Make Vrooom For The Hybrids

(2 of 2)

GM executives are now playing up their hybrid efforts and racing to retool assembly lines in order to crank out up to 1 million hybrids by 2007. The company delivered a mild-hybrid version of its full-size Chevy Silverado pickup to Miami-Dade County's government fleet last month, and plans to make the vehicles available to consumers this fall. Over the next few weeks, GM says, it will deliver 234 hybrid buses to the city of Seattle. GM executive Larry Burns claims that those buses will provide the fuel savings of 8,000 hybrid cars on the road.

Automakers have strong incentives not to ramp up hybrid production too quickly. Hybrids are technologically complex and costly and require the retraining of service technicians. Toyota and Honda insist they make money from each sale, but those profits are meager compared with what they earn from conventional cars and light trucks, especially their luxury brands. The Big Three Ford, GM and Chrysler are even more reliant on SUVs and big pickups for profits, and if hybrids eat into sales of conventional models, the industry would be maiming a critical cash cow. So while auto executives talk of a greener future of hybrids and hydrogen-fuel-cell vehicles, they continue luring customers to gas guzzlers loaded with powerful engines, luxury amenities and gadgetry and moving them off the lot with generous incentives.

That's what Wall Street wants to see (aside from those rebates). But the Street is rumbling that automakers may be saddled with a glut of heavy metal at the precise moment that consumers want more economical cars. "I get a sense that nobody is panicking about this, and that makes me a little nervous," says Steve Girsky, senior automotive analyst at Morgan Stanley. It has happened before. In the 1970s, when gas prices soared, the Big Three were caught flat-footed with large, fuel-hungry cars, allowing Honda, Nissan and Toyota to swoop in and grab market share. If it happens again, the pain will be shared by Japanese manufacturers. Toyota is planning to ramp up production of its full-size pickup, the Tundra, with a plant under construction in San Antonio, Texas. And Nissan just bet on a line of full-size SUVs and pickups being built at a new factory in Canton, Miss.

The latest sales trends don't augur well for such vehicles. Sales of some full-size SUVs, such as the Ford Excursion and Expedition and Lincoln Navigator, fell during the first four months of the year, with a sharp drop in April, while sales of GM's mighty Hummer H2 tanked 25%. Smaller SUVs and crossover models are gaining momentum. "The mix is shifting down, and that's something we haven't seen in quite a while," Girsky says. GM plans to temporarily halt assembly lines at an SUV plant near Oklahoma City, Okla., this week one of the few times that rising SUV inventories have triggered such a closure. Nonetheless, GM officials insist the company is equipped to handle a spike in demand for more fuel-efficient vehicles. GM aims to build its hybrids on the same assembly lines as its standard light trucks, giving it more flexibility to change the production mix as buying patterns shift.

Hybrids have plenty of detractors. Critics point out that after paying the extra cash for one, say a $2,500 premium for a hybrid Civic, it will take about a decade to recoup that amount at the pump (at 15,000 miles a year and with gas at $2 per gal.). They claim that if fuel economy becomes an even more important consideration, there are already plenty of fuel-efficient cars and smaller SUVs that are less complex and easier to fix than hybrids.

What can't easily be discounted is the coolness factor. As hybrids with the looks, luxury and power of conventional cars emerge, consumers may snap them up. Ryan Brown, 25, a computer consultant from Arlington, Va., just dumped his hot car an Audi TT roadster for a Prius. He fell in love with the Prius' technology, peppiness and design. But he is having one problem. The Prius runs silently on electric power at low speeds, and that can be spooky. "Driving it in a parking garage, people don't hear me coming. You don't want to honk, but folks are shocked."