Toyota

Missing the hybrid moment

Fixated on an elusive hydrogen future, Detroit carmakers are letting Japan waltz in and grab a market that could explode.

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Missing the hybrid moment

An invitation to visit General Motors’ main R&D facility, just north of Detroit, is like being given a ticket back to a mid-1950s World’s Fair. The General Motors Technical Center, as it is called, was designed by the architect Eero Saarinen — who would later collaborate on the IBM pavilion at the 1964 World’s Fair in New York. Saarinen’s research campus for GM features a stainless-steel water tower that resembles a spacecraft ready for liftoff, stately rectangular reflecting pools punctuated by fountains, a 65-foot-tall dome, and sprawling, low, International Style office buildings. All that’s missing as I park my rental car is the surging, glockenspiel-heavy “World of Tomorrow” soundtrack.

I’d come to talk to some of General Motors’ top research executives about the company’s investment in hydrogen fuel cell technology. (GM has been touting hydrogen as the fuel of the future and showing off a concept car called the Hy-wire.) But I ended up surprised at the swipes GM executives took at Honda’s and Toyota’s success with hybrid vehicles. They accused the two Japanese carmakers of selling their hybrids at a loss to generate positive environmental buzz, and argued that hybrids appeal only to a microscopic subsegment of U.S. consumers.

“You always have your early adopters,” said Alan Taub, GM’s executive director for R&D, about today’s hybrid buyers. “Toyota sells as many Priuses as we sell Pontiac Aztecs. Is that a success?” Earlier this year, at the Detroit International Auto Show, Bob Lutz, GM’s vice chairman of product development, had said that the company’s decision not to make a hybrid car “was a mistake from one aspect, and that’s public relations and catering to the environmental movement.”

It is true: Hybrids — vehicles that improve gas mileage by pairing internal combustion engines with batteries and electric motors, and recapturing some of the energy that is usually lost in braking — represent only a tiny sliver of cars sold in the United States this year. For 2004, they’ll account for about 0.52 percent of total sales, or 88,000 vehicles, according to Anthony Pratt, an analyst at JD Power and Associates. But is that a sign of a weak market, or merely the thin end of a wedge that could quickly become very, very large? Toyota recently announced that it will double the number of Priuses that it allocates to the United States next year, from 50,000 to 100,000, and Honda will introduce its third hybrid model this month, the first hybrid version of its popular Accord sedan. Pratt expects hybrids to account for 1.3 percent of all car sales in the United States next year, and other industry observers say that Toyota could surpass General Motors as the world’s biggest automaker by 2006, partly on the strength of its hybrids.

As for the question of whether the Japanese carmarkers are selling their hybrids at a loss, just to look good for P.R. purposes — well, the closer one looks, the less that seems to be true. Instead, Japanese carmakers appear to making the kind of front-end investments that pay off in the long run, with market share and eventual profits.

GM is not alone in its hybrid disdain. Its Detroit rivals have been similarly slow to warm up to hybrids. DaimlerChrysler, which is more interested in cleaner diesel engines than hybrids, did announce plans to produce a hybrid version of its Dodge Durango SUV by 2003, but that vehicle has apparently gotten lost on the way to dealerships. The introduction of Ford’s first hybrid, the Escape SUV, was delayed from 2003 to 2004. General Motors aims to be the first company to profitably sell a million hydrogen vehicles — “we measure success when it has six zeroes behind it,” Taub told me. But the company has so far introduced only two “mild hybrid” pickup trucks, which improve gas mileage by about 10 to 15 percent, in a few scattered markets. (By comparison, Ford’s hybrid Escape drives nearly twice as far as the traditional Escape on a gallon of gas.)

Back in the 1970s, the Big 3 carmakers watched in dismay as Japanese imports carved a huge swathe through their traditional markets. Is history about to repeat itself? Is Detroit missing out on a major shift in technology — and car-buyer psychology — by committing only grudgingly to hybrid vehicles? By betting big on the ever-elusive technologies of tomorrow, like hydrogen, carmakers such as GM may be letting the present slip away.

