Can Uncle Sam Sell Hybrids?

By JOSEPH B. WHITE

The government's rescue plan for General Motors Corp. and Chrysler LLC has focused on financial engineering. Soon, the Obama administration and whoever is running GM and Chrysler will have to confront a more-challenging problem: how to sell the cars they want America to buy.
President Barack Obama said during his press conference last week that just because the government could hold shares in GM and Chrysler doesn't mean he intends to micromanage their affairs. Then he added, "I'm not an auto engineer, I don't know how to create [an] affordable, well-designed plug-in hybrid. But I know that if the Japanese can design [an] affordable, well-designed hybrid, then doggone it, the American people should be able to do the same. So my job is to ask the auto industry: Why is it you guys can't do this?"
GM and Chrysler's new management teams will likely treat this question as something more than a suggestion. What's worth watching is whether they will deliver a complete answer.

This Fiat 500 minicar would cost the equivalent of $17,900 in the U.K.
It's not as if American consumers won't buy efficient vehicles. Seven of the top-10-selling vehicles in April were cars that average 29 miles per gallon on the highway or better. The top seller was the Honda Accord, which gets 30 mpg on the highway in its four-cylinder version.
But this must be kept in perspective. Total small-car sales are down 33% for the year, and small cars from domestic brands in the segment that includes the Toyota Corolla, Chevy Cobalt and Dodge Caliber are down 51%, according to AutoData Corp.
Demand for hybrid vehicles is in the doldrums. Toyota Prius sales are down 49.5% for the Jan. 1 to April 30 period, and Toyota has been offering discounts on the model to clear inventory ahead of the launch this month of a redesigned 2010 Prius. Honda sold just 2,096 of its new Insight hybrids in April, the first full month after its formal launch. Honda Civic hybrid sales are down 26% for the year, and at the current pace will struggle to crack 30,000 vehicles for the year -- a pittance even in today's depressed market.
At $2 a gallon for regular unleaded, the most-enthusiastic purchasers of hybrids are governments and corporations eager to wear green.
As for plug-in hybrids, the costs remain daunting for major car makers on both sides of the Pacific. Toyota Motor Corp. has said it plans to offer a test fleet of about 150 plug-in versions of its Prius model to certain fleet customers next year. It's a tentative, toe-in-the-water approach that reflects Toyota management's uncertainty about the technology -- and about the robustness of demand.
The Chevy Volt, GM's plug-in, won't go on sale until late 2010. But whether that car will be "affordable" at an estimated $40,000 depends on who you are. The Obama administration's automotive task force delivered its opinion of the Volt in blunt terms in a March 30 report: "... while the Chevy Volt holds promise, it will likely be too expensive to be commercially successful in the short-term."
Around the world, other governments aren't shy about pushing consumers toward certain choices. China has encouraged consumers to buy more-efficient cars by recently halving the purchase taxes levied on vehicles equipped with engines smaller than 1.6 liters displacement, while sharply increasing taxes assessed on cars with engine displacements larger than 3.0 liters. The result has been a surge in sales of smaller cars with smaller engines -- just what the government wanted.

Europe uses high fuel taxes and other means to push consumers to pay higher prices for smaller vehicles. Fiat SpA, Chrysler's new industrial partner, sells a cuddly little minicar called the Fiat 500. I went to a U.K. Web site and configured a red one with a 1.20-liter "stop start" gasoline engine, an Italian flag stripe down the side and an electric sunroof. Fiat will throw in access to software that I can download and use to get readouts on the mileage and greenhouse-gas emissions of my car.
Asking price for my little red "green" car: £11,950, or about $17,900. That's what I'd expect to pay for a midsize car in the U.S., after discounts. But in the U.K., higher fuel costs make buying a Fiat 500 more sensible -- though not necessarily one with a stripe.
U.S. car makers have lobbied for higher gas taxes as the simplest way to push consumers into high-mileage cars. The Obama administration is betting on a different approach: Leave gas taxes alone, and instead invest government money in advanced battery development, offer tax breaks of up to $7,500 on hybrids and mandate tougher mileage standards to force car makers to use new fuel-saving technology. Washington now has a big financial stake in getting this right, or billions in public money plowed into Chrysler and GM could be vulnerable to energy markets.
This is probably why Mr. Obama sounded so sincere when he said, "I don't want to run auto companies."
Email: joseph.white@wsj.com