Can These Hybrid Cars Save Detroit?

Ford, General Motors and Chrysler are pegging their rebound on new hybrid cars.

December 3, 2008, 5:53 PM

Dec. 4, 2008— -- The buzzword out of Detroit these days seems to be "hybrid."

As the Big Three automaker CEOs return to Washington today -- arriving by hybrid vehicles instead of private jets -- they will try to sell Congress on turnaround plans focusing on an aggressive new line of fuel-efficient cars.

Lawmakers might buy the plans from Ford, General Motors and Chrysler, but it is going to be a lot harder to sell American drivers on the hybrid cars.

The key may be gas prices.

Maryann Keller, who runs an automotive consulting company, said that people lined up to buy more-efficient cars only after gas topped $4 a gallon.

"Short of that, people are going to buy what suits their pocketbook and suits their needs," Keller said. "It's sort of human nature to want to buy the biggest and fastest, if you can afford it. And you're not gong to think necessarily about the environment in that purchase. At least, the vast majority won't."

To make things worse, consumers wanting that nice shiny hybrid SUV that Chrysler CEO Robert Nardelli arrived in might just be out of luck. Chrysler has plans to shut the factory where the Aspen is made. In fact, the automaker doesn't plan on having any hybrids in production until the 2010 Dodge Ram Pickup truck starts moving down the assembly line sometime next year.

Jack Nerad, executive market analyst for Kelley Blue Book, said that hybrids tend to have better resale value than say SUVs, but it doesn't mean the cars are the panacea for the automakers.

"Certainly a hybrid alone will not save Detroit," Nerad said.

In the 1980s, American automakers profited off the sale of minivans. Then in the '90s and first part of this decade, the SUV and pickup took over. Call it the age of the Hummer.

But when gas prices started to climb in recent years, Americans turned toward more-efficient vehicles. That -- along with higher labor and production costs -- in part have crippled the Big Three automakers. (The current recession and limits on borrowing were the nail in the coffin.)

"We're a nation where there's sort of an underlying assumption that we have a birthright to cheap fuel," Keller said. "The car has shaped our lives. It has shaped where we live, how we live, where we work and we're paying the price for it now."

Hybrid Sticker Shock

Keller said that there are plenty of enhancements that automakers could make to conventional vehicles to improve gas mileage without the cost of the hybrid.

After all, hybrids typically cost $4,000 more than a conventional vehicle, according to Stephen Spivey, senior auto industry analyst with Frost & Sullivan.

When gas prices were at $4 a gallon, that extra cost would be quickly recouped by city drivers. But for those primarily on the highway, the heavy weight of the battery and lack of braking -- which charges the battery -- didn't make the cars economical.

Now that gas is below $2 a gallon -- although nobody is sure how long that will last -- hybrids don't make sense on price alone.

Spivey said hybrid sales track closely with the price of gas.

To see this in action, look no further than the Toyota Prius. In April, when gas was climbing fast, 21,757 of the popular hybrids were sold. But last month, after the return of cheap gas, only 8,660 of the cars sold.

So why are automakers centering their recovery plans, in part, around hybrids?

Spivey said there is a growing demand in Congress for better fuel economy and they are "sensitive to their audience."

To highlight their newly-expanded commitment to hybrids, Ford CEO Alan Mulally, General Motors CEO Rick Wagoner and Chrysler CEO Nardelli are all arriving in Washington in hybrids. The move also might help diffuse anger about the three taking individual private jets last time to ask for a taxpayer-funded bailout.

GM's Wagoner took three vehicles for the journey from Detroit, with most of the trip spent in the Chevy Malibu Hybrid. He also traveled in the Cobalt XFE, the highest fuel-economy car that GM sells, and the E-85 Buick Lucerne, which runs on ethanol. Wagoner also will drive a test version of the Chevy VOLT before testifying.

Ford's Mulally was reported driving a Ford Escape hybrid, and Chrysler's Nardelli took the Aspen.

Those three cars can be seen as prime examples of the challenges the automakers face.

For instance, a conventional Ford Escape starts at $20,100 and gets 22 miles per gallon in the city and 28 on the highway. The hybrid version of the Escape starts at $29,305 and gets 34 miles per gallon in the city and 31 on the highway.

That $9,000 sticker- price difference can be a major stumbling block for consumers. The Chevy Malibu has a $4,000 price difference between its conventional and hybrid models.

The Gas-Price Factor

The automakers might start ramping up hybrid production, but it doesn't mean that drivers will buy them.

"The problem is, in the short-term, if gas prices stay low, there won't be any demand for these vehicles," said Ron Harbour, an auto industry analyst with consulting firm Oliver Wyman.

Harbour said that larger Americans, in particular, may be turned off by smaller cars, even if they are fuel-efficient.

"I'm 6 foot 3. There's not much motivation for me to buy a small Ford Fiesta if gas is a $1.69 a gallon," he said.

Historically, large vehicles have been the most profitable. Meanwhile, fuel-efficient vehicles rely on expensive technologies and are, therefore, less profitable for automakers.

"The government wants all the automakers to move in the direction of smaller, more fuel-efficient vehicles … [but] they're very cars that make the least amount of money," Harbour said.

But Gregg Lemos-Stein, a credit analyst at S&P who covers the automobile industry, said that for some there is an appeal to the hybrid that goes beyond price.

"There's also the good feeling you get for being more attentive to the environment," Lemos-Stein said. "It's kind of like a badge of pride that you are doing the right thing and burning less gas."

The Prius Effect

The hybrid cars are still a very small segment of the market for Ford, GM and Chrysler.

But having just one hit hybrid can help a carmaker's whole line of vehicles.

"Toyota has benefited greatly from the halo effect of being known as a producer of environmentally-friendly cars," Lemos-Stein said.

The rest of Toyota's lineup is not necessarily any better than Ford's, for example. But because of the Prius, Lemos-Stein said, many consumers think they are.

GM is hoping for that type of success with the Chevy VOLT.

The company is rushing the car through design and testing, hoping to get it to market in two years. The car is expected to travel up to 40 miles a day just on its electric battery and then use a gasoline-powered engine for further journeys.

But even if the VOLT becomes a top seller, Lemos-Stein said it takes years to recoup the development costs and turn a profit on the car.

"We would hold our breath on the VOLT transforming the financial risks of GM any time soon," he said.

AutoTrends Consulting analyst Joe Phillippi said that cost is "the first giant hurdle" the automakers need to overcome.

"You pay a premium for being green," Phillippi said.

An SUV hybrid might burn less fuel than a traditional SUV, but it still isn't going to be as efficient as a small compact.

But not everybody wants such small a car.

"If you have four or five kids," Phillippi said, "a Chevy volt or Toyota Prius isn't going to do it for you."

ABC News' Alice Gomstyn and Charles Herman contributed to this report.

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