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Hybrid Sales Drop with Gas Prices

But Auto Executives Believe the Hybrid Age Is Upon Us

By Joe Benton
ConsumerAffairs.com

January 4, 2007

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Declining gasoline prices as well as disappearing federal tax credits are hammering hybrid sales in general and Prius sales in particular, although automotive executives worldwide believe that long-term consumer buying habits have been changed forever by the recent spate of high gas prices.

Not long ago consumers waited months for a Prius but now many Toyota dealers are advertising several Prius models in stock. In some cities, Toyota is offering to lease the hybrids for 36 months at less than $300 a month.

After rising for most of the year, hybrid sales fell to 19,000 in November from nearly 32,000 in August when gas prices across the country hit $3 a gallon.

Gasoline prices have declined 24 percent since August and hybrid sales have declined 31 percent.

In California, the country's largest hybrid market, changing consumer attitudes toward hybrids are influenced by more than just gasoline prices and tax credits. Uncertainty in California over the availability of HOV lane stickers for new hybrids is an additional factor slowing sales for the Prius as well as other hybrids.

The federal tax credit available to buyers of the Prius was cut in half late in 2006. Until then, the Prius enjoyed the largest hybrid credit, $3,150. The credit shrank to $1,575 on October 1.

Despite dropping sales, prices for the Prius and Honda Civic Hybrid have remained virtually unchanged. The average price paid for a Prius, less any cash rebates, was $26,281 in November compared with $26,076 in August.

The Industry View

Toyota executives predict Prius sales will rebound. The Japanese automaker expects U.S. hybrid sales to climb by 50 percent in 2007 to nearly 300,000, in part because of larger supplies of the Prius and the hybrid Camry.

Most automakers agree with Toyota and continue to ramp up for increased hybrid production in spite of the recent sales slump. General Motors just announced it has awarded lithium-ion battery development contracts to two suppliers for the upcoming Saturn Vue Green Line hybrid.

A recent survey by KPMG LLP, the U.S. audit, tax and advisory firm, confirms that auto executives believe that we've entered the hybrid age.

The survey, based on interviews with 150 senior executives at vehicle manufacturers and suppliers worldwide, found that executives continue to believe that fuel efficiency and quality are the primary consumer preferences when purchasing a new car, 89 percent and 88 percent respectively.

Last year, 87 percent of executives said quality was the leading factor, and 84 percent said it was fuel efficiency.

"High gas prices, which are permanently etched on consumers' minds, have had dramatic implications for auto manufacturers who lack quality, fuel efficient products to satisfy demand," