Green Cars

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After decades of botched starts, the promise of an eco-friendly, mainstream automobile is lurching ahead again.

Mark Schar might be described as the poster boy for Early Adopters. He bought his first home computer - an Apple II - 20 years ago. He and a colleague shared the first PC inside the offices of Procter & Gamble Co. And Schar was in the vanguard of buyers of the new Volkswagen Beetle. So his most recent cutting-edge purchase seemed a natural: a $13,000 Corbin Sparrow, a single-seat commuter car, powered by a non-polluting electric motor. "Spending a lot of time in Europe, you realize how connected those people are to their environment," says the 43-year-old Schar, who has trotted the globe as a brand manager for P&G, and now runs its business-to-consumer Internet initiative. "I saw this and said, `That's something worth investing in.'"

Schar represents a distinct group of American consumers who are eager to buy environmentally-friendly vehicles. Whether they're motivated by a passion to be green or a desire to be style setters, they are the group the auto industry is counting on to bring the latest wave of eco-friendly automobiles to a new level of legitimacy in the marketplace. Indeed, after decades of false starts, the promise of an ecologically innocuous but mainstream automobile is lurching ahead, again. Spurred on by higher gasoline prices, tougher new emissions laws in California, new leadership in Detroit and Japan, and above all, technological advancements, Japanese automakers Honda and Toyota have both recently introduced environmentally-friendly models. Other manufacturers are expected to follow suit. "The technology is now getting good enough," says Ken Stewart, brand manager of advanced-technology vehicles for General Motors Corp., "where the concern once was overcoming the laws of physics, now it's overcoming market conditions."

Until recently, consumers like Schar have been able to choose from only a handful of quirky, all-electric cars to satisfy their desires. But last year, two brand-new cars with super fuel-efficient, "hybrid," gasoline-electric powertrains - Honda Insight and Toyota Prius - surged into the marketplace, garnering as many as 10,000 orders in total. The Big Three automakers will begin introducing their own hybrids in a few years, including entries in the popular truck and sport-utility vehicle segments. Ford's first hybrid will be the 2003 version of the Escape, its new, small SUV; Chrysler Group will bow in with a hybrid of the Dodge Durango SUV in the same year; and GM will arrive with hybrid Chevrolet and GMC trucks in 2004. And within another decade or so, hydrogen-powered "fuel cells" could begin ushering in an entirely new era of virtually pollution-free driving.

Today, research shows that consumers' receptivity to eco-friendly cars may be on the rise. In a survey of 500 motorists conducted for American Demographics by QuickTake, a division of Greenfield Online, a Wilton, Connecticut-based market research firm, 68 percent of respondents said they would be interested in buying an electric or hybrid car within the next three to five years. And about one out of four said they would be extremely interested in purchasing an eco-friendly car in three to five years. Christopher W. Cedergren, an analyst with the Nextrend automotive consulting service, projects that hybrids could make up 20 percent of total automotive sales in this country by the end of the decade.

It was only a few years ago that the green-car movement seemed stalled at the entry ramp. The majority of entrants into the market had a range of less than 200 miles and had to be tethered to an outside power source to be charged overnight. When General Motors debuted its all-electric EV-1 in 1996, the car was supposed to help legitimize green cars in the marketplace. But it took GM more than two years to sell or lease the first lot of just 500 of the $35,000 EV-1s, and by last year the company stopped producing them altogether.

Even the end of the mass market electric-vehicle dream couldn't snuff out embers of demand, however. Several years ago, rising consumer consciousness about global warming began to draw attention, once again, to automotive pollution. And nowadays, according to our QuickTake survey, 83 percent of motorists say they are concerned about global warming; 77 percent say it is "extremely" or "very" important that car manufacturers make cars that produce less carbon dioxide. Also, regulators have been goosing the equation, over car makers' objections, by continuing to ratchet up their emissions requirements: By 2003 more than 6 percent of all vehicles sold in California will emit practically no particulates.

