Will Recession Squash Electric, Hybrid Car Market?

David Blume, a 48 year-old seafood retailer from Bloomfield Hills, Mich., feels guilty about the gas he burns during his 60-mile roundtrip commute—up to a point. A self-described environmentalist, he considered purchasing a hybrid, but balked at spending $5,000 more, an amount he won't soon recoup with gas prices at their current level. He ultimately picked a conventional Honda Civic that gets 37 miles per gallon. "I'm all for saving the environment, but my first priority is putting my kid through college," says the father of a high-school senior. "I won't even consider a hybrid unless gas prices change dramatically again."

Such sentiment could pose a major problem for beleaguered automakers that are shifting away from SUVs and banking on fuel-efficient hybrids and electric cars to stay in business. As expected, the cars showcased at this year's North American International Auto Show in Detroit were vehicles that run primarily on batteries, including the much-hyped Chevy Volt, the Jeep Patriot and the Dodge Circuit EV sports car. Also front and center were updates of already popular hybrids like Honda's Insight and the revamped Toyota Prius.

Carmakers saw the show as an opportunity to advertise positive change. "People were expecting a funeral for 2009," says Jon J. Lauchner, vice president of global program management for General Motors, but "GM is here to stay. There is no reason to think we won't get past this rough patch." Glancing around the auto show floor, he adds, "We have cars that people will buy and will buy in big numbers."

That may be a bit optimistic. Given the bleak economy and relatively tight financing market, buying a new car just isn't as easy as it once was. The million-dollar question going forward: Will the recession kill the chances of hybrid and electric vehicles from going mainstream? Asking drivers to pay more when they've got little to spend is proving to be a tough sell for the auto industry. "With gas under $2 a gallon, it's hard to convince consumers to invest that additional money," says John Nielsen, director of auto repair and buying for AAA in Orlando, Fla.

For the moment, driving green requires a substantial upfront investment. The GM Volt, which plugs into a household electric socket to charge, is slated to retail for $40,000, nearly the same price as a conventionally fueled Mercedes C Class. While Jim McDowell, vice president of BMW's Mini division, says drivers are going "bananas" over its pilot electric vehicle, the one-year monthly lease price is $850, more than twice as much as the comparable non-electric Mini. And hybrids, which use gasoline to power a combination electric-gas motor, cost more than comparable gasoline-powered vehicles. For example, Honda's 2010 Insight is slated to be the least expensive hybrid sold in the United States at under $20,000. That's still nearly $5,000 more than a Honda Civic running on unleaded. And for all the positive press and public opinion about Toyota's Prius, sales of the car plummeted 44 percent from December 2007 to December 2008.

Washington has put a lot of pressure on carmakers to go green, but that doesn't mean consumers are willing to buy, says Geoff Pohanka, a dealer with Pohanka Automotive Group in Marlow Heights, Md. The "economic crisis is trumping the environmental crisis," and it will "be a bumpy road" with many of these vehicles, especially the larger hybrids, sitting on dealer lots, says Pohanka, whose dealership sells numerous makes including cars from GM, Chrysler and Toyota. While the IRS does allow tax breaks on hybrids, they're limited and range from only $300 to $3,000 for 2008 and 2009 cars.

Buyers are feeling too squeezed by the economy and just are no longer willing to pay a premium for cars like the Prius, says Jon Kinkov, managing editor of autos for Consumer Reports. Americans are fickle and "there won't be a wholesale rush" on hybrids unless their prices come down and gas prices go back up.

Detroit says it's taking sticker shock into account. Sue Cischke, Ford Motor Co.'s group vice president of sustainability, environment and safety engineering, acknowledges that hybrids and electric vehicles need to be made more affordable. As technology evolves, she insists, and more of these cars roll out of showrooms and are produced on a bigger scale, prices will begin to come down. Exactly when that will happen is unclear.

Michael Simon, a 52-year-old professor in Ann Arbor, Mich., is waiting for hybrids to become more mainstream before he trades in his 2001 Honda Accord, which has racked up 195,000 miles during Simon's 92-mile roundtrip commute. An environmentalist who composts vegetables in his backyard, he would prefer a hybrid—but not yet. "I'm holding out," he says. "As long as my Honda is safe, I'll continue to drive it."

Will Recession Squash Electric, Hybrid Car Market? | Business