Hybrids are popular, but making them profitable is a challenge. U.S. automakers, looking to Congress for a bailout, must show they can change.
WASHINGTON — Many members of Congress believe they know what the car company of the future should look like.
But the car company they envision could turn out to be a money-losing operation, not part of a “sustainable U.S. auto industry” that President-elect Obama and most members of Congress say they want.
That’s because car manufacturers still haven’t figured out how to produce hybrid and plug-in vehicles cheaply enough to make money on them. After a decade of success with its hybrid Prius, Toyota has sold about a million of the cars and is still widely believed by analysts to be losing money on each one sold. General Motors has touted plans for a plug-in hybrid called the Volt, but the costly battery will prevent it from turning a profit for years.
“In 10 years are they (at GM) going to solve the technological problems with respect to the Volt? Sure,” says Maryann Keller, an automotive analyst and author of a book on GM. “But are they going to be able to stake their survival, which is really more of a now-to-five-year proposition, on it? I’d say they can’t. They have to stake their future on Malibus, the Chevy Cruze, and much more conventional technologies.”
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U.S. automakers last week faced a barrage of demands that they provide evidence and assurance that they would use federal bailout money to transform their companies to produce automobiles of the future, using advanced technologies and featuring hybrid or plug-in vehicles. And in his “60 Minutes” interview on Nov. 16, Obama said that before backing a big loan package he wanted to be sure “that we are creating a bridge loan to somewhere as opposed to a bridge loan to nowhere.”
But there’s no guarantee that the new business model would be any more viable than the current one. Automobile experts estimate that the battery in a plug-in vehicle could add at least $8,000 to the cost of a car, maybe considerably more. Most Americans will be unwilling to pay the extra price, especially if gasoline prices languish around $2 a gallon.
That’s why one of the mysteries about GM’s plans to introduce the Volt in 2010 is the price tag. “I would be happy to answer that if you can tell me the price of oil in 2010,” said Robert Kruse, GM’s executive director of global vehicle engineering for hybrids, electric vehicles and batteries. “I can tell you to the penny what it will cost GM, but pricing is much more related to market conditions.”
Many experts say gas guzzlers will not fade away as long as Congress fails to impose higher taxes on gasoline.
“You’d think from reading the media that we have had a burial ceremony at Arlington cemetery for the last pickup truck,” said James Womack, a management expert who has written about the automobile industry. “I can easily imagine three years from now when the public is focused on a new set of priorities … that this whole thing would go poof.”
Eager to reduce U.S. dependence on foreign oil, Congress passed a tax credit of up to $7,500 for plug-in vehicles. But roughly half of Americans don’t earn enough to take advantage of such a big tax credit. (A head of household would need to earn almost $50,000 to have a federal tax liability that large.) Many others don’t have the cash to purchase an expensive vehicle, then wait for a federal refund.
Womack warned that it takes time to design a new vehicle, change assembly lines and then turn a new product into a profitable one. “For anything that’s really new it’s still about four years,” he said. “To get your money back, you need to make that product for eight to 10 years with only cosmetic changes.”
Helping automakers over that hump may take more money and patience than Congress or taxpayers have.
The experience of Tesla Motors, a Silicon Valley sports-car maker, illustrates the challenges of making a radically new automobile. Founded by high-tech multimillionaires, Tesla has been trying to become the first new successful U.S. car company since Chrysler, founded in 1925.
Tesla’s founders set out to make all-electric vehicles. The company’s first: an all-electric sports car with a price tag of $109,000 that can go from zero to 60 mph in a bracing 3.9 seconds. As of a week ago, only 63 had been delivered to customers; a couple of dozen were nearly ready, and the company has about 1,200 back orders.
“The reason we started with a $100,000 sports car is that when technology is new, it tends to be expensive,” said Elon Musk, the PayPal co-founder who is the chief executive of and a big investor in Tesla. “It just takes time to optimize the right design and work up to economies of scale. … Why we didn’t start with a Honda Civic is that it would be a $70,000 to $80,000 Honda Civic.”
With a chassis made by Lotus in England, body parts made by a French carbon-fiber firm Sotira and battery parts from Taiwan, Tesla has had supply-chain problems. Musk recently hired some veterans from the Detroit automakers to smooth out production problems.
“For sure, this game looks a lot easier than it really is,” said Jon Lauckner, GM’s vice president of global program management. “You’ve got to get 3,000 parts all together in one place to assemble a vehicle.”
Tesla isn’t any different from the Detroit Three in one regard: It, too, is looking for government assistance. Eager to make a luxury sedan as the next in what it hopes eventually will be a full line of electric vehicles, Tesla Motors has applied for $400 million in low-interest federal loans under the $25 billion loan package approved by Congress a year ago.
How instead to succeed
But GM and other car companies, while preparing plug-in vehicles, are more likely to live or die based on the sales of conventional cars that get better fuel efficiency through improved transmissions, reduced weight or hybrid technology. GM has used “single-mode” or “mild” hybrid technology, which has only modest mileage gains but is far less expensive. It says it will offer nine hybrids for sale by the middle of next year. Reinert says that Toyota will eventually offer hybrid versions of all its car models.
Still, production of the new cars will be limited.
“People ask us when will we produce not just 10,000 but 50,000,” said Frank Weber, GM’s global vehicle line executive and chief engineer for E-flex systems. “I say when the battery and powertrain costs have come down significantly.”
The economic downturn also has changed the equation.
“Will the U.S. auto industry ever be as profitable as it was from mid-90s to the early part of this decade?” automobile expert Keller asks. Those days were “magic. … Everybody from Toyota and GM to Ford and Nissan were feasting on our desire to drive around in those giant vehicles.”
But the industry has gone from feast to famine. Auto-industry experts say the basic problem is that the U.S. industry geared up to make 18 million cars and light trucks a year, and that it will be lucky to sell 11 million this year. How far sales will climb back — and when — is anybody’s guess.
“There’s fluff, and there’s reality,” Keller said. “The fluff is the Chevy Volt. … That’s not going to save GM in the next five years. What will save GM is more small sedans and more crossovers. That’s what people are going to be buying.”