Saturday, April 16, 2005

Hybrids: Once more into the Niche.

From a Money/CNN report of April 2004, GM: Hybrid Cars Make No Sense:

GM executive Lutz argues critically acclaimed hybrid compacts like Toyota Prius are bad business
DETROIT (CNN/Money) _ General Motors Corp. has no plans to try to answer the success of the Toyota Prius, the critically-acclaimed gas/electric hybrid car, said Robert Lutz, GM's vice chairman of product development.
It just doesn't make environmental or economic sense to try to put an expensive dual-powertrain system into less expensive cars which already get good mileage, Lutz said at the North American International Auto Show. (Italics mine, bold CNN) (snip)

Toyota insists the Prius will be profitable, but Lutz said he believes the only way a company can shoulder the extra cost of a hybrid system is by putting it on a higher-priced, higher margin vehicle such as a pickup or sport/utility vehicle. He argues that developing hybrid SUVs and pickups will have a great positive environmental impact because those vehicles can save more fuel with hybrid technology than can already fuel-efficient small cars.

Lutz also argues that it doesn't make economic sense for consumers to pay several thousand dollars more for hybrid cars that get up to 30 percent better fuel economy.

"Hybrids are an interesting curiosity and we will do some," he said. "But do they make sense at $1.50 a gallon? No, they do not."
He said it would make some sense for automakers to use the pricey hybrid systems in light trucks to help their sales in that segment meet federal fuel economy regulations. And he said that's why GM will concentrate on hybrids in the light truck models in coming year.

Notice a couple of key ideas so far. Hybrids are dual-power train vehicles. (There is another dual-power train vehicle in Florida. It makes regular trips into space.) And people pay several thousand dollars more for hybrids, a substantial premium. Why? That comes later. At $1.50/gallon and a jump from about 33MPG to 43MPG, the cost of gas per mile driven drops from $.045 to $.035. One penny per mile. That $3000 premium is built from 300,000 pennies, or 300,000 miles. (I don't know the milage costs of the Space Shuttle. I do know it is 250,000 miles to the moon.)

And notice GM's motivation to use hybrids, to meet fuel economy regulations. There are more influences on the market than peoples' urges for more miles per gallon. What about those trucks then? Read on:

Sunday Toyota Motor Corp. introduced its first light truck hybrid, a version of its Highlander SUV, due out this fall. On Tuesday, its luxury Lexus brand introduced its first hybrid, the RX400h SUV. While Toyota executives wouldn't give numbers for average fuel economy of the hybrid SUVs until testing is completed, they predict these vehicles will get better mileage than the average gas-powered compact car.
Lutz did concede it may be more difficult to get an environmentally-conscious buyer(300,000 pennies) to look at a hybrid light truck rather than a hybrid compact. That's part of the reason both Toyota and GM will be emphasizing the additional power available on a hybrid light truck, rather than simply better fuel economy.

Yes, power! "Make us strong, give us power." "We like power," said the Paqulids. Not just fuel economy sells trucks. And a tip of the hat to Toyota from Mr. Lutz:

And Lutz did concede that Toyota has won the public relations battle with the Prius, even if it followed a business strategy he does not endorse.
"For Toyota, it was a huge, huge, immeasurably valuable PR coup," said Lutz. GM's decision not to pursue a hybrid car "was a mistake from one aspect, and that's public relations and catering to the environmental movement."

I think Toyota's Prius is like the MacDonalds' Arches, a big flashing sign. Instead of fast food it is saying "Oooh, high-tech future", with a lot of "See how much I care about The Environment!"
I'd say about 300,000 miles worth of care. To the Moon, Alice?

Let's churn some sales numbers. (Bold mine this time.) From the South Florida Sun Sentinel:

Ford sales analyst George Pipas says demand for traditional, truck-chassis SUVs peaked in 2000 and has been declining ever since. "What gas prices are doing in the sport-utility-vehicle segment is accelerating a trend that was already well under way," he says. More consumers are opting for lighter, crossover wagons, usually built with chassis and engines designed for cars or minivans. Crossovers accounted for 41 percent of total SUV sales last year, Pipas says, up from virtually zero in 1995.
Detroit's auto makers have fought this trend by offering bigger and bigger discounts on traditional SUVs. But that fight has reached a point of diminishing returns, industry executives say.

