Get Ready for Less Boring Green Cars

Until now green cars have had all the sex appeal of a Birkenstock sandal, but carmakers are beginning to change that.

Everybody wants clean air, but the increasing public and political clamor to cut greenhouse gases and raise fuel efficiency is giving the world's automakers an ulcer.

Executives in Detroit, Toyoda City, Stuttgart, and Turin are passing the Prilosec because times are already tough enough for the auto industry. Stricter standards for CO 2 emissions in Europe and a new 35-mpg Corporate Average Fuel Economy (CAFE) standard in the U.S. mean they have to sort out which alternative fuels hold the best solutions, in terms of cost, technology, regulations, and customer acceptance. And they have to pay for it out of their increasingly dwindling profits.

But there's nothing like having a gun to your head to stir the creative, and gastric, juices. The recent North American International Auto Show, which ended Jan. 27, featured an impressive array of fuel-efficient, green-themed technologies (BusinessWeek.com, 1/16/08), including clean diesel, biodiesel, ethanol, gasoline-electric hybrids, diesel-electric hybrids, plug-in hybrids, two-mode hybrids, and fuel cells.

The pressure to succeed has produced unexpected juxtapositions, like Audi's diesel-powered super-sports car, which to some people may sound like an oxymoron. Instead of the mighty V8 and V12 gasoline engines the U.S. market has come to expect, Mercedes-Benz ( DAI ) displayed a greener, though less exciting, four-cylinder diesel-hybrid version of the S-Class flagship. Even notorious Italian fuel hog Ferrari, whose 534-hp 612 Scaglietti rates a Hummer-like 9 mpg in the city and 16 mpg on the highway, showed a car that can run on 85% ethanol and 15% gasoline.

There were also a few surprises in Detroit, such as the introduction of a great-looking plug-in hybrid, the $80,000 Karma (BusinessWeek.com, 1/17/08), from Lake Forest (Calif.) startup Fisker Automotive. What makes it so special is the combination of great looks and innovative technology. CEO Henrik Fisker has devised a method of building the car's body separate from the bulky battery pack, which is installed underneath the car. "The battery never really gets put in the car," he said in a Jan. 14 interview, pointing out that by doing so it saves cost and complexity, and keeps the car's center of gravity low. However, the company is mum on most other details about the car, including how fast it is, and even where it will be built.

And yes, just like it sounds, a plug-in hybrid can be recharged from a plug, off household current. That gives it greater range than most of today's hybrids, which rely on a conventional motor to recharge the battery, but plug-in hybrids still have a conventional motor, too.

Toyota ( TM ), newly crowned the world's No. 1-selling automaker, also roiled the Detroit show by announcing it will introduce a fleet of hundreds of plug-in hybrids for research and development by 2010, in greater numbers than expected, and with lithium ion batteries. Toyota already has a small handful of plug-in hybrid prototypes around the world, with poorer-performing nickel-metal-hydride batteries. Other rivals, such as General Motors ( GM ), have been careful to avoid hard deadlines for introducing plug-ins with lithium ion batteries like the Chevrolet Volt (BusinessWeek.com, 1/7/07).

Lithium ion batteries produce a better range than other batteries, but there are still bugs to be worked out, especially the fact that they generate a lot of heat. Toyota also announced it is adding an assembly line in a joint venture with Matsushita's ( MC ) Panasonic division to produce the batteries, which implies they have a working solution.

The auto industry's explosion of new green technologies means it really doesn't know which ones will dominate in the long term. The one thing that's clear is they all have serious drawbacks. Pending a breakthrough by Toyota or another competitor, electric vehicles lack batteries that most ordinary customers will accept or can afford. Fuel cells don't have an infrastructure to distribute the hydrogen fuel they need. Ethanol is popular in states that grow corn or sugarcane, or whatever, but ethanol is a less powerful fuel than gasoline, and it's questionable whether enough ethanol could be produced to make much of a dent in America's thirst for gasoline. In the absence of a clear winner, the industry is putting its chips on a lot of different numbers.

GM has made a virtue out of necessity, stressing the point that there's "no one solution." GM even created an advertising and public relations tagline with its own logos, "Gas-Friendly to Gas-Free," to describe the range of green technologies GM is exploring. "Gas-Friendly," with a fuel-gauge logo, refers to economical but conventional gasoline engines, and clean diesels; "Gas-Free," symbolized by a drop of water, refers to fuel cells, which run on hydrogen and emit water. In between are ethanol (a plant); hybrids (two arrows forming an "H"); and battery-powered cars (a lightning bolt).

Of all the fuel-saving technologies, clean diesel is the one that's most ready to go right out of the box. Diesels already dominate some European markets, where gas prices are much higher than in the U.S., even with the recent increases in the U.S. market. The German automakers in particular are eager to start selling greater volumes of diesels in the U.S., now that customers are interested in higher mileage. The technology exists; the cars are ready to go.

However, clean diesel is probably the least popular green technology with U.S. consumers. Americans remember smelly, smoky, underpowered diesels from the mid-1980s, following the second big oil crisis of 1979. Ultimately, U.S. emissions regulations made it impossible to sell those old diesels in the States. Meanwhile, the Europeans came up with powerful, clean-burning diesels, with direct-injection engines and clean, low-sulfur diesel fuel. The U.S. government mandated low-sulfur diesel fuel starting in 2006.

That made a U.S. diesel comeback possible, along with better emissions controls. One factor that's different is that diesel fuel was cheaper than gasoline in the mid-1980s, and today it's roughly on a par with gasoline. Nevertheless, for an engine the same size as a gasoline engine, diesel engines get better mileage. Despite the obvious advantages, Americans are more interested in hybrids, and even in fuel cells, which aren't on the market yet, than they are in diesels.

This is particularly maddening for the European automakers, which have years of experience with clean, quiet, powerful diesels that get up to 30% better mileage than gasoline engines, and account for a majority of sales in some European markets. At the Detroit show, Audi ( NSUG ), BMW ( BMWG ), Mercedes-Benz, and Volkswagen ( VLKAY ) brands all showed diesel versions of existing models.

"If the whole discussion was only led by facts and numbers, and not only by us, there could be huge increases in diesel. I am convinced it will come. There is no commonsense reason against it," said Audi board member Axel Strotbeck in a Jan. 14 interview in Detroit.

The real crunch for automakers is that while consumers say they want cleaner air and better mileage, they don't show much inclination to give up anything in return. Most Americans still want fast acceleration, enough room to carry people and cargo, automatic transmissions, power windows, power everything, and a growing list of bells and whistles in their cars like iPod integration and video screens.

Auto executives at the Detroit show warned that meeting tougher emissions and mileage regulations will raise consumer prices by as much as a couple of thousand dollars. But that could be wishful thinking. It's been a long, long buyer's market in the U.S. industry. If consumers balk at higher prices, the automakers will have to eat the costs themselves, or to put it another way, raise productivity enough to cover the extra costs.

"There's no reason to believe people are looking for less. If anything, they want more―they're more discerning, more demanding―just in a more fuel-efficient vehicle," said GM Vice-Chairman and CFO Fritz Henderson on Jan. 13.

"Over time [because of mileage and emissions regulations], vehicles are going to get more expensive to the consumer," he said. "There's no free deal here."