GM’s research executives work in sleek offices and conference rooms reached by ascending Saarinen’s renowned floating spiral staircase; the spaces would make ideal sets for a revival of “How to Succeed in Business (Without Really Trying).” The executives seem to view hybrids as a steppingstone on the way to hydrogen-powered vehicles, which would use fuel cells to turn hydrogen into electricity. (The problem with hydrogen is that there’s no guarantee of three important things: that hydrogen fuel will be cost competitive with gas, that it will be produced in an environmentally sensitive way and that a hydrogen fueling network will be built anytime soon. Consumers also associate the gas with an ill-fated blimp that crashed in New Jersey.)

“By 2010, we want to be ready with a commercially viable hydrogen car technology,” says Byron McCormick, GM’s executive director of fuel cell technology and commercialization. He spins out visions of hydrogen cars that could serve as electrical plants for individual homes, plugging into the garage at night to produce power. “If you had just 10 percent penetration of fuel cell cars in California, the cars would have more generation capacity than the electrical grid,” he says. The company is investing more than $1 billion in its hydrogen car development program.

But the day when 10 percent of Californians will be tooling around in fuel cell vehicles is still far off, as is the fantastical year of 2010, when teenagers will travel by personal jet pack and Christmas dinner will be packaged in a pill. Today, consumers who care about gas mileage and limiting their impact on the environment are purchasing hybrids.

General Motors’ first forays into consumer hybrids, its Chevy Silverado and Sierra pickup trucks, aren’t really in the same category as the Toyota and Ford hybrids. They’re “mild hybrids,” which seek fuel efficiency by capturing energy lost in braking and by shutting off the engine when a driver is stopped at a red light, using batteries to power accessories like the radio and air conditioning. Full hybrids like the Prius do those things, too, but they also use banks of batteries and electric motors to actually propel the vehicle when it’s moving at low speeds. GM won’t offer a full hybrid until 2007. (DaimlerChrysler has yet to start selling its first hybrid of any sort in the U.S., though now it seems that a Dodge Ram pickup will likely be first in line.)

GM’s Taub says the company is trying to “take the hype out of hybrids,” introducing the technology slowly, and in vehicles where it will have the greatest environmental impact, like trucks and SUVs, which swill more gas and emit more pollutants than passenger cars. And he adds that GM doesn’t intend to sell money-losing vehicles. “The question with hybrids is who will be the cleverest at driving down costs the fastest,” Taub says.

It’s true that hybrids will have more mass-market appeal once they’re no longer priced at a premium. (Today’s hybrids can cost $2,000 to $3,000 more than their nonhybrid doppelgangers.) But it’s also true that the Japanese carmakers, by virtue of five years of production experience, are already figuring out how to drive down manufacturing costs more quickly than their rivals in Detroit. Toyota is already producing some of its Priuses on the same assembly lines it uses to produce traditional sedans — rather than their own dedicated lines. That’s a precursor to being able to cost-effectively offer any vehicle type in one of two flavors: regular or hybrid.

“It’s natural to wonder how we can make a profit on these vehicles,” says Wade Hoyt, a spokesman for Toyota Motor Sales USA. “I would chalk it up to sour grapes. We broke even on the first-generation Prius during its model run, and the current generation will be profitable after about two years on the market, which is typical for any vehicle.” The company’s high-end Lexus division, which will start selling its first hybrid SUV next year, has tallied up more preorders for the Lexus RX 400h than any other vehicle in Lexus’ 15-year history.

Honda won’t disclose whether individual car models are profitable, but spokesman Chris Naughton says that while “some things may not be profitable from Day One, we are in the business to make money.” Naughton says Honda had its three consecutive best months of sales of the Civic hybrid last spring, when fuel prices were peaking. The company expects to sell about 20,000 of the new Accord hybrids in the coming year. “Hybrids are selling in increasing numbers as there are more available in the marketplace, and as customers understand that you don’t have to plug them in,” Naughton adds.

