Sales of green cars down, but great strides in fuel economy

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Skorupski: ICE has a strong future

Now that the market for greener American cars finally is arriving, it looks a little different from what was expected.

Some green-vehicle technologies that looked like sure bets for the second half of this decade are lagging. And some technologies that seemed like long shots seven model years ago have become viable.

Coming up on the outside in this horse race for higher fuel economy: diesel engines, aluminum bodies and -- still a long shot -- hydrogen fuel cell-powered vehicles.

Struggling to live up to expectations: electric vehicles and plug-in hybrids.

And the big-selling fuel-reducing technology of the moment has turned out to be a more efficient gasoline engine.

"There's definitely a future for electric vehicles and plug-in hybrids," says Doug Skorupski, Volkswagen of America product strategy manager, recalling the widespread outlook for alternative power in 2008.

"But a few years ago, as we were thinking through all this, I don't think people said this loudly enough: There is a lot of life left in the internal combustion engine. You really have to give the customer a good reason to move away from it."

Morgan Stanley analyst Ravi Shanker is more blunt: "EVs have been a disappointment, compared to what we expected."

"Their cost hasn't come down enough. Batteries haven't gotten better. And gas prices haven't gone up like everyone expected. And at the same time, the automakers have done a great job of making the internal combustion engine better."

It isn't that the auto industry got the green forecast wrong. It's that the world is different in 2014, says Andy Palmer, Nissan Motor Corp.'s global product planning chief.

"Things have continued to change," Palmer says. "A few years ago, a couple of my competitors believed that hybridization was the only realistic path to improve fuel economy, and I don't think anyone believes that now.

"Americans are now more open to diesels, and we're testing that possibility. And five years ago, we'd probably have dismissed the idea of downsizing in North America. We've proven that downsizing is a reality now."

Downsizing comes in two forms. Under the hood, it is the strategy of putting smaller, sometimes turbocharged engines into vehicles that previously used larger, more gas-thirsty engines. U.S. sales of four-cylinder-powered vehicles rose 12 percent in 2013 from a year before, according to IHS Automotive, while sales of those with six-cylinder engines declined slightly, despite a growing vehicle market. (See chart, Page 4.)

Over the past few years, some automakers have made hay offering four cylinders instead of six -- in the Hyundai Sonata and Nissan Frontier pickup, for example -- or allowing consumers to opt for six cylinders instead of eight. And Ford has introduced a 1.0 liter, three-cylinder engine on the 2014 Fiesta.

The downsized engine
4-cylinder engines are growing in popularity and are projected to continue their rise. U.S. consumers have surprised automakers by being more accepting of small-engine cars in recent years.
 U.S. Sales
Cylinders201220132014*2015*
310,00912,19935,47146,271
47,138,9077,982,7748,442,4998,906,920
5224,879184,69117,4551,890
64,665,5124,661,6544,886,3464,815,878
81,994,4142,196,8932,009,5841,976,936
1015,14816,01011,8184,263
124,1693,7143,4734,979
     
*Projected
Source: IHS Automotive

Smaller cars, too


Downsizing also means the general market shift from large or mid-sized cars into an improved lineup of compacts and subcompacts.

"Downsizing has happened more than anyone expected, and it's going to continue happening well beyond 2014," says Jeff Jowett, powertrain analyst at IHS Automotive. "It is the lower risk, less expensive way for an automaker to improve its fuel economy."

Creating EVs, hybrids or diesels is costlier, Jowett says: "And it's less risky for a consumer because they're not buying a new technology."

What has changed since the days of 2007 and 2008 is not merely that downsized vehicles are now available -- it is that automakers are confident that American consumers will accept them. That was far from a certainty a few years ago when manufacturers were drawing up their plans for greener U.S. fleets.

Back in 2008, when fuel-price shocks and environmental awareness combined to put carmakers on a new, less petroleum-centric course, the future looked like a marketplace of EVs, plug-in hybrids and Prius-style "parallel" hybrids.

Early in the Obama administration, at a time of economic trouble and dismal auto sales, the U.S. Department of Energy awarded billions in low-interest loans to automaking ventures under the $25 billion Advanced Technology Vehicles Manufacturing Program to stimulate less petroleum-dependent cars.

President Obama also summoned a vision for one million EVs on U.S. roads by 2015.

That hasn't materialized.

After more than three years on the U.S. market, the industry's leading EV, the lithium ion-powered Nissan Leaf, is still at a monthly selling rate of about 30,000 or fewer a year -- despite using some of that DOE loan money to construct a U.S. factory to produce six times that many.

