How Can Advanced Autos Improve Their Value Proposition?

It’s hard not to feel a bit underwhelmed by the hybrid vehicles being offered up by automakers today after reading a recent New York Times assessment of the time it takes for buyers of alternative technology cars to recoup the higher sticker price in fuel savings.

The Times, working with, found that “Except for two hybrids, the Prius and Lincoln MKZ, and the diesel-powered Volkswagen Jetta TDI, the added cost of the fuel-efficient technologies is so high that it would take the average driver many years—in some cases more than a decade—to save money over comparable new models with conventional internal-combustion engines.” It’s clear that fuel efficiency technologies must improve their value proposition for consumers if they are to have much of a future.

But what about the cars that did offer an attractive payback? Ford, which has emphasized fuel economy, offers the MKZ hybrid at the same price as the traditional version, but with a four-cylinder engine assisted by the electric motor to boost fuel economy for the hybrid to 41 mpg city and 36 highway, compared with 17 city and 24 highway for the traditional model.

The Prius introduced hybrid technology on a mass scale, so it’s interesting to consider what its story might mean for the Chevrolet Volt and other advanced-technology vehicles yet to be rolled out.

The Prius Story

The Prius program started as what the auto industry calls a “moonshot.” Toyota made a high-risk, high-reward bet on the Prius that many thought to be a mistake even as the first of the pioneering hybrids became available for purchase in 1997. No one really knew if the market for such a vehicle would exist.

To get some idea of the stakes, the development of a new auto, from conception to design to the actual manufacturing, typically costs between $1 billion and $3 billion, requires over one million engineering hours and takes from two and a half to three years. Engineering teams must design and integrate the manufacturing of the over 10,000 parts that make up a typical auto. Automakers leverage as many parts as possible from already existing models to reduce the risk and effort. But the Prius team was designing the first mass-market hybrid-electric powertrain, including new battery technology, regenerative braking, and the advanced controls to run it all.

The Prius went on sale in 1997 in Japan. It wasn’t available in the U.S. until 2001. Volumes were low and there was talk that the Toyota could be selling at a loss. Only about 60,000 of the first-generation vehicles were sold in the U.S., but they found a niche, for example with celebrities.

The current, third-generation Prius was introduced in in 2009. The car is an unquestioned success, selling at annual volumes over 2 million, generating both a large chunk of revenue and a healthy margin. The Prius, now offered in different sizes and with a PHEV rolling out, has become a sort of flagship vehicle for Toyota, establishing it as an environmental and technological leader in a world of high and volatile fuel prices.

As a first mover, Toyota seems to have built a durable advantage. There are many ways to make a hybrid, some more effective than others (see NYTimes article on “Untangling the Hybrid Taxonomy”). The design and integration of the system makes a big difference, too, and the followers may be having a hard catching up.

GM’s moonshot Volt and a few others

The Chevy Volt is also noted in the New York Times piece, although in a much less favorable light. Only time will tell if GM’s very big bet on the Volt, an electric car with a gas generator backup, will pay off. Will the plug-in hybrid market develop in a manner similar to that of the current hybrid market? Will the Volt technology mature as intended? Maybe most importantly, will the cost come down fast enough and lead to consumer adoption? Will the Volt change the way the world looks at GM and provide a durable advantage? It may take another five to 10 years before we know the answer to these questions.
A few other automakers are making big leaps, too, including the all-electric Nissan Leaf, which outsold the Volt in 2011, the first full year both were available. The one that I find most interesting is the BMW i3. The vehicle will either be electric or PHEV, but most interestingly it will include over 400 pounds of carbon-fiber composite material. At an initial annual volume of 30,000, this will be the first vehicle to contain that much carbon fiber composite at anything near this volume. BMW has also taken a 49 percent stake in an automotive focused joint venture with SGL Group, the carbon fiber supplier for the i3. The company is clearly serious about the future of the material and gaining advantage as a first mover. Carbon fiber composites were noted as a key enabler to the transportation sector vision of Reinventing Fire, so BMW’s is a key move to watch.