And neither company is ignoring hydrogen fuel cell technology, either. In 2002, Toyota and Honda were the first to begin leasing fuel cell vehicles in California. But, as Hoyt puts it, “whether or not the hydrogen market ever develops is something of a crapshoot.” Toyota isn’t giving up the bird in the hand for the one in the bush. The company is also licensing its hybrid technology to other carmakers, like Nissan and Ford, leading some analysts to compare Toyota to Intel. “They’re kind of becoming the ‘Intel Inside’ for hybrids,” says Pratt at JD Power. And it’s highly unlikely that Toyota is selling hybrid technology to its competitors without turning a healthy profit.

“There’s no question that Toyota and Honda are ahead of all the other carmakers, including the European manufacturers, when it comes to hybrids,” Pratt says.

GM and its Detroit brethren do seem to be stuck in neutral, with GM in particular obsessed by the hydrogen-powered world of tomorrow. But that could change quickly. The forecasting firm CSM Worldwide expects 20 new hybrid vehicles to be introduced by 2007. “General Motors sells about 1.2 million full-sized trucks and SUVs every year based on one platform,” says Lindsay Brooke, an analyst at CSM. “If GM prices its hybrids well, and markets them and advertises them in the right way, GM could well be the volume leader in hybrids.”

Brooke says that while the Japanese carmakers have earned bragging rights by being first to market with hybrid vehicles, it’s too early to pick a true winner. But if there is a victory in store for one of the Big 3, it’ll be one of the come-from-behind variety.

Scott Kirsner is a Boston writer who covers business and technology for Fast Company, Boston Magazine, Wired, and CIO.

Ecofriendly wheels can’t get a break

Despite being ultra-low-emission vehicles, hybrids are denied government incentives, while dirtier competitors get the OK.

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When Daanon DeCock discovered that the Toyota Prius qualified as an ultra-low-emission vehicle — meaning that it burns about 90 percent cleaner than a traditional car — he rejoiced. Not only could the Arizona resident help the environment by purchasing a car that mixed electric motors with a high-tech, internal-combustion engine, but by doing so, he figured he could cut the $21,000 sticker price by more than half, qualifying for a $2,000 federal tax credit and an Arizona state rebate of up to 50 percent of the cost of the car.

Unfortunately for his checkbook and the Arizona air, he figured incorrectly.

“It doesn’t make any sense,” says DeCock, a 30-year-old software tester in Tempe. “These incentives seem to be based on the emission rating, but here’s a car that has an extremely low emission rating and it didn’t qualify. It’s extremely frustrating.”

What gives? Why is the federal government unwilling to offer incentives for environmentally friendly hybrids like the Prius or the Honda Insight? And why aren’t states like Arizona and California eagerly subsidizing these ecofriendly cars as they’re doing for other options, like Ford F-150 trucks that run on propane?

The Department of Energy’s Office of Transportation Technologies Web page offers an answer, stating that “because the [hybrid vehicles] on the market today do not use alternative fuels (they use gasoline), they can’t be considered for credits” under Energy Policy Act.

And Richard Varenchik, spokesman for the California Air Resources Board, the state agency that regulates emissions, says that hybrids don’t deserve special treatment because gasoline is simply a dirtier fuel than alternatives such as propane. So even hybrid advances like bladder gas tanks — which contract and expand according to the fuel level, thus decreasing evaporative fumes that are precursors to ozone — don’t do much good. Plus, because of gasoline’s more complex chemical makeup, it will soil everything it touches.

“A gasoline-powered vehicle will suffer some degradation,” he explains. “It won’t be as clean at 40,000 miles as it was at 4,000, which is why anything that has a gasoline engine can’t be as clean as one that doesn’t.”

But experts insist that energy departments are dodging the issue, focusing more on politics and legal technicalities than on the environment. By accepting the “alternative fuels” language of the law, they’re eyeing what goes into a car at the expense of what comes out. And in the process, they’re perpetuating a system that hampers the rise of ecofriendly cars and essentially punishes consumers like DeCock who would like to help, but don’t want to spend over $20,000 for what is essentially a low-budget compact.