No surprise then, that automakers have launched a renewed effort to produce an environmentally-friendly vehicle that would sell to consumers. So far, in Japan at least, Toyota and Honda have proved that Prius and Insight can deliver acceptable punch with super fuel efficiency. The cars rely on an internal-combustion engine that switches off in favor of an electric motor during idling - and then continually recharges the motor battery while the car is moving. Neither has to be plugged into a charger - ever.

Since Insight zipped into the U.S. market in December 1999, it has achieved the best gas mileage of any car on record - 60 miles per gallon in the city and 71 mpg on the highway. Sporting an all-aluminum body and a fetching, ultra-aerodynamic design, the car is targeted at buyers in their 30s, with high incomes. Insight buyers are mostly male and married, and most likely to be engineers, "or other people interested in technology or the environment," explains Art Garner, a marketing manager for Torrance, California-based American Honda Motor Co. The company reportedly got a little ahead of itself during last summer's gas-price scare, and projected sales of as many as 7,500 Insights last year. But more recently, Garner expected 2000 sales of Insight to come in around 4,000 units. He expects sales of 6,500 Insights this year.

Prius has the same $20,000 suggested retail price as Insight. But market watchers say Toyota's green entry has demonstrated more appeal to typical vehicle buyers than Insight. It's a four-door, five-passenger sedan, standard-equipped with amenities such as antilock brakes, power mirrors, and a security system, and bearing an eight-year, 100,000-mile warranty on its hybrid system, which yields more than 500 miles to a tank of gas. Because it is a more practical carrier than Insight, Toyota is looking for Prius to double Insight's sales this year, projecting sales or lease of about 12,000 units.

"I'm more encouraged now about the future of [green] vehicles than I was even a couple of years ago," says Thad Malesh, director of the alternative-systems vehicle practice for J.D. Power and Associates, a leading analyst of the automotive marketplace. "The new forces at work will result in huge changes in the market."

To be sure, purchasers of green cars now represent only a fly-speck minority of vehicle buyers. Will the environmentally-friendly car become a fixture in the American garage anytime soon? Here are some of the other factors expected to shape the consumer dynamics of the eco-friendly vehicle market:

THE TRUE BELIEVERS: Every manufacturer is counting on a certain percentage of early technology adopters and "environiks" to precipitate demand for their new green offerings. Toyota has been marketing its Prius heavily on the Web, for example, aiming at consumers who also probably bought some of the first laptop computers, DVDs, and CD-Roms, and using a database of people who have e-mailed them about the car. And Ford plans to offer discounts on its hybrids to members of environmental organizations, according to James Schroer, the auto company's vice president of global marketing. "We'd love to develop a first-mover market among folks who are particularly environmentally sensitive," he says.

But Schroer also believes that, as Generation Y matures, the appeal of green vehicles will quickly spread beyond tree huggers. "As [teenagers and twentysomethings] grow up they're going to demand more environmentally-friendly vehicles and factories from Ford and our competitors," he says. "And they'll be the first generation since the Boomers whose views will cascade across the rest of society as they age into power."

The "cascadees," says J.D. Power's Malesh, will include Boomers, "who once were like these kids are now." They're the people who are now voting for more taxes for schools, for example. "They want to do the right thing." To that end, Ford has recently purchased Th!nk Mobility LLC, a Carlsbad, California-based company that sells electric bikes and small "neighborhood" cars. Th!nk "will appeal to the people out there who really want to do the right thing for the environment," says Rob Stevens, the company's president.

THE PRAGMATISTS: For green cars to appeal to the broader marketplace, including older consumers, they're going to have to offer something besides do-goodism to the more pragmatic among us. "Vehicles whose virtue is simply that they're powered by hybrids may not be able to provide American consumers with the same sort of emotional satisfaction that regular vehicles do," Cedergren insists. Geralyn Yoza, Prius product manager for Torrance, California-based Toyota Motor Sales USA, says that with the Prius, the company "realized that consumers don't want to compromise performance, convenience, or comfort." So, whereas Honda's Insight is a radically designed two-seater, Prius is a five-seater family car with a design more akin to the compact Toyota Corolla.

