Saturday, May 28, 2005

Growing Doubt on Hybrids

An article from Autoweek concerning direct injection engines got me thinking. Direct injection engines are gasoline engines that through a complex process I do not completely understand, are able to take low sulfur gasoline, and get mileage comparable to a diesel car. Direct injection engines are now only available, or will soon be available, in Europe. For America, because we use oil with too high a sulfur content, we will have to wait. It's a similar situation with diesels: because we use too dirty of diesels, we can't get all the latest common rail diesel engines, which means we can't get cheap diesel cars.

Soon however, the US will be adopting lower sulfur diesel, and perhaps in the future, lower sulfur gasoline. Let's say that our government institutes these changes, what then? My belief is that they could be the end of hybrids.

Hybrids tied to larger engine vehicles seem to give a questionable amount of additional mileage:

Honda Accord Hybrid combined highway/city fuel mileage: 32 mpg
Honda Accord v6 Automatic mileage: 24 mpg

The above comes from the government's fuel economy website here. There is a six thousand dollar premium in price to pay for a hybrid. What if that v6 automatic had a 15 percent increase in fuel economy? Combine that with no additional cost in MSRP, and you have a steal. The purpose of the hybrid is negated. You might argue that a battery married to an engine that uses low sulfur gasoline will produce even better mileage. But the same conundrum returns. You would still have a six thousand dollar surcharge, and your mileage would only be improved by a few miles per gallon.

If the government institutes cleaner gasoline as they are doing with diesel, a car company that offers a regular engine without a hybrid system will be able to undercut their competitors. The hybrid, instead of being a necessity, becomes yet again a higher trim level that only conservation types will purchase. This is all in the face of steadily rising gas prices, as I predict.

I think clean diesel and gasoline are the solutions for the longer term, rather than hybrids, unless the price of hybrids falls dramatically. The people who need fuel efficient vehicles aren't the middle and upper classes of American society, they are the lower classes. Small diesel cars are their answer. Unfortunately, there aren't any on the market. It seems strange, but the middle and upper classes, the people who can afford to drive less efficient cars, are the only ones able to purchase the most fuel efficient vehicles. Also, unlike a common rail diesel or direct injection car, hybrids require costly battery replacements. That means poor people will not be able to purchase used models, because the cost to maintain them will be too high. All this seems to point to hybrids being a fad, and the real solution to ever increasing fuel prices lies in smaller vehicles, that run on clean sulfur fuel.

This is important, because if gasoline hits three dollars a gallon as the national average, many people will not be able to afford cars, yet have desperate need of them because their public transportation systems are not suitable near them. In most parts of the country, public transportation is inadequate. An enormous market is being overlooked, and possibly being legislated against, as the government has been slow to implement diesel changes that would allow diesel cars to be sold in great numbers here. The MSRP of a diesel Golf TDI is around 18 thousand. With an automatic transmission it gets 36 mpg. A Honda Civic with a normal gasoline engine gets 39 mpg combined, and costs almost 15 grand. In Europe for those prices you could get a car with significantly higher mileage. There are also cars in the ten thousand dollar range with comparable mileage. It's a market that is being ignored. There aren't many used cars with good mileage, as most of the used cars on the lots come from eras where fuel was cheap and abundant. The first automaker that can produce, or is allowed to produce for America a car that is cheap and gets great mileage, and is small is going to make a lot of money.

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Friday, May 27, 2005

Great Interview with Ford COO Jim Padilla

Autonews and Autoweek have a rather good and informing interview about the state of the Ford Motor Company with Jim Padilla, COO. As my obsession with the interplay between increasing oil prices in America and automakers grows, I've highlighted that part of this interview that covered the subject below, with Padilla's words in italics, and the interviewer's in bold:

...we didn't see a huge impact of fuel prices on some of our bigger products. We had a phenomenal December for the F series. As January and February came in, it became clear that we were seeing some implication from fuel prices. It affects the margins.

So we've got our challenges, and we're taking them on...

Will rising car sales make up for the Explorer and Expedition segments weakening?

This is kind of the way we see the industry changing. Traditional trucks, which is pickups and SUVs, are down quite a bit as a percentage share of the industry. Crossovers and small SUVs are up. Small cars and sports cars are up. We're affected. Our large SUVs are down. But we're pretty much offsetting that with crossovers, which is the Freestyle predominantly, and the Escape. We anticipated a movement that would put less emphasis on sport utility vehicles. We didn't expect it changing that fast because we didn't expect the fuel implications.

And that will save them. So far the only product in Ford's stable that is in huge demand is the Mustang. But as Padilla points out in another part of the interview, the Mustang is part of the trend away from SUVs and into mid-size and small cars. The Mustang, as viewed as a mid-size car that gets better gas mileage than a comparably priced SUV is catching that portion of the market that is now interested in performance, rather than size.

There's a striking contrast on what Ford is saying on fuel prices and GM is saying on fuel prices. You are acknowledging this is a big hit this year. GM is saying that any suggestions that vehicle sales are being affected by fuel prices is poor analysis and poor journalism. What do you make of that? Is it a real issue or isn't it?

I call it the way we see it. I'm an engineer. We deal with facts and figures. I think the facts speak for themselves.

Is this a hint that Padilla and other Ford higherups are aware of the shortage of oil for the long term? Possibly. Padilla continues with his critique of the Nissan and GM strategy for higher oil prices, which is to speed up the replacements of SUVs with new ones:

Is aging product also part of the SUV decline?

It's anybody's supposition, but it didn't affect it much a year ago. The Explorer and its competitors are fairly modern products. You don't have to apologize for them. I think it's a segment shift that we're seeing. And, on top of that, the fuel prices are having an implication.

The article is really fantastic, and a good barometer that Ford is at the very least preparing for a radical change in the automobile market in America. For a company like Ford, who are incredibly dependent on the sale of gas guzzlers like the Explorer and the F-150 to stay afloat to say that SUVs are no longer the priority is amazing. Crossovers and mid-size sedans have much smaller profit margins. To embrace these new market segments can only mean that Ford realizes that oil prices are making an enormous impact on the industry. It's good to see that they may be ahead of the curve.

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Sunday, May 22, 2005

Lexus and Japan in Europe

Autonews (reg. required) has an article about Lexus's travails in Europe. It's interesting. Lexus is seen by many if not all reliability surveys as the most reliable brand in existence. Lexus offers adequate handling and power compared with rivals BMW and Mercedes, adequate accessories, and superior reliability. Sales are increasing, but in general the whole enterprise to me seems unprofitable. Aesthetically, Lexus is inoffensive.

Looking at how Lexus took the American luxury market by storm, Lexus entered an arena where the homegrown luxury makers, Cadillac and Lincoln, had largely maintained marketshare by selling unexciting larger engine versions of Chevrolets and Buicks and Fords, and calling them luxury cars. Basically, the domestic car makers put little effort towards maintaining market share, and Lexus was able to get a permanent foothold. Cadillac and to some extent Lincoln as well have changed their tune and are not making decent cars, but it was that act of letting the guard down for years that allowed Lexus to become popular in America.

With Europe, Germany, the largest car market, already has a very developed luxury market which is dominated by homegrown companies. Italy too with Maserati and Alfa Romeo has luxury brands comparable at least in price and sophistication with Lexus. Britain has Jaguar, France has nothing but high end Peugeots. The future of the Japanese in Europe are markets where the homegrown companies have taken their eyes off the ball. I think a close watch on Lexus in the future is very important. The general trend in America, and more slowly, Europe, is a gradual realization by markets that the Japanese build the most reliable vehicles, but not necessarily the most exciting vehicles. The question next becomes whether customers are looking more for reliability, or for driving excitement. In the US the answer is increasingly the former, and in Europe it is the latter. But Lexus' and Japanese companies' continued positive sales means that might change, at least in the distant future.

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