“There are no compelling reasons not to make these cars eligible,” says Dan Kammen, professor of energy and society at the University of California at Berkeley. “It’s ridiculous. These hybrid vehicles are significantly cleaner and they should be supported.”

In fact, they represent the dominant innovation for the next decade in terms of fuel efficiency and pollution reduction, says David Nemtzow, president of the Alliance to Save Energy, a Washington nonprofit that lobbies for energy efficiency. Zero-emission options like cars that run solely on electricity are years away from being viable, and the infrastructure isn’t in place. That’s why only a fraction of the cars on the road — 2,000 out of millions in California, for example — run on alternative fuels.

“You simply can’t recharge a battery as easily as you can fill a tank with gas,” he says. “That’s why hybrids are so vital. You can just fill them up, which is to say that their weakness is their greatest strength. They make for a perfect transition.”

And if laws aren’t rewritten to subsidize them, the country faces two big risks: “One is that hybrids will not catch on quickly. Therefore, we’ll be wasting gas and creating pollution that’s completely unnecessary,” he says.

“The second risk is that we’ll relive the ’70s, which is to say that Toyota and Honda will outpace the domestic car companies.” In other words, when the public — perhaps disgusted with pump prices of $3 per gallon — gives up once again on gas hogs, Japanese carmakers will be the ones that benefit.

Indeed, the legal technicalities that allow hybrids to be singled out appear to be rooted in the ’70s. When the oil-producing nations of OPEC drastically cut production in 1973, causing world oil prices to double, Americans realized their dependence on foreign oil and sought to overcome it with policy. Over the past 20 years, several amendments to the Clean Air Act set increasingly high standards of fuel efficiency for the car industry, while federal funding went toward non-gasoline research and development.

More recently, the legacy of this stance can be seen in the Energy Policy Act of 1992 (EPAct). This is the the law governing which vehicles receive federal rebates, and according to the Department of Energy Web site, Congress passed it not to help the environment but rather “to accelerate the use of alternative fuels in the transportation sector.”

Another document goes even further, stating explicitly that in implementing the EPAct, “the U.S. Department of Energy’s primary goals are to decrease the nation’s dependence on foreign oil and increase energy security through the use of domestically produced alternative fuels.”

“Emissions,” “environment,” “pollution” — these words don’t seem to appear anywhere in the act. “Congress was looking backward not forward in 1992,” Nemtzow says. “There were enough people in Congress then who remembered the embargo of the ’70s, and that’s why the language reads as it does.”

The U.S. Department of Energy didn’t return phone calls requesting a response.

Meanwhile, Arizona’s stance mirrors the federal law. “Diversifying our fuel source, moving away from foreign oil, was a major goal when we enacted the rebate legislation eight years ago,” says Amanda Ormond, energy director of Arizona’s Commerce Department. Thus, the hybrids are not covered under the rebate plan precisely because they do not meet this criterion.

“The hybrid is a very clean vehicle and it goes very, very far on that gasoline, but it’s not an alternative fuel,” she says. “We subsidize alternative fuels for two reasons — to increase fuel diversity and to clean the environment. Hybrids cover one of these, but not the other.”

Toyota and Honda, the only two companies with hybrids on the market, don’t seem worried about seeing their high-tech darlings left out. One Toyota spokesperson says the company isn’t lobbying for legislative change, although another says it is. Honda is maintaining a hands-off approach. “That’s a question for the government to decide,” says Honda spokesman Art Garner of the incentives system.

Perhaps this is because both companies are treating hybrids like concept cars. They expect to sell fewer than 20,000 combined, a number that looks especially weak considering that Toyota expects to sell 230,000 Corollas in the same period. And Garner says Honda is happy with its hybrid model even if it sells only a few of them because they portray Hondas as “the most fuel-efficient, cleanest-burning cars in the industry.”

But by diminishing these cars’ potential and adhering to a ’70s-inspired law, the automakers, Congress and state governments are all sitting back and allowing an environmentally unfriendly system to thrive. At the very least, they’re perpetuating a confusing state of affairs, one that could put off people who are considering an ecofriendly vehicle.