Linda Watson, management supervisor for Oasis, the New York City-based agency that crafted strategic marketing for Prius, adds that Toyota understood "people would say, `Isn't that great they're doing this car.' But what we didn't want them to say is, `I sure hope my neighbor buys one.' Consumers are willing to embrace technology as long as it doesn't require a compromise on their part."

Indeed, more than 50 percent of those surveyed in our QuickTake survey cited unproven technology, and concerns about difficulties servicing the cars as reasons not to buy an environmentally-friendly automobile. Cedergren says the answer to such concerns may be for the Big Three to make hybrids more like popular, larger vehicles, offering a hybrid powertrain as an option just as they do air conditioning. Big Three executives believe these types of hybrids will have much more of a market impact than the Japanese small-car pioneers. And by targeting trucks and SUVs for hybrid treatment, the American companies are applying the technology "where they can really offset fuel consumption," says GM's Stewart.

THE GASOLINE-PRICE WILD CARD: Some experts say that the only way a mainstream market for green vehicles will materialize is with a pronounced and prolonged rise in fuel prices. In an earlier Greenfield Online survey, completed just after last summer's upward spiral in gas prices, saving money on gas was the leading reason given for interest in electric or hybrid vehicles - cited by 83 percent of the 2,000 respondents surveyed. Two out of three people considered fuel efficiency to be very important when shopping for a vehicle. Some experts believe, however, that consumers won't be motivated by the green cars' fuel efficiency unless they are faced with outright gasoline shortages, such as those in the '70s. "Most people spend $1,000 to $1,500 a year per vehicle for fuel, and if you cut it in half you save maybe $500 to $1,000," says AutoPacific's Hossack, whose company surveyed 28,000 people earlier this year about such price-elasticity questions. "But people aren't going to be willing to spend $5,000 more on a hybrid to save $1,000 in fuel and have lower emissions."

ACQUISITION PREMIUMS: While Gen Ys might be more favorably inclined toward electric and hybrid vehicles in principle, these young consumers also have much higher expectations than their predecessors that "new technology will be incorporated into products at equal-to or declining costs," says Ford's Schroer. Trouble is, he says, "you can't make all these vehicles eco-friendly at no additional price. Unlike with the semiconductor, there is no technology out there on the horizon that delivers these zero-emissions vehicles without enormous costs."

Industry executives insist they would have to charge a premium of $3,000 to $5,000 per hybrid vehicle to offset development and higher production costs that would accrue even at reasonably high-volume levels of production. J.D. Power's Malesh, speculates that many consumers would be willing to pay a smaller premium, "even up to $1,500 or $2,000." But many observers believe that even Sierra Club members would balk at ponying up much more for a hybrid vehicle than for a comparable conventionally powered model. According to our QuickTake survey, 19 percent of those most likely to buy a green car said price was their top concern.

Some relish the idea of a proposed federal tax credit of up to $3,000 for hybrid vehicles. DaimlerChrysler says that such a government incentive would help it sell 80,000 hybrid-powered Durangos each year. Meanwhile, the company has already announced that it plans to justify a price premium for its Durango hybrid by touting the fact that the vehicle can serve as an emergency power generator for non-automotive uses. It could run construction equipment, they say, or even supply electricity to a house during a power outage, and save owners the expense of buying a freestanding generator for upward of $10,000. GM has also hinted at such a marketing ploy.

The need for such gimmicks today underscores the reality that the auto industry still has a ways to go in its race to go green. Big Three executives are sensitive to the suggestion that Japanese rivals have beat them to market yet again, this time with viable hybrids. So now they're aiming to leapfrog their competitors to "fuel cells," which pull electrons from the chemical reaction between hydrogen and oxygen and produce an ultra-quiet ride - and clean-water exhaust. DaimlerChrysler alone has pledged $1 billion to fuel-cell development, for example, and has a working version of a Mercedes Benz model that it may begin selling in Europe in four years.

The daunting challenges include building a new fuel-transportation and storage system for the hydrogen. "It's definitely going to happen," according to GM's Stewart. "The key is to figure out a way that meets consumer needs instead of just something that would be a `win' for society."

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