Some Analysts Find Ford's About-Face On Hybrids Baffling - Tulsa World

[hatrack]

Understandably, some are puzzled by Ford Motor Co.'s recent decision to give up on plans to build more hybrid vehicles. Hybrid sales are on course for another record-setting year, driven by consumer demand for more energy-efficient cars and trucks. Yet Ford has abandoned its pledge to build 250,000 gas-electric hybrids a year by 2010, saying it will instead focus on vehicles that use ethanol, a controversial substitute for gasoline.

EDIT

Ford is scaling back its hybrid aspirations because the hybrid market is not as strong as expected. The market is struggling because hybrids cost $3,000 to $4,000 more than their conventional counterparts. Consumers are reluctant to pay the premiums. But Honda and Toyota, known for their keen sense and vision, have not dropped their plans to expand the production of U.S. hybrids.

Ford switched directions because flex-fuel vehicles are cheaper to build. In addition, public policy promotes the increased use of ethanol. The government, in addition to giving credits to the makers of flex-fuel vehicles, has mandated a doubling of ethanol in gasoline by 2012.

EDIT

ulia Olmstead, a graduate student in plant breeding and sustainable agriculture at Iowa State University, says ethanol's so-called benefits are illusions created by industry. "Corn is probably the most fossil fuel-dependent crop produced in the Midwest," Olmstead said. "If we're talking about growing corn on an even bigger scale than we do now, that means huge quantities of fossil fuel-based fertilizers. The idea that this is going to make us energy independent is a fallacy."

EDIT

http://www.tulsaworld.com/BusinessStory.asp?ID=060709_Bu_E1_Fords8597

[leveymg]

1. You will burn 40% more E-85 than gasoline. You will pay 40% more,

if big energy conglomerates get their way, unless there is some sort of parity required by law. Are any Democratic policy wonks listening?

[Sherman A1]

2. Agreed

[Dickster]

20. not true

I have a flex fuel vehicle and I burn E-85 excusively. It gives up about 2 miles to the gallon on E-85 as opposed to gasoline. E-85 cost about $.60 a gallon less that gasoline. I'm laughing at all you fools who are still burning gasoline all the way to the bank!

[NickB79]

21. What kind of vehicle is it?

I would wager my gas-only car still costs WAAAY less to drive than your vehicle, even though you can burn E85. I base this on the fact that most flex-fuel vehicles sold in the US are gas-guzzling SUV's and trucks that 90% of the population has no good need to drive.

[flyingfysh]

3. "consumers are reluctant to pay"??

Has the writer of that article tried to buy a Prius? If you can even get one, there is a long wait.

Toyota sells all the Priuses they can make.

[Strelnikov_]

6. That's One Of Those 'Inconvient Truths'

that conflicts with the authors agenda.

[Ian David]

4. We've been burned on flex-fuel before

The manufacturers build the flex-fuel vehicles and get CAFE exemption credits for building them.

But then nobody actually builds the infrastructure to make or sell flex-fuel to put in the cars.

[freethought]

5. That and Ford does not have to spend dollars

for the designing and retooling for hybrids. This is just another reason why the U.S. auto makers have sunk so low. Rather than embracing innovation, they look at it as radioactive.

[Ian David]

9. I thought Ford's problem was Gawd was punishing them for being pro-gay?n/t

[Bamboo]

7. Do Dealerships Like Hybrids?

If someone pays the hybrid premium I suspect they take it out from other portions of the car budget.Items that pad dealer profits-chrome wheels,suspension packages,appearance and comfort packages will be declined.

How many hybrid buyers "convert" from a hybrid to a regular car at a Toyota dealer verses a Ford dealer?If a Ford hybrid customer does not convert to a Ford car but to a Corolla then the hybrid buzz just benefits someone else.