Meanwhile, General Motors' competing Chevrolet Volt -- the plug-in hybrid GM heralded as emblematic of its post-bankruptcy comeback -- captured fewer than 60,000 sales cumulatively from its 2010 debut through this March.

EV market leaders have also faced a publicity challenge. A number of high-profile electric startups -- including EV-maker Coda, the plug-in hybrid startup Fisker Automotive and battery supplier A123 -- crashed in their infancy.

There are some factors pushing electric drive, such as a U.S. corporate average fuel economy goal of 54.5 mpg by the 2025 model year. And, Palmer says, the Chinese government is "pushing us toward electrification."

But others say the EV future will be slow to develop.

"I think the industry assumed that there was a willingness among consumers to radically change the way they drive -- to recharge batteries instead of going to a gas station," says IHS senior analyst Devin Lindsay. "There was a lot of emotion in that period. But once the hysteria settled down, I think car companies began to feel that change wasn't going to come so rapidly."

EVs lag small cars
U.S. sales of EVs and plug-in hybrids have grown but remain low compared with sales of subcompact and compact cars.
SubcompactsCompactsEVs/Plug-in hybrids
2011586,86420111,733,983201117,813
2012655,16420122,072,786201253,172
2013656,23020132,181,970201396,202
      
Source: Automotive News Data Center, companies and HybridCars.com

Palmer: Things have changed.

Diesels creep up


In 2008 and 2009, as automakers looked out to the middle of this decade, they were also shying away from the promise of clean diesels for the U.S. market.

The problem? At that awkward moment, car companies were struggling to sell vehicles of any kind, Lindsay says. The prospect of raising a sticker price to offer a fuel-efficient diesel lost out.

But diesels are creeping back into the outlook for America's green fleet, going beyond the German automakers that have traditionally offered them here.

Chevrolet is now marketing the Cruze compact with a turbocharged 2.0-liter four-cylinder diesel that gets 46 mpg on highways.

Last summer, Nissan said it will install a diesel engine in its upcoming new-generation Titan pickup. At the Chicago Auto Show in February, Nissan said it is studying a plan to put a diesel in its mid-sized Frontier pickup.

VW's Skorupski says Volkswagen can testify to growing U.S. interest in diesels.

The mid-sized 2014 Volkswagen Passat diesel delivers 43 mpg in highway driving, according to EPA figures. But the model is challenged by a $2,000 sticker-price premium over the standard gasoline-engine version Passat.

Volkswagen planners assumed early on that the diesel version would enjoy a 15 to 20 percent take rate among American consumers, who have never cottoned to diesel engines as Europeans have, partially because of the high price of diesel fuel here. Diesel fuel in Europe is typically as much as 10 percent cheaper than gasoline.

But Skorupski reports the Passat diesel is now running at 30 percent of the sales mix.

The mid-sized 2014 Volkswagen Passat diesel delivers 43 mpg in highway driving, according to the EPA, but there's a $2,000 sticker-price premium over the gasoline version.

In March, he points out, with TV commercials offering a $1,000 rebate on it, the diesel accounted for 40 percent of sales.

"We were pleasantly surprised," Skorupski admits.

Meanwhile, new technologies are rising.

Hydrogen fuel cells have long been heralded as a promising power source for EVs. U.S. industry officials, however, have routinely dismissed fuel cells as being at least a decade away from retail showroom reality -- mostly because there is no national infrastructure for hydrogen refueling.

But both Toyota and Hyundai plan to sell hydrogen fuel cell-powered EVs in California dealerships next year.

"We wanted to stop the debate about whether the technology is ready," says Mike O'Brien, Hyundai Motor America's vice president of corporate and product planning.

"It's ready. And we want to move ahead and get past all the naysayers.

"We can sell cars based on the number of hydrogen fueling stations that are available today. More will be available tomorrow."

Forecasters also got a surprise this year on the outlook for aluminum as a green-vehicle technology. Ford revealed in January that it will build the body of its 2015 F-150 pickup out of aluminum.

Ford has said it will use aluminum on other vehicles. And rival GM says it will use aluminum on trucks by 2018.

Until now, the conventional wisdom has been that although aluminum offers significant fuel-efficiency gains over steel through weight loss, it is also more expensive than steel. And it has been considered to be challenging to work with in high-volume production.

Ford's plan for the F-150 shows the industry shredding another past assumption about green technology.

That will probably continue as the industry's strategies for producing greener vehicles evolve.

You can reach Lindsay Chappell at lchappell@crain.com.


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