Forget the Fuel Economy Rhetoric – Manufacturers will Comply

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March 20, 2008

It has been a few months since the President has signed the Energy Independence and Security Act of 2007. In this time the vehicle manufacturers have begun to digest and hint publicly their strategy or expectations to conform to the long term target of selling a fleet of vehicles with a fuel economy average of 35 mpg by 2020.

Back in January 2008, Toyota’s President Katsuaki Watanabe reinforced the company’s promise to sell one million hybrid vehicles annually in the 2010s, and to make hybrids available to Toyota's entire product lineup by 2020. According to Watanabe, Toyota has not changed it strategy. He asserts hybrid technology is versatile and can be applied to their fleet of vehicle.

More encouraging for advanced powertrain hybrid vehicles was Watanabe’s statement, Toyota is making money on hybrids and suggests the profitability of hybrid technology is improving.

"As of today, there is no problem with the profitability of hybrids. Of course there is room for improvement. The next generation will be one-half the size and one-half the cost." Watanabe

Given that Toyota is the industry leader in terms of hybrid vehicle sales, I find Toyota’s position on hybrids very encouraging for the company and the larger industry. Toyota currently licenses its hybrid technology to both Nissan and Ford for select vehicles. However over time as companies expand their internal Research and Development into advanced powertrains, I do expect that to change.

Even General Motors Corp. has gone on the record about its expectations for hybrid sales in the near future. According to GM Vice Chairman Bob Lutz it is estimated that as many as one-third of GM’s U.S. auto sales by about 2015 will be from vehicles such as hybrids that use technology different than current internal-combustion engines as a result of the new CAFE requirements.

"Around 2015 we're going to have to sell a ton of hybrids whether people want them or not." Bob Lutz

Lutz went on to state "It's basically going to result in the quasi-disappearance of V-8 engines."

GM is also known to be developing fuel-efficient technologies such as hydrogen fuel-cell autos and the plug-in hybrid Volt. The sedan slated to go on sale by 2010 would recharge at electrical outlets. GM expects to sell 100,000 Volts by 2020. Lutz also reiterated advanced powertrains are expected to cost the company $6,000 to $7,000 per vehicle.

See here for GM’s rollout of fuel efficient vehicle.

As I have known, GM is taking fuel economy seriously and investing in the necessary improvements. GM has already announced it cancelled a new premium V8 engine program that was planned to be in production in about 18 months.

Over time the picture will be clearer as to how automakers expect to realign their fleet for improved fuel economy. However I am concerned about the conflicting statements by Toyota and GM over the cost of the hybrid technology. Granted, Toyota hybrid vehicles can sell for about a $5,000 premium over a similar model vehicle with a conventional powertrain, helping to offset cost because of the higher price structure.

In GM’s case I fear their cost estimates are based upon the depressed nature of the selling price of their vehicles compared to a more profitable company such as Toyota. In general Toyota vehicles, model for model are sold at higher transaction prices than GM vehicles. When Toyota factors in an additional premium for its hybrid powertrain option, Toyota can more easily absorb the higher cost penalty.

Personally I think the cost discussion outlines the significant difference in the financial health of Toyota and GM. This also brings to light the problems smaller companies will have with bringing advanced technology vehicles to market.

In the end I am encouraged by the hybrid sales Toyota and GM expect. By my estimates, it is possible one-third or about 5 million annual sales could by hybrid by 2015.

One last thing I feel the need to address with regard to Bob Lutz’s “whether people want them or not” statement above in reference to hybrid sales by 2015.

I hate to remind Mr. Lutz, today “whether people want them or not” car buyer today get air bags, seat belts, engines that operate on non-leaded fuel, electronic fuel injection, electronic stability control, catalytic converters, etc with their vehicles today. Yet today passenger vehicles are more affordable, safer, more efficient and powerful than they have ever been. The auto industry can be very resilient in controlling the cost associated with vehicle regulations and technological improvements. I do not underestimate the challenges vehicle manufacturers face, I am only pointing out the fact they can find cost effective solutions.

Update 3/20/08: Lutz is now saying by 2020, 80% of GM's vehicle will by hybrids. 

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