Notice, tastes and wants changing ahead of rising gas prices. Stay tuned.

Toyota Motor Corp. is investing heavily to ramp up production of hybrid gasoline-and-electric vehicles. Toyota has generated loads of buzz with its Prius hybrid, which, like hybrid models from Honda Motor Co. and more recently from Ford, are selling briskly. "My belief is in our lifetime the majority of vehicles sold will be some kind of hybrid powertrain," says Jim Press, executive vice president of Toyota's U.S. sales arm, adding that he expects gas prices to continue to rise and hit $3 a gallon by 2010.
But for all the chatter about hybrids, they still represent well less than 1 percent of U.S. auto sales. Toyota itself sells far more SUVs in the U.S. than it does hybrids. Indeed, Toyota is expanding its range of large SUVs and pickups, because for some consumers --people with large families, or commercial users -- "demand for that size vehicle is not solely optional," Press says. Still, he cautions that, in part because of rising gasoline prices, "there are going to be pressures on those segments."

Less than 1 percent of sales. Eye catching yes. Large market share, well... Nissan chief executive Carlos Ghosn from a story originally via Reuters, now gone missing there but still at Planet Ark joins in:

Nissan Chief Says Hybrid Cars Make No Sense.
They make a nice story, but they're not a a good business story yet because the value is lower than their costs," said Nissan Chief Executive Carlos Ghosn.
Nissan will, in fact, start manufacturing a gas-electric hybrid version of its Altima sedan for the US market in 2006.
But Ghosn said the model was only intended to help Japan's second-largest automaker comply with strict fuel economy and emissions standards in states like California, not because he expects it to be a money-maker.

Notice again, losing, or at least not earning money, just to meet fuel economy and emissions standards. (Before you start howling at either the moon or me, remember how intensesly clean modern cars truly are. There is such a thing as diminishing returns. Can you really eat one gallon of popcorn and drink the two quarts of coke you paid an extra buck for? Twice as much, only $1.50 more. 300,000 pennies. For really nasty air pollution see China, Beijing, Air in-.) More Mr. Ghosn:

Nissan will license some technology for the hybrid Altima from Toyota Motor Corp., which is the world leader in hybrid production along with Honda Motor Co. Ltd..
The hybrids made by Toyota and Honda are in high demand, but production levels are still relatively small.
Toyota plans to nearly double production of its hybrid Prius car for the US market this year, with production totaling some 100,000 vehicles.
Ford Motor Co. is alone among US automakers in producing mass-market hybrid models; Ford recently announced plans to introduce four new models between this year and 2008.

That announcement from Ford will bear watching the results. Remember, expensive, dual-power train engines.

In his speech, he noted that only about 88,000 of the 16.9 million light vehicles sold in the United States last year were hybrids, adding that they are still considered "niche" products and something way outside the automotive mainstream.
He also poured cold water on hydrogen fuel cell vehicles, which many automakers see as the industry's next big technological breakthrough.
"The cost to build one fuel cell car is about $800,000. Do the math and you figure out that we will have to reduce the cost of that car by more than 95 percent in order to gain widespread marketplace acceptance," Ghosn said.

Um, that is 80,000,000 pennies. The sun is 93,000,000 miles from earth. Light gets from there to here in eight minutes. I don't know the MPG for that. If you are thinking of dismissing this guys opinions, don't.

Nissan -owned 44 percent by Renault -scored the biggest sales jump of any major major car maker in the United States last year, with a 24 percent surge to 986,000 vehicles.

Remember two things. Nissan is Japan's second biggest car maker. And 986,000 sales in 2004.
Oh, and they're made in Ohio. What about number three, and other (semi-) hybrid maker Honda? From Yahoo Business :

How Honda Is Stalling In The U.S.
Its most popular models show signs of weakness -and the mighty yen is hurting profits.
Until recently, Honda Motor Co. (HMC ) seemed unstoppable. With its sporty Civic compact, stalwart Accord sedan, and a fleet of snazzy sport-utility vehicles and minivans, sales seemed to go nowhere but up. Profits soared, and Honda's U.S. market share rose to 9% last August from 6.7% in 2000.

