Freeman Spogli Institute for International Studies Program on Energy and Sustainable Development Stanford University


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October 3, 2005 - In the News

In an article in the Wall Street Journal, David Victor states that while it's clear the hybrid vehicle could well be a platform for innovation in automobiles, it is not yet clear that fuel cells or solar panels are winners in the alternative-energy race.

Ford Plans to Speed Up Production of Hybrid Vehicles

Push Reflects Growing Worry That Japan Holds Big Edge In New Fuel Technologies

Appeared in Wall Street Journal, September 22, 2005

Ford Motor Co. unveiled ambitious plans to accelerate its production of gas-electric hybrid vehicles, an area dominated by Toyota Motor Corp., reflecting broader anxiety at many U.S. companies over Japan's advantage at making products that use alternative-power technologies.

The No. 2 U.S. auto maker intends to offer hybrid systems on half its models, Ford Chairman William Clay Ford Jr. said yesterday. If demand warrants, he said, Ford will build up to 250,000 gas-electric hybrids a year by 2010 -- a tenfold increase from its current production.

The popularity of hybrid vehicles, which use less fuel and increase efficiency by combining a small gasoline engine with a battery-run electric motor, has risen in recent years amid consumer concern about rising fuel prices and pollution. Some auto analysts expect that to continue with gas prices in the U.S. now averaging about $2.80 a gallon and threatening to go higher in the event of a supply crunch.

Yesterday, as Hurricane Rita swept into the Gulf of Mexico, the price of a November barrel of oil rose by 60 cents, to $66.80, in trading at the New York Mercantile Exchange.

Toyota has aggressively promoted its Prius compact to become the world's No. 1 seller of hybrids, at a time when U.S. auto makers have continued leaning on sport-utility vehicles. The company has sold 470,000 hybrids world-wide, which by one industry estimate is more than the hybrids sold by all other car makers combined. In the U.S., motorists often wait months to buy hybrids, despite their higher cost.

Ford's move represents the most substantial commitment yet by a U.S. auto maker to make up some ground on hybrid vehicles. Still, 250,000 vehicles by 2010 would only match the number of hybrids Toyota expects to make this year.

Mr. Ford reflected awareness of Toyota's lead by taking a jab in its direction while speaking to hundreds of Ford workers at a research lab in Dearborn, Mich., yesterday. "Other companies pretend they invented everything about hybrids," he said. "But they had to invent an entirely new vehicle to house them."

He clearly was referring to the Prius, specifically designed to be a hybrid. "We decided to put our hybrids into mainstream products that were already popular," Mr. Ford said, adding that Ford's hybrids "were born in the USA."

Toyota spokeswoman Cindy Knight reacted by pointing to previous statements by company officials that the auto maker wants to sell one million hybrid vehicles annually by early next decade. She added the company expects to produce 400,000 hybrid vehicles next year.

Ford's challenge mirrors that in a number of other industries in which Japanese manufacturers have opened up a big lead on their U.S. rivals in the use of alternative energies.

Japan's solar-panel makers, for instance, currently control half the global market -- once dominated by U.S. and European companies. Sharp Corp., a top flat-panel TV maker, has built a $1 billion-a-year business in solar technology with double-digit growth.

Sharp's biggest U.S. markets include New Jersey and California, which have incentive programs for alternative-fuel sources. Federal Express Corp. last month turned the switch on an Oakland, Calif., processing hub that has 5,700 solar panels covering a facility of 81,000 square feet, supplying 25% to 30% of the facility's electricity.

Separately, Toshiba Corp., Hitachi Ltd. and Fujitsu Ltd. plan to launch laptops, cellphones and MP3 players in the next few years that run on fuel cells, which make electricity from hydrogen combined with oxygen from the air, with water as exhaust. U.S. technology firms such as Motorola Corp. have been researching the technology too, but are further behind the commercialization curve.

For now, the market for fuel-efficient technologies, while growing, remains small. But the initial Japanese success in developing such products, combined with the difficulty of bringing them to market, is beginning to stir concern among U.S. competitors as some analysts warn that fossil fuels such as oil will be costly for the foreseeable future.

"The Japanese are particularly good at focusing on promising technologies and commercializing them," said David Victor, director of Stanford University's Program on Energy and Sustainable Development. While there are many innovative U.S. companies, he said, the Japanese have a proven knack for "managing innovation," and "integrating innovation into the manufacturing process."