Consider DeCock’s story. When the air conditioning died in his 1991 Corolla, he found himself in the market for a new car. He didn’t intend to save the environment; he just wanted a reliable, four-door car for about $15,000. But while checking out the Honda Civic, he discovered its natural gas model. It cost just over $20,000, but the state promised a 40 percent rebate. The car would have cost about $12,000.

But when DeCock test-drove the Civic, his 6-foot-5 frame didn’t fit comfortably. Plus, his wife, Michelle Aron, heard about a Harvard University study pointing out that compressed natural gas could be even more dangerous to human health than diesel fuel.

So the couple kept looking. “I didn’t want a bigger American gas hog like the [Ford] Taurus,” DeCock says. And since he’d been happy with his Corolla, he headed for the Toyota Web site. “And there it was — a four-door, five-passenger, practical hybrid-electric vehicle, the Prius.”

He tried one out, found it comfortable, marveled at the average efficiency of 45 miles per gallon and then did the rebate math. He knew that the Ford F-150 truck — which many owners convert after purchase into a bifuel vehicle that can use both natural gas and traditional gas — burns only 60 percent cleaner than a traditional gas vehicle, but still qualifies for a rebate. Even though there was no way for the state to force people to fill its tank with natural gas instead of regular unleaded, this was the case — and still is, according to Ormond — which is why DeCock believed that the gas element wouldn’t be a problem. He didn’t expect any trouble getting a rebate or the federal tax credit. But of course, he did run into trouble. Both incentives apply only to cars that gain 70 percent of their power from sources other than gasoline. And since, unlike the Civic or the Ford truck, the Prius’ gas-to-electric ratio varies beyond measurement (highway travel requires more gas than stop-and-go traffic), it qualified for neither.

None of this drove DeCock away. He ended up putting money down on a Prius. But he says that he would have traded in his wife’s Saturn, too, if he could have received a rebate. More Americans, he believes, would do the same if the Prius didn’t cost $5,000 more than comparably equipped cars like the Corolla or Civic. And ultimately, he says, costs matter less than the law’s misplaced focus. We have a Clean Air Act, not a Reduce Dependency on Foreign Oil Act, he says, noting that what comes out of the tailpipe should matter more than what goes into the gas tank.

There is little chance that this xenophobic focus of the law will change. Although Congress is considering a bill that would offer a $2,000 tax credit to hybrid buyers, and several states, including New York, California and Connecticut, are also discussing the topic, these plans largely keep intact the outdated overemphasis on foreign-oil dependency.

“It doesn’t make any sense,” DeCock says. “If you can have a car that reduces emissions by anywhere from 70 to 90 percent, there should be an incentive. It should be that simple.”

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Damien Cave is an associate editor at Rolling Stone and a contributing writer at Salon.

Hopping into hybrids

Automakers hope smog and high gas prices will persuade consumers to embrace their new "green" lineup.

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Hopping into hybrids

On a hot Los Angeles afternoon when the sky is a dreary brown (yes, smog still blankets the City of Angels), any solution to the discomfort caused by the twin evils of pollution and excessive fuel consumption amounts to paradise.

But at what price for paradise? Car manufacturers already have agreed to sell “zero-emission” (e.g., electric) vehicles in California by 2003. But the limited driving range of these cars, long battery recharge and huge cost of replacing battery packs ($22,000 per car) make the cars unfeasible. Hope now rides with fuel-celled cars, which are essentially pollution-free and extremely fuel-efficient. Major U.S. manufacturers already have begun developing cars using this technology, but their lineups won’t appear in dealer showrooms for at least a decade. At the moment, the latest advances aimed at easing drivers’ breathing woes and pump-side pains center on “hybrid” cars, such as Honda’s Insight and Toyota’s Prius.

Earlier this month, General Motors also entered the “green” race, saying it will begin producing hybrid versions of its full-size pickup trucks and buses. That followed Ford Motor’s announcement that it plans to improve the fuel economy of its sport utility vehicles by 25 percent during the next five years. Ford, however, seemed less sincere about saving the environment when it said its next generation of Ford Explorers — the industry’s top-selling SUV — would be larger and have a more powerful engine.

