sales are estimated to have broken 200,000 in 2005, according to HybridCars.com, but that is only about 1 percent of the roughly 17 million cars and light trucks sold overall.

One big reason, say analysts, is the added cost of a hybrid compared to a conventional gasoline-powered vehicle. That premium varies but can run as much as $7,000. So far, hybrid buyers tend to come from two groups: “early adopters” looking for the latest technology and environmentalists, who may care more about saving the planet than saving money.

“Neither of these are particularly sensitive to the economics. They have other reasons why they're buying this,” said David Cole, chairman of the Center for Automotive Research. “There’s a question as to how large those groups are, but once you get to more mainstream buying groups, then economics really begins to take over as a primary factor in that decision.”

The math goes something like this: If you drive a conventional gas-powered car that gets 20 miles per gallon for 100,000 miles, you’ll burn through 5,000 gallons of gas. If you buy a hybrid that gets 33 miles per gallon, you’ll save roughly 2,000 gallons over that same 100,000 miles. At $2.50 a gallon, that will save you $5,000. (To sweeten the deal, Congress this year gave hybrid buyers a tax credit of about $2,000 depending on the model.)

So for new car buyers trying to decide whether they will save money on a hybrid, the answer depends heavily on where gasoline prices are headed, according to Corey Shaker, CEO of Hometown Auto Retailers, a publicly held chain of auto dealerships in the Northeast.

“If gas is $4.50 a gallon, (the answer is) yes,” he said. “If gas is $1.65 a gallon, no. You can buy a lot of gas for $3,000.”

And the hybrid premium is turning out to be bigger than the difference in sticker prices. Because production of hybrids is still limited and demand is strong, dealers are typically getting the full sticker price for a hybrid — even as they heavily discount most conventional models.

The hybrid’s higher sticker price may come down a bit as manufacturing ramps up. But it will probably always be part of the purchase equation, according to Cole.

“There are a lot of additional parts (in a hybrid) because you have parallel power systems, electrical and mechanical,” he said. “So even over the long term, with economies of scale, you’re still dealing with several thousands dollars of inherent cost difference.”

While consumers make up their minds, automakers are hedging their bets by producing hybrid versions of conventional models, essentially offering hybrid drive trains as just another option. (One exception is the Toyota Prius, the best-selling hybrid to date, which is available only as a hybrid. But Toyota's future hybrids will also be available as conventional gas-powered models.)

Carmakers are also pursuing different engineering strategies.

Toyota’s full-hybrid "synergy drive" relies on large electric motors that provide full power at low speeds, reserving the gas-powered engine for passing and cruising at higher speeds. Ford is using a similar technology. GM’s "mild" hybrid technology, due next year, uses smaller electric motors that are built into the transmission. GM’s "two mode" approach doesn’t rely as heavily on the electric motors, but GM says it will be cheaper to produce. The technology is also being adopted by DaimlerChrysler and BMW. Honda is also using a mild hybrid technology.

“Our desire is to get the most economy that we can out of a given vehicle with the smallest motors and smallest battery pack that we can,” said Larry Nitz, executive director of GM’s hybrid powertrain program.

Critics of GM’s strategy say the company hasn’t moved as quickly, and their hybrid designs don’t use the technology as aggressively, as Japanese rival Toyota.

“What GM is talking about in my book are not hybrids,” said David Healy, an auto analyst with Burnham Securities. “These are trucks with humongous starter motors.”

The idea behind hybrids has been around for years. The main reason for combining the two power systems is that electric motors operate most efficiently at low speeds and gasoline engines operate most efficiently at high speeds. Making the two work together smoothly and efficiently just wasn’t possible without the latest generation of cheap, powerful microprocessors, according to Nitz.

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