I think the hybrid premium will increase with plug-in hybrids that use expensive lithium batteries,maybe Toyota will have an economy of scale but not Ford,the dealer will hear the lithium battery suck all the oxygen out of the room.Quarter by quarter thinking at the national level is magnified at the dealership level to month by month.

Businesses walk a tightrope and Toyota was prepaired with a long pole and has make it to the other side,Ford had a short pole and has thrown it down and quit.

[Kolesar]

8. Variable valve timing,constant velocity transmissions get gains for cheape

...than hybrids. The gains are not as much, but the cost/benefit ratio is better. Aerodynamics are a cheap gain, also.

[happyslug]

10. I suspect a battery problem

A battery problem in that REPLACEMENT of the Batteries is a cost killer. Ford knows the life cycle of a typical Automobile purchased in the USA. A auto is purchased new and then held either 3 or 6 years (many business trade in their Cars at the three year mark, many consumers also sell their cars after owning it for three years, then you have a set of used car buyers who buy these three year old cars, but for our purposes I will treat them all as one car owner for most new car makers market they cars hat way). Whether a car is sold for the first time at three years old, or at six years old, for this discussion the issue is what happens when the car is six years old and is sold "used".

When a car is about six years old it is sold (Either for the first or Second time). At this point the price for used cars is set by who is buying the car. Such purchaser do not expect a perfect car, but one that runs without costing them to much to upkeep. They know they will have to replace the tires (At about $200 a set) and other olds and ends (i.e. repairs to various parts that goes bad, such as Brakes etc). On the other hand the buyers of thee used cars do NOT expect any LARGE costs.

Thus the problem is how much will these hybrid be worth when they are SIX YEARS OLD. Remember that fact. Toyota also knows of this life cycle, thus it agreed to pay for only ONE SET of replacement batteries to get the hybrid through the FIRST set of owners. The problem then is what about the SECOND set of owners, the people who buy the car when it is SIX years old? The hybrid will need a new set of Batteries AT $2000 a set. Which is more than a NEW MOTOR is such a car (I recently replaced the engine in my Jeep for $1200). Remember this is in addition to the "normal" needs of new tires and other odds and ends a car needs to have done to be resold as "Used" (I.e. new brakes and other things that are designed to wear out).

I suspect that is the problem for Ford, Ford basically has made a call that when the Hybrids are six years old they will be worthless. The costs of a new battery set will exceed the trade in value of the car, basically making them unsellable except as junk. This will have the effect of making the re-sale value of Hybrids to drop to Zero (and maybe even further given the high costs to recycle the lead batteries in such hybrid's batteries). Furthermore this will increase demand for non-hybrids resell value for you will have less cars for sued car buyers to buy.

Given the above if I was a car maker I would hesitate to invest heavily in Hybrids. I would NOT leave the hybrid market exceed 5% of my car sales until I have a feel for how these hybrids sell when they are six years old. I may be shocked and they sell well, they may even sell well in Southern Europe (Just operate on its small engine instead of the Batteries). Time will tell, but I suspect the problem is hybrids life-cycle (and more importantly BATTERY life-cycle).

[NNadir]

11. That is a way of thinking about it that I'd not considered.

It's an interesting thought.

I wonder if any data is available for how frequently Prius batteries are being changed. Surely there are now some with more than 50K miles on them.

[NNadir]

12. I googled my way to this report from BC gov't hybrid maintenance costs.

http://www.hybridexperience.ca/Reliability.htm

2001 Toyota Prius
The detailed maintenance/repair records for the 64 Toyota Prius in the BC Government Fleet were analyzed and the following conclusions can be made from this data:

The average maintenance cost for the 64 vehicles was $1268. Based on the 2.57 million kilometres (Average of 40,293 km per vehicle) traveled, the maintenance costs were an average of $.0336 per kilometre. Note: Two vehicles had charges for accident repairs totaling $10,630 and $7,097. These costs were removed from the average maintenance/repair costs to more fairly represent typical maintenance costs.
The remainder of the costs were related to normal type costs for items such as winter tires, preventative maintenance, and windshield repairs.
There were no costs identified that were specific to the hybrid components of the vehicles.

[happyslug]

15. Given that most fleet owners only keep cars three years.

They really should be no additional costs to hybrids, for by the time it is to replace the batteries the car should be ready for re-sale (and given Toyota's commitment to replace one set of batteries, at three years old these cars should retain a good bit of their re-sale value).

The big issue is going to be when they hit six years old, will they age "prematurely" i.e. value drop like a rock do to excessive costs to replace their batteries, or will the costs drop do to demand for such cars (and maybe hydrogen fuel cells batteries will be available at that point to replace the lead acid batteries being used today).

All types of questions in my mine on this subject, to many ifs, if I was an investor. The best solution is keep your finger in project but do NOT invest to much into it. Thus if it takes off you an quickly move into the market, but if its fails you can easily write off the loss as a good idea gone bad.

[NNadir]

16. The best business successes I think, involved taking risks.

The risk to Ford of pursing the status quo is obviated by Ford's performance. It sure seemed like a pretty sure bet to build the Expedition in 1995.

The Prius was a risk for Toyota as well.

[happyslug]

18. Yes, neither exceeded 5% of total sales in both corporations

That is the problem, risks MUST be taken, but you also have to manage the risk. That is what I think Ford is doing, it is NOT abandoned hybrids, it is seeing how the market handles hybrids in the long run (i.e. 6-10 year period). Right now the oldest Hybrids are just entering the 6-10 year market (Honda's insight and other hybrids). Thus Ford may just want to wait to see how these cars SELL now that the OWNERS have to replace the batteries. FORD may have some preliminary data showing a huge drop in re-sale value after six years (and this can lead to a huge drop in re-sell value in newer used cars).

KBB says the first Honda Insight was in 2000 and the First Toyota Prius was in 2001, both were small market shares at that time (More do to lack of production capacity than anything else).

KBB says the trade in value of the 2000 Honda Insight was 7100 in excellent condition and the 2001 Prius was over $10,000 in Excellent condition. The real issue will this stand up? A 2000 Honda Accord trade in value was just $5100 fro comparison. Thus in appears TODAY the hybrids are holding their value better than non-hybrid but they are just getting to the age of my concern (i.e. 6-10 years of age). What has Ford found out in its marketing research? While they is a demand for 6 years old cars that need $2000 worth of Batteries, is that demand DEEP enough to keep these values up? Or has Ford found out that the Demand is weak for cars needing $2000 in batteries when they are 6-10 years old and thus Ford expects they resale value to drop like a rock? A delay of 1-2 years could be good to see how the market handles this situation. Will Ford have to pay to re-cycle the Batteries in its Escape and thus drive up the cost of the Escape?

I suspect that given the potential battery disposal problem, the potential cost to replace the batteries, AND the fact that Fuel Cells may be in production soon to the degree fuel cells can replace Batteries in hybrid vehicles, Ford has decided to wait to see what happens in the next 1-2 years. I suspect Ford to continue to produce its Escape to keep its hands in the market, but given the overall problem with Oil supplies, Ford may now be agreeing with Volkswagen that the future is NOT in Hybrids but low power cars (i.e. cars with less performance than modern cars but get substantially improved fuel economy).

Remember Hybrids get they fuel efficiency by using very small engines that provides most of the power needed most of the time. During times when the engine is NOT operating at full speed to power the car, the excess energy being used is stored in a battery (Which is only 20% efficient, but that is energy that would have been 100% wasted in a conventional car). At time of high acceleration or need for excess power the battery is used to supplement the engine. Thus a hybrid can use a smaller engine than a conventional car for two reason, any excess power is used to charge the battery, and the batteries permit the engine to be smaller in that you do NOT need as big an engine as in a Conventional car to get around the same performance.

The problem is they is ANOTHER way to achieve even HIGHER fuel efficient, that is by going to low performance cars. Literally design a car NOT to go faster than 50 mph (or even 35 mph). Since our roads are design for much higher speeds, such low performance cars can run at peak efficiency on our roads, maybe getting mileage in excess of 100 mph. The is achieved do to the fact if you make the engine smaller, the car can be smaller, the smaller the car the lighter it is, the lighter the car the smaller the engine you need to propel it. Thus if you lower performance by going to a much smaller engine, you also can cut other weight improving fuel economy even more. This was the rational behind VW's 235 mpg car of a few years ago, very small body, very small engine. VW even ran it on the German Autobahn and it stayed up with traffic (at times, its acceleration was not mentioned for obvious reasons).

Such low performance cars can be produced at costs much like conventional cars (Through the low end car market is noted for being extremely price sensitive so most auto makers stay out of it).

Thus we are in a state of flux, what is the best solution to high energy costs? Is Ford going to switch its bet from maintaining current performance to betting the US Government may restrict speeds to save fuel (The first US National Speed limit was 35 mph and imposed to save fuel during WWII, the 55 mph was imposed during the energy criss of the 1970s), is Ford thinking that such max speeds will be re-imposed?

Remember if the US hits Iran, oil is expected, at least in the short term, go above $100 a barrel (and maybe even reach $200 a barrel depending on how much damage the Iranians can do to the Saudi and other Persian Gulf Oil fields and exportations centers). If that happens you are looking at $10-$20 a gallon and people trying to squeeze every drop out of every gallon of oil. The better solution is NOT hybrids but very small engine cars and is this what Ford has decided to bet on? The next question will be why? what does Ford now that Ford is not telling us?

[NNadir]

19. I see that you have given the matter some very clear thought.

I'm certainly not going to claim that your analysis is incorrect. You clearly know more about this subject than I do.

However, if I were Ford - and I'm not - I would be covering all of my bases with fuel economy. There was a time when American industry led the world, and I don't think it was necessarily a time when everybody stood around trying to see which way the wind was blowing.

As for fuel cells, they presuppose a drive train in which electricity is involved. Somehow I think that Toyota is going to have something of a head start.

I personally have no objection to low performance cars, except that they are cars at all.

[happyslug]

14. Most battery deteriorate over time as opposed to use

Thus most people replace their car battery every 3-4 years. Now both usage and time affect battery life, but failure to use can cause a battery to fail almost as much as constant discharging and charging. This is my biggest concern regarding hybrids, I generally buy new but then keep my cars about ten years (they are a few of us that do that). With a hybrid I may have to buy a new car every 7-8 years instead of 8-10 years that I have been averaging (My Present car is ten years old and I purchased it new, I had to trade in some cars that were no longer wroth keeping and two whose cost to keep exceeded their value, one do to an accident the other do to general decline in the car after it hit about 8 years old).

[phantom power]

17. I wonder if this is a consequence of assuming "cheap oil forever"

I don't know, but I strongly suspect the leaderhsip of the Big Three simply don't believe (are incapable of believing) that the age of cheap oil is coming to an end. Similarly, I suspect that the Japanese auto execs, for whatever reasons, are very capable of imagining that scenario. Maybe it is a consequence of the fact that Japan has always been a resource-starved country, and America has (historically) been embarrassingly rich in terms of resources.

If you operate under the assumption that oil will essentially remain cheap into the forseeable future (ie. recent oil prices are an aberration, which will correct itself), then the theory that "hybrids will be worthless after six years" actually makes a fair amount of sense. If you are thinking in terms of oil entering a fundamentally new price equilibrium post-peak, then the prediction doesn't hold together.

Of course, all of this is ignoring the issue that continued fossil fuel burning will kill us all thru climate change, but clearly very few Americans have yet come to grips with that. I wonder if the Japanese are further along in that regard?

[iconoclastNYC]

13. I think the big three are more interested in selling oil than selling what

People want to buy.