(Market share of 9% on 16.9 million light vehicles is 1.52 million.) More:

These days, though, Honda doesn't look so invincible. In April, (2004) once-hapless Nissan Motor Co. (see above,heh) (NSANY ) overtook Honda as Japan's second-largest car producer. And on Apr. 27 the company surprised investors by slashing this year's earnings forecasts by 7%, to $5.2 billion. Its profit for the quarter ended in March fell 36.5%, to $682 million...What's going on? Honda is paying the price of its large exposure to the U.S., where the company makes 80% of its profits. The U.S. problem is twofold: sales of key models are slipping, and the rising yen lowers the value of U.S.-derived profits when they're translated back into the Japanese currency.

To take some of the sting out of such shifts, Honda is boosting its investment in U.S. production: at least that way it won't be making autos at home, where the high yen makes exports less profitable...On May 7, Honda CEO Takeo Fukui inaugurated an addition to the company's four-year-old factory in Lincoln, Ala., that will double capacity there to 300,000 vehicles annually. Today, 80% of the 1.53 million cars Honda sells in North America are made at North American factories, and the parts in Honda's American cars increasingly come from local suppliers...But if the yen problem can be blunted, the larger issues...are harder to address. Sales of the flagship Accord have fallen by 9% so far this year. The Civic has gained 1.8%, but mostly because of rich incentives added after sales slipped by 4.3% last year.

Honda is struggling in newer segments, too. The boxy Element SUV hasn't been the hit among young drivers that Honda had hoped, with sales down 9% this year. Even the Odyssey minivan, once the vehicle to beat in its class, is down by 9% this year as would-be buyers await its relaunch in the fall. And Honda had to set aside $369 million to cover recall and warranty costs for 600,000 SUVs and minivans with transmission problems. "Honda's situation in the U.S. isn't so good right now," says Yoshio Watanabe, an analyst at Mizuho Securities Co.

"Your news is all of woe" cried Eomer in dismay. It grows darker.

Honda has long been successful because it entered mainstream market segments with offbeat cars. Its high-tech engines offer the best of two worlds: They're zippy and fuel-efficient. The cars handle well, offering a little fun to go with their high quality and utilitarian design. But the current Civic is getting long in the tooth...With the Accord, meanwhile, Honda has also had to boost incentives to keep moving the metal. Granted, the Toyota Camry, for instance, is shored up by incentives that are double what Honda is offering on the Accord, according to CNW Marketing Research Inc. But Honda is adding to its incentives much faster than Toyota, damaging profits.

Incentives in the 1950's Am radio business were called payola. Now it's "Cash Back!!!"

Moreover, the entire midsize-sedan segment is weak in the U.S., as buyers keep moving to SUVs.

That last point underscores Honda's other weakness: the relatively limited scale of its lineup in the U.S. Toyota has seen sales and profits soar because it offers buyers just about anything they want, from the smallest subcompact to the biggest road-hogging SUVs and pickups. Honda, by contrast, builds almost everything using variations of the front-wheel-drive Civic and Accord chassis with four-and six-cylinder engines. It has no big truck-based SUV and no V-8 engine.

Any color as long as it's black. Any model as long as it's an Accord. Wait till you see the distance in millions of miles for a Honda big truck. (I may have to resort to scientific notation.)

Honda says it would cost too much to revamp its factories to produce all-new platforms and big engines for trucks and luxury cars, so a big shift isn't in the cards soon. The auto maker only has three cars in the pipeline for this year: the new Acura RL sedan, a revamped Odyssey minivan, and the latest version of the gasoline/electric hybrid Accord. Rivals are rushing out many more models...Honda isn't totally hitless...Pilot SUV is so popular that Honda can't make them fast enough. Although the Lincoln plant will build Pilots as early as this summer, it will only be able to churn out 30,000 of them this year, well below the potential demand.

