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Auto Makers' Gamble: Gas or Electric

In the middle of a financial crisis, automobile makers worldwide are facing an enormous gamble.  While sales and profits are at a low point, they are being forced by events to invest in hybrid electric vehicles that have an unproven demand. 

Taxpayers are angry.  They believe that their tax money is being used to rescue car makers from problems caused by their own bad management.  They want the car companies to become leaner and more efficient; with lower pay, fewer retirement and health benefits for line workers and drastically reduced compensation for top-level executives.  At the same time, politicians and the public are pressing for green solutions.  Unfortunately, developing those solutions will take money, something that is in short supply at auto companies. 

There are several emerging technologies, gasoline direct injection, dual clutch transmissions and electronic valves for example, that together have the potential of improving the efficiency of gasoline engines by 15% to 25%.  The investment needed to incorporate those technologies is much less than the investment needed to develop hybrid electric cars.  The improved gasoline engine cars would be less expensive than hybrid electric cars; and the auto companies would make a profit on them, which may not be achievable for hybrid electric vehicles for five to ten years. 

Since going above four dollars a gallon, gasoline has returned to a little over two dollars a gallon; but most US drivers believe that it’s only a matter of time until higher gas prices return.  Under those circumstances, hybrid electric vehicles are in demand, but previous experience indicates that consumers soon forget their pain.  If gas prices do go up again, investing in hybrid electric technology will have been a good decision.  If gasoline prices instead stay low for a few years and consumers return to their old ways, as they did in the seventies, developing hybrid electric cars might be a very bad investment.  That is the gamble auto makers are being forced to take. 

There is no doubt that hybrid electric or plug-in electric vehicles can eventually reduce gasoline consumption and dependence on imported oil in many countries, but how soon can they be developed profitably.  With most car companies bankrupt, on the verge of bankruptcy or in severe financial difficulty, it is going to be difficult to find engineering dollars.  Investing the few dollars available in better gasoline engine efficiency is a less expensive short-term solution, with quicker results.  Significant investments today in hybrid electric or plug-in electric cars with a very long term ROI would not seem to be a good business decision.  The Chevrolet Volt will not save General Motors. 

Morry Marshall
Director - Strategic Technologies
Semico Research Corp.

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