CSM

Uncertainty over the size of the U.S. hybrid market has suppliers puzzled.

Few technology trends in the auto industry have generated as much buzz as hybrid-electric powertrains. And few trends have left the supply chain scratching its collective head in confusion. Deciding whether or not your company should pursue business in this emerging segment isn’t easy, because the North American hybrid-electric vehicle (HEV) landscape is full of uncertainty — and is expected to remain so for most of the next decade.

For starters, it’s too early to precisely dimension the U.S. HEV market. With average retail gasoline prices in the U.S. projected to remain low throughout the next decade, the threat of a major disruption in U.S. oil supply unlikely and a lack of political will to raise fleet fuel efficiency mandates, there is no strong external driver for HEVs in high volume. Diesels face the same situation.

That’s not to say that the industry won’t be able to raise HEV volumes significantly by suppliers
spreading the technology across platforms, particularly across the light truck spectrum where hybrid powertrains can deliver the best fuel efficiency and emissions bangs for the buck. Tax breaks for HEV purchases could also spark the segment. Automakers, of course, must balance the question of market demand — “If we build them, will buyers come?” — with the certainty that CAFE and emission mandates will become more stringent over time.

For example, Toyota’s well-publicized plan to eventually hybridize most of its U.S. model range has less to do with “green leadership” and more to do with Toyota’s serious long-term strategy to grow its truck business in the U.S. The broad HEV portfolio will be available to protect it from any dramatic CAFE hike. On the emissions side, hybrids will qualify at squeakyclean SULEV or AT-PZEV levels, and offer Toyota and the others a hedge against potential CO2 emission laws. And by putting its capital behind hybrids, Toyota is also betting that diesels won’t meet future emission regulations without losing much of their fuel efficiency advantage. Finally, HEVs will also serve as a technology bridge to fuel cell vehicles, if indeed that’s where powertrains are headed.

The Lexus RX330 (above) will get an optional full-hybrid powertrain next year, while GM has chosen to go with a mild-hybrid system on its full-size pickup trucks (below).

Before the industry reaches that horizon, however, gasoline prices must jump dramatically and be sustained indefinitely for most consumers to want hybrids. Automakers also have to make a profitable business case for HEVs — something that even Toyota has yet to do, although by being first to market in 1997 it is getting very close to this goal. Those who have thus far committed to HEVs — DaimlerChrysler, Ford, General Motors, Honda, Nissan and Toyota — have made the technology optional, rather than standard, on virtually all models except Toyota’s pioneering Prius. To minimize investment risk, the HEVs currently approved for production will be deployed alongside their conventionally-powered counterparts. This way, the market can decide the “take level” of the hybrid versions, while giving automakers a capacity buffer in case demand does not meet expectations.
 
It’s a relatively safe way for them to gradually dip their toes into an uncharted product subsegment, with reduced exposure for suppliers of hybrid-driveline equipment — battery packs, electric motors, control electronics, etc. As one HEV engineer at a U.S. automaker explained recently, “We don’t want to mislead our vendors regarding the upside of hybrids, because we don’t really know how far ‘up’ the upside is.” Older readers who recall GM’s nearly disastrous flirt with the Wankel rotary engine in the early 1970s will appreciate such caution.

Another reason the HEV frontier appears daunting to suppliers is the sometimes confusing variety of HEV architectures slated for the American market over the next three years. The so-called “full hybrids,” including Prius, the 2005 Ford Escape, 2006 Nissan Altima and 2007 GM Yukon/Tahoe, can propel the vehicle electrically (battery power only) and on gasoline (using the internal combustion engine with or without electric boost). These full-HEVs offer the best fuel efficiency, up to 40 percent greater than their gasoline-only counterparts, but also add the most weight, complexity, cost and potential program management headaches.

As its suppliers attest, Ford’s Escape program is nearly a year behind its original timetable due to program management issues related to the system’s sophisticated controller network. The Escape system actually is structurally similar to the first-generation Toyota Prius system because Ford acquired it when it bought Volvo — which was doing joint hybrid powertrain development with transmission expert Aisin, which is a Toyota kieretsu company. And with few exceptions, most of the Escape’s primary hybrid-system suppliers are Japanese — no surprises there. To further shrink the existing hybrid world, Nissan’s Altima hybrid system will also be a chip off the old Prius because Nissan signed a three-year deal to purchase Toyota’s hybrid technology starting in MY 2006. Small world.

The other broad hybrid category, called “mild hybrids,” includes Honda’s Insight and Civic, and a variety of trucks from GM and DCX. Mild hybrids will constitute the brunt of North American HEV volume well into the next decade. In terms of design, these systems replace the engine flywheel with an electric starter-generator motor, allowing the engine to shut off and restart rather than idle and waste fuel. The efficiency benefits are less, about 10-15 percent on average, but systems cost is also less. Some systems, like the one now slated for the Saturn VUE and Chevy Malibu in 2006, employ an even more cost-efficient belt driven starteralternator. DCX, with its Dodge Ram HEV, will be the only player utilizing a diesel engine with the hybrid driveline — the most expensive power combination but one that makes most sense given the Ram HEV’s target customer (contractors and commercial users).

Cost remains the greatest bogey in hybrid development, and suppliers say cost-benefit decisions are even more prevalent in HEV development than in conventional vehicle programs. For example, in the mild hybrid arena Honda uses high-power 144-volt electronics, while GM went with the cheaper 42-volt battery. This enabled GM to use MOSFET power control technology rather than IGBT technology, which saves cost on the black box and also allows them to use a cheaper lead-acid battery rather than nickel-metal-hydride. On the full-hybrid side, Toyota and its suppliers are now developing their third-generation hybrid driveline. The company’s latest second-gen system, in the 2004 Prius and upcoming Lexus RX400H SUV, has nearly double the system voltage (500V) of the original Prius while bumping power from 33kW to 50kW. This is a cost-reduction strategy. Current drives the cost of the power electronics in hybrid systems; by increasing voltage and using the same mass of silicon in the switching transistors, Toyota now pushes more power through its Prius at a lower unit cost.

It is understandable that in this pioneering phase of HEVs, the supplier community is a bit befuddled. Often the automakers don’t seem to know where they’re going. Ford’s problems with the Escape, and GM’s recent decision to postpone full-hybrid versions of VUE and Malibu for two years (changing their drivelines to mild-hybrids in the process) in favor of producing full-hybrid versions of the Tahoe/Yukon large SUVs, appear to put the domestics a few steps behind the “industry leading” Japanese.

But the hybrid era has just begun. CSM forecasts mild-hybrid vehicles will enjoy the greatest volume in North America through the next decade because they present the best cost-benefit proposition. And because of this, the former U.S. Big 3, led by GM, will deploy the greatest number and variety of HEVs — that is, if buyers believe the hybrid option is worth paying for in the land of cheap fuel. Until the market gets to know this technology and its economics, the big question for suppliers remains: How much “up” is in the hybrid segment’s upside?

Lindsay Brooke is senior manager of Market Assessment, CSM WorldWide Inc. LindsayBrooke@csmauto.com. www.CSMAuto.com