Bailouts: The Real Hybrid Premium

If the idea of bailing out the auto industry doesn't make your day, consider this. Toyota says today that it will not be able to fund the development and production of hybrid vehicles without government intervention. Don't assume that Toyota is also looking for help from Washington, though. These comments, made by Toyota chief Max Yasuda, relate to the company's ability to bring hybrid cars to Australia.

The alternative to building hybrids in Australia, says Yasuda, is to import them from Thailand or Japan. Importing is an important consideration, since it directly affects the price that the average Aussie will pay for a green vehicle. Automakers Ford and Holden also warned that they may not have enough capital to produce hybrids Down Under.

The issue of auto bailouts becomes more concerning when content laws, such as those in Canada, that largely require production of most of the vehicle's components to take place in that country, are taken into consideration. Automakers are increasingly caught between government regulation on fuel economy, tailpipe emissions and production goals, burgeoning research and development costs, the long development cycle of a vehicle, increased vehicle safety regulations, the real costs of automobile production, "world cars" versus regional vehicles, the state of battery technology, content regulations and buying incentives that most consumers demand.

To put it succinctly, something's got to give. Regulatory agencies in Europe, Asia and North America are demanding more stringent controls over tailpipe emissions, and while legislating particular emissions targets is easy, designing and building cars and trucks that meet them is not. The cost of research and development is enormous, and the state of technology advances faster than the automotive design cycle does. As a result, the latest vehicles are just introducing technology that is approaching obsolescence.

Under the circumstances, asking for government assistance is the only reasonable thing to do. Research and development can take place quickly, as long as the funding for it is in place. If private industries need to fund their own research and development to meet government mandates that stretch the definition of reasonable, innovation will take place at a much slower pace. The manufacturers have to balance their current production and operational needs with the cost of future development. Operations are funded largely through vehicle sales, and in a down economy, vehicle purchases decline. Fewer dollars are available for production and operation, and many fewer dollars are available for research and development.

It isn't in the public interest to halt production of vehicles to further research and development, nor is it in the public interest to redirect research and development dollars to the operation of the company. In a survival situation, however, the research and development matters little when production stops. Automakers are seeking assistance from governments around the world in order to meet governmental demands that are incompatible with the current state of automotive technology and that will require massive investment to achieve.

Ultimately, if governmental bodies want green vehicles, they're going to have to pony up. If that doesn't sit well with you, consider the alternatives.