Excellent cars, just not enough of them; too narrow a range of choices. Bear with me, a bit more on Honda. We're almost to the rings of Saturn. From the Business the costs to make big Honda trucks.

Honda continues to have some big successes, including a string of record profits and successful expansions into China and other new Asian markets. But the carmaker, Japan's third largest, is now falling behind its powerful Japanese rivals, Toyota Motor and Nissan Motor, in markets that matter most, the United States and Japan.
Honda has long run on a strategy of doing a lot with a little. It builds a wide range of vehicles, from compact cars to sport utility vehicles and luxury sedans, using just a few basic chassis designs. That efficiency has been crucial to its profitability -the company has never reported a loss in its 46-year history. Still, the recent sales slump points to the strategy's limitations.

Toyota and Nissan have been picking up market share in the United States in part by rapidly expanding their lineups of full-size pickups and S.U.V.'s. Honda is just now taking its first tentative step into the pickup truck market with the introduction of the Ridgeline earlier this month.The company's approach in building its pickup is different from that of Nissan and Toyota, which have both been selling pickups in the United States for years. The Nissan Titan and the Toyota Tundra have V-8 engines and are built on the same kind of truck frames that the original truck makers in Detroit have long used.
But Honda does not make a V-8, nor does it have a truck factory, and developing either would cost more than $1 billion.

It's about 800 million miles from the Earth to Saturn. You can take that side trip to Jupiter's moons on the way out, Saturn's on the way back and have miles to spare. Back to hybrids.

How Big is the Hybrid Car Market?
Estimates of annual U.S. hybrid sales in 2010 run from a conservative 535,000 by J.D. Power and Associates to 3.5 million in a Booz Allen Hamilton forecast.
In 2004, the U.S. market totaled 16.9 million vehicles. J.D. Power's forecast assumes a $4,000 premium for a hybrid vehicle. The Booz Allen Hamilton forecast assumes price parity when hybrids achieve high volumes and economies of scale. Another confusing factor: Both projections include so-called "mild" hybrids, which use a device that merely stops the engine when the vehicle stops. In true hybrids, electric motors provide propulsion.

Notice, Honda's is a mild; the electric motor takes over at speed but does not provide propulsion, unlike Toyota.

Toyota sees rising demand. Its internal research in late 2004 showed that 50 percent of consumers were familiar with the workings of hybrid vehicles, and 26 percent had intentions to buy a hybrid. That's double the figures of 18 months before. Toyota expects to sell 300,000 hybrids worldwide in 2006, climbing to 2 million annual units worldwide by 2010.

So far only the Prius hybrid is a huge success. It sold 53,991 U.S. units in 2004, and there is a six-month wait in some areas. With production ramped up, Toyota estimates it can easily sell 100,000 U.S. units annually. It also wants to sell about 25,000 units each of the Lexus RX 400h and the Toyota Highlander hybrid, which go on sale this year. Both will have waiting lists.
But other automakers have modest results with hybrids.
Honda sold 25,571 Civic hybrids in 2004, right on its annual target. In addition to maintaining Civic sales, Honda also wants to sell 25,000 Accord hybrids this year. Honda has no incentives on its hybrids. Honda's Insight can be obtained only by special order.
Meanwhile, Ford Motor Co., which is constrained by limited quantities of hybrid batteries, says it expects to sell about 20,000 hybrids in 2005.

Despite selling all they can make, very small numbers for Honda. Still a niche market for them. Time will tell on Ford's 2008 hybrid entry. Too early yet. People are paying that premium for the Prius and Honda Civic hybrid. If it makes them feel good, isn't that part of what buying anything involves? It is still a lot of pennies for that feel good. Will that feeling persist if a $5000 battery needs replacing? If your home address is Malibu it might not matter. Otherwise I'm not so sure. As the Chinese demand for petroleum increases pressure on world supplies and prices, let us hope that $800,000 fuel cell car doesn't begin looking attractive. I'll bet on human ingenuity to solve this problem, hopefully Yankee ingenuity. Like the Chinese curse, we live in interesting times.

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