By no means will hybrids — which combine traditional internal-combustion engines with electric motors — turn L.A.’s skies blue. (Angelenos may never rid themselves of their not-so-lovely smog problem.) But Japan’s top two automakers are betting a market exists for these vehicles, engineered for minimal exhaust emissions and maximum fuel economy. Honda initially anticipated selling a modest 4,000 Insights per year, but revised its estimate to the bit less modest 6,500. Toyota, which recorded more than 850 Prius orders during the first four hours after the car went on sale, counts on selling 12,000 cars this year. (GM wouldn’t say how many hybrid pickups it plans to sell.)

It’s true. Insight and Prius buyers will see phenomenal gas mileage figures. (Seventy-one mpg in highway driving for the Insight and 45 for the Prius.) But it’ll cost them about $20,000 for either car, which is quite a lot for a two-seater (Insight) or a four-passenger economy sedan in the Ford Focus mold (Prius).

The thinking, however, is that pioneers have to make sacrifices.

But just who will these pioneers be?

Industry analysts and carmakers expect the initial group to be environmentalists, as well as those who want to be first in line for almost any trendsetting car. But then the hard part comes — persuading the masses to hop into a hybrid. The key, analysts say, is allowing consumers to make a seamless transition to the green version of their favorite cars. Honda plans to unveil a hybrid version of its popular Civic in 2002, the same year Ford introduces a hybrid Escape, its compact SUV. Toyota also has plans to expand its hybrid line.

A proliferation of hybrids on the roads could convince the public that a hybrid really does look and drive like an ordinary car. But because they paid a premium (Toyota estimates that hybrid buyers initially will pay $6,000 more than they would if they bought a traditional car), they’ll probably expect a lot more than they would from an ordinary set of wheels. However, tax incentives for hybrid buyers, now in place in Connecticut and being considered by lawmakers in Massachusetts, Virginia, Louisiana and New York, may ease some of the sticker shock.

Even with the somewhat elevated prices, Toyota is likely to lose a little money on each Prius it sells. Honda isn’t making a similar estimate of profitability on its Insight, and for good reason. Industry insiders believe Honda will lose a bundle on each Insight because it’s clearly the more exotic of the two hybrids, making use of expensive lightweight construction and mechanical components not used on any other Honda. Insights are built in the same labor-intensive assembly facility that turns out the Acura NSX sports car.

Ultimately, Toyota expects to make money on the Prius, making it willing to take a loss now to establish the vehicle in the marketplace. And Honda is using the Insight as a launching product to make even better — and greener — cars, which could make the cash register ring.

But Eric Noble of the Car Lab, an industry consulting firm in Santa Ana, Calif., sees a problem for hybrid manufacturers. “Under current North American conditions, people aren’t willing to pay more just for better fuel economy — gas is too cheap.” Manufacturers, according to Noble, are betting on future fuel price or supply shocks to make hybrids acceptable. Even so, the point where hybrids gain acceptance on their own will probably occur, Noble says, when a manufacturer “makes a conscious decision to sacrifice some of the hybrid’s fuel efficiency gains for an increase in performance. Fuel economy is not exciting in today’s market; performance is.”

Aside from the high cost, the government also hasn’t yet embraced hybrids — since it’s keener on promoting electric cars. The California Air Resources Board, for one, has demanded that 10 percent of all new cars sold in the state starting in 2003 be “zero-emission vehicles.” The agency will credit Toyota for the Prius (counting every three sold as being equivalent to one electric vehicle), but the Insight, with its slightly dirtier exhaust, gets no such consideration.

Analysts believe California will be forced to back away from its stringent demands, since there’s no evidence there’s a big demand for electric cars, aside from that by golf course owners and the government. In the end, customers will dictate what cars will be on the road. And at the moment, hybrids seem the most likely compromise between finicky drivers and environmental woes.

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Ray Thursby is a freelance writer who writes about the auto industry.

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