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The case for hybrids is weakening

DETROIT — It's a sign of the times when Cadillac is staking its comeback on a compact car that boasts fuel economy approaching 40 mpg.

Cadillac's ATS sedan is one example of how carmakers at the Detroit auto show are putting new emphasis on small, powerful models with more fuel-efficient engines as sport-utility vehicles and even hybrids take a back seat. General Motors Co.'s luxury brand brags that the ATS will run on a turbocharged four-cylinder engine that kicks out 270 horsepower while still offering robust fuel economy. At the same time, Ford said it's dropping plans for a hybrid version of its popular Escape SUV.

While past auto shows have been stocked with gas-electric hybrids and SUVs, slow hybrid sales have brought a dose of reality to the industry. Carmakers are realizing they can give buyers what they want and avoid the expense of electric motors and batteries by shrinking cars and wringing better fuel economy from traditional gasoline engines.

"The advantages of hybrids are getting harder to justify," said Scott Corwin, a vice president with consulting firm Booz & Co. in New York. "It's the cost differential. Consumers are rational, and they understand the cost of ownership."

Hybrid sales slowed last year to 2.2 percent of U.S. auto sales, from 2.4 percent in 2010, according to researcher LMC Automotive.

The challenge with selling hybrids is that gasoline engines have become more efficient and the cost of hybrids hasn't come down fast enough to justify the added expense for many buyers, said David Champion, senior director of the Auto Test Center at the Yonkers, N.Y., magazine Consumer Reports.

He pointed to Honda's Civic, which gets 32 mpg in combined city and highway mileage, and the Civic hybrid, which gets 44 mpg. The hybrid version of the car saves a consumer $322 in fuel a year, according to the Environmental Protection Agency. Given the added sticker price, it would take more than six years to get the money back on a similarly equipped car at today's fuel prices.

Mike Jackson, chief executive of Fort Lauderdale auto retail chain AutoNation Inc., said that 75 percent of customers come into his showrooms and want to talk about hybrids. Only about 2.5 percent of AutoNation sales are hybrids. "What happens from the 75 percent consideration to the 2.5 percent commitment?" Jackson said in an interview. "They look at the price premium for the technology, which is already subsidized and discounted, and say, 'The payback period is too long; not for me.' It's a back-of-the envelope conversation on the part of the American consumer."

The biggest opportunity for fuel efficiency remains with the gasoline engine, not electric cars or hybrids, for the next decade, said Xavier Mosquet, a senior partner at Boston Consulting Group in Detroit .

The battery in an electric car still adds $10,000 to the price at current technology costs, and it will be difficult to reduce that penalty in the near future, he said.

By contrast, improvements in an internal combustion engine may improve fuel economy by 40 percent with costs of $2,000 to $2,500 per model by 2020, according to a July 2011 Boston Consulting study Mosquet helped write comparing costs and benefits of gasoline engine improvements versus hybrid and electric car technology.

The challenge for carmakers will be long-term fuel economy goals. Environmental Protection Agency regulations mandate that carmakers meet a fleet average of 54.5 mpg by 2025.

The case for hybrids is weakening 01/14/12 [Last modified: Saturday, January 14, 2012 3:31am]
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