Analysts said Japan's current edge in the alternative-fuel arena in part comes from making a virtue of necessity. The country has few domestic sources of oil and natural gas, prompting Japanese manufacturers to explore alternative technologies years before the recent surge in oil prices. Toyota, for instance, introduced its first hybrid in 1997.

More important, perhaps, are generous subsidies and other support from the government, which has long worried about the country's dependence on imported oil. Buyers of solar panels, for example, have received more than $1 billion in subsidies from the Japanese government during the past decade.

By no means does Japan's lead extend to all alternative technologies. General Electric Co., for example, has won plaudits from environmentalists for its turbines that create power from wind, a promising innovation that hasn't caught on widely in Japan. The Japanese are lagging behind, too, in areas such as biomass, a potentially significant energy source in which organic waste is burned to create steam that turns a turbine.

What's more, not all alternative technologies may pan out. "It's clear the hybrid vehicle could well be a platform for innovation in automobiles," said Mr. Victor of Stanford. But with fuel cells or solar panels, he says, "it isn't yet clear these are winners."

Indeed, hybrid cars and trucks still face some hurdles, despite their popularity. As currently designed, they cost an estimated $4,000 to $5,000 more each than standard models, and add weight and bulk which detract from performance and passenger space. Toyota's rivals claim its hybrid vehicles don't deliver the fuel economy they promise, especially on the highway, where the electric drive typically isn't running or doing much to power the car.

Still, Toyota has a multiyear head start in building a network of hybrid-technology suppliers and in designing vehicles to run with hybrid systems. Toyota Chairman Hiroshi Okuda made green technologies a priority starting in the mid-1990s, as concerns of global warming grew, and has worked steadily to refine the technology, boost the performance and lower costs -- mainly by squeezing suppliers. "We have reduced costs to the point where we make money" on the cars, said Toyota Executive Vice President Kazuo Okamoto.

While Ford boosts production, Mr. Okamoto's goal in the next five years is to cut hybrid manufacturing costs by half, to a level at which customers can earn the extra upfront expense back through gas savings over the life of the car. People familiar with Toyota's strategies said the premium would have to come down by at least $2,000 to achieve that goal.

Following the success of its egg-shaped Prius, which gets 51 miles to the gallon in city driving, Toyota is now putting hybrid systems into other models, from the Corolla sedan to the Lexus RX 400h SUV.

So far, the hybrids made by U.S. car makers generally have been less fuel-efficient, and record fewer sales. Many in Detroit concede that the Japanese have the edge. Larry Burns, chief technologist at GM, said Toyota's approach -- putting a product in the market, watching how it performs, improving it and then throwing it out on the market again -- appears to be the right one.

"It's pretty clear the technology business is about generations of technology and fast cycles of learning," Mr. Burns said. "If you wait until you get to 'generation perfect' to move, you'll never move."

But yesterday, Mr. Ford made it clear his company intends to compete in pushing the technology forward, when he said Ford's hybrids will be designed to maximize fuel economy.

Moreover, while the company loses money on its hybrids now, it does expect that it can tap into profit as it builds scale and makes and sells the cars in high volume. Making 250,00 vehicles would equal 8% to 9% of the company's current U.S. sales. Ford has 26 different vehicles across Ford, Lincoln and Mercury, the three brands which Mr. Ford said would focus on hybrids.

"Once you have a common power pack for the engine, we will be able to offer a hybrid in any of our vehicles that are four or six-cylinder and front-wheel drive," said Phil Martens, Ford group vice president for product creation. "We want to have the widest range possible for consumers."

Detroit's other auto companies have been pushing to speed up their hybrid development, too. GM has said it will offer a new hybrid system on its Chevrolet Tahoe and GMC Yukon large SUVs starting in 2007, and will expand the use of a so-called mild hybrid system, essentially a beefed up starter-alternator that provides an electric boost. But GM hasn't put out volume targets for hybrid vehicles, or disclosed plans to offer the systems on as wide a range as Ford outlined.

Mr. Martens said Ford believes its hybrids ultimately could take off in an even-bigger market: China. "We were there in China in April at the Beijing Auto Show and internally our feeling is that they are very interested in China for hybrid vehicles, surprisingly interested almost," he said. "Given their size and the scale, that's something you need to pay attention to."




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