Hybrid Car Economics Improve, as Technology Goes Mainstream

Hybrid cars aren’t worth it. That’s the perennial complaint levied against fuel-efficient gas-electric cars, which can carry a higher price tag not recouped in gas-savings compared to similar conventional vehicles.

A new report from Bloomberg feeds fuel to that fire—while tossing in hints of Tea Party small-government rhetoric. Bloomberg reports that the federal government has purchased nearly 15,000 hybrids in the past two fiscal years—about one in four hybrids sold by Ford and General Motors since the Obama Administration took office in 2009. That includes the purchase of nearly one in three of all Ford Fusion Hybrids, which last year was named the North American Car of the Year. The hybrid purchases represent about 10 percent of the vehicles bought by the U.S. General Services Administration during that period.

The Bloomberg story states that “consumer sales of hybrids are headed for their third consecutive yearly decline,” as evidence that big government needed to make those purchases—even at $5,281 less than dealership sticker prices—to keep the hybrid market afloat. Jeff Schuster, director of forecasting at J.D. Power & Associates tells Bloomberg, “At some point, the reality is that for this technology to be accepted, it needs to be done without a government crutch.” Schuster doesn’t see natural demand without big increases in gas prices and a lot more government purchases.

Deeper Reflection

Yet, Bloomberg fails to mention a few major issues. First, the decline in hybrid sales in the last three years has been modest compared to the drop in overall vehicle sales. In 2008, hybrid sales fell by 10.3% compared to a drop of 17.9% in overall auto sales. In 2009, hybrids fared even better compared to the main auto market, declining by 7.6% compared to overall losses of 21.4%. Okay, it is true that hybrid car sales have not bounced back like the overall market did in 2010. Through October, overall sales are in fact up by 10.6%, while hybrid sales have slid another 8.5% so far this year.

That’s party because sales of fuel-efficient cars are closely tied to gas prices. Those prices at the pump are well below the high mark in 2008—which led to the spike in hybrid sales (the point from which hybrids have since been declining). Are the economics of hybrids forever doomed? That depends on where you believe gas prices are going in the next few years—as the global economy starts to recover and demand for petroleum from China and India skyrockets.

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Perhaps more important to the discussion of government’s role in stimulating sales of hybrids, we’re now seeing “a shift from the carrot to the stick,” according to John Gartner, an clean transportation analyst with Pike Research. We’re still very much in the carrot phase of pure electric cars, with lots of government grants and incentives, but consumer incentives for the most popular conventional hybrids—the ones without plugs—from Toyota, Ford and Honda have been gone for a couple of years.

At the same time, rising fuel efficiency standards are going to carmakers to sell hybrids deep into the market—not just to early adopters of new technology. Starting in 2012, the fuel efficiency average will jump from 27.5 mpg today to 35.5 in 2016. That number could go past 50 mpg by 2025. Don’t expect government to buy its way to those new levels. Those targets will only be met with industry stepping in with the most cost-effective tried-and-true technology solutions for maximum increases in efficiency and significant reductions in emissions.

That means dramatic increases in economies of scale for production and sales of hybrids in the coming years. We’re already seeing signs of that. Due to dealership and manufacturer discounts—not government incentives—hybrids have never been more affordable, according to a story in McClatchy-Tribune. “Hybrids have always had some status attached to them, which made a lot of customers willing to pay more for them,” said Earl Stewart, owner of Earl Stewart Toyota of North Palm Beach, Fla. “But now, they’ve gone mainstream.” Jesse Toprak, vice-president of industry trends and insights at TrueCar.com, an auto analysis firm in California, concurs. “In terms of pricing and discounts, now is a really good time to buy a hybrid, especially a mid-sized sedan hybrid.”

As production capacity continue to increase, and automakers become increasingly motivated to sell fuel-efficient hybrids to meet regulations, the cost difference between hybrids and conventional cars will narrow, and may even reach parity in the next few years. In fact, Ford is offering the hybrid version of the Lincoln MKZ Hybrid at the same price as the conventional version, and the four-cylinder version of the recently unveiled Buick LaCrosse will come standard with a mild hybrid system.

Mainstream hybrids with much better fuel efficiency but offered near or at the same price as conventional cars? It’s time to break out the calculator again.


  • Yegor

    One more reason why Hybrids sales are not so big this year is the coming of the plug-ins cars.
    Nissan Leaf waiting list is more than 20,000. Chevy Volt does not have a waiting list but anticipation is huge – lots of reports of dealers price increases above of MSRP up to $20,000.
    It means one thing – lots of people are waiting for plug-ins.

  • Yegor

    One more reason is Clean Diesel vehicles have improved in the last two last years and are eating into Hybrid share of the market.

    So there is an explanation for this year lower sales. Bloomberg got it all wrong.

  • Pat

    If Yegor is right, dealer able to raise as much as $20,000 on the sticker price of Volt. Why the US government still subsidize the purchase?

  • Yegor

    It is going to happen just in first couple of months – people are really looking forward to the revolutionary Chevy Volt and the dealers want to take the advantage of it.

  • kelly

    When the Model T neighbor vehicle(<45 mph) went into years of mass production, the price fell by over 60 percent. The same thing happens with PCs, TVs, CDs, and any major mass produced device, including EVs.

  • Indigo

    My hybrid (an Insight-II) didn’t cost a penny more than a comparable compact car. At $17,588, it’s right in line with a similarly-equipped Fit or Yaris. So I started saving money the first time I turned the ignition. Add to that the fact that it only needs an oil change every 9,000 miles, the maintenance cost is lower than in a regular car.

  • Indigo

    Pat: I don’t think you’ll see price gouging on the Volt. I remember reading an article a few months ago that GM would immediately terminate association with any dealer that charged above MSRP on the Volt.

  • Anonymous

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