Hybrids In The World Of $34/bbl Oil

Over the summer, auto manufacturers that didn't have hybrid models for sale were chided for being "slow" to respond to consumer demand. As prices at the pump crested $4 per gallon, the few consumers who were in a car-buying mood snapped up the hybrids that were available. Toyota dealers reported months-long waiting lists for Priuses, and Honda sold itself out of a tax deduction offered by the US government to buyers of highly fuel-efficient vehicles.

There were also a few studies done, one most notably by AutoTrader, that showed that the shocking cost of gasoline more than any other reason (including the environment), was far and away the primary justification for spending the extra dollars on hybrids.

Four months down the road, gasoline prices have hit a six-year low. More telling are the figures for auto sales, which have reached a twenty-six year low. As a category, hybrid sales - which account for barely three percent of all vehicles sold in any given year - are off by 43%. The sawed-off sales figures support the Auto Trader survey, which predicted that low gasoline costs would translate into lower sales, if only because they cancel out the primary driver for hybrid demand.

Toyota is warning investors that it will declare its first annual loss in seventy years, and it's not hard to see why. The Prius, which is one of the most popular cars in Toyota's global line, has a razor-thin profit margin of about $100 per unit. The story is similar, and the profits even thinner, for smaller conventional vehicles like the Yaris.

As a rule in the auto industry, small cars have very thin profit margins. While they're popular with extremely price-sensitive customers, they're not healthy for the manufacturer's bottom line, and the more small cars they sell, the less money they make. Automakers can usually reap large profits on luxury and larger vehicles to make up for their loss leaders. Unfortunately, those are precisely the models that aren't selling right now.

Another complicating factor is the design cycle for a new vehicle. Currently, new vehicle programs are on a three- to five-year design cycle. That "lead time" is far too long to respond to the near-instantaneous changes in consumer demands. This question has plagued automakers for several years in the form of automotive electronics. By the time the design cycle is finished, many of the electronics included in "new" vehicle designs are passé. The pace of electronic technology improvements is simply too fast to accommodate automotive consumer tastes.

Automakers aren't rushing into the hybrid market for several reasons. Big question marks remain around the batteries. Is Li-ion, which appears to be the best overall technology, safe enough, small enough, cost-effective enough and powerful enough to push a car around for ten or more years? What is the overall environmental impact of the manufacturing and recycling processes for dead car batteries? Can the weight of the battery pack be reduced further? Will mass production of the batteries bring their overall cost down, thereby pushing up profit margins? Are there sufficient raw materials available to make Li-ion batteries in large quantities? Will the battery supply be equitably distributed among all auto manufacturers? Will consumers tolerate a technology that potentially has a large "balloon payment" waiting for them once the warranty on the battery pack runs out?

Within the next five years, these questions will be answered, both economically and technologically. Improvements in alternative battery technologies may eclipse the Li-ion battery race. Shortened or simplified design cycles may help automakers keep better pace with consumer demands, and global policies on greenhouse gases may lead to a more coherent approach to automotive development.

Hybrids are likely to play a significant role in transportation and the automotive industry, but continued development may produce hybrids that are completely different than those sitting on dealer lots right now. The development of hybrid technologies should be encouraged and explored, but regulators should not insist on the pursuit of one hybrid technology over another, lest they interfere with the "natural selection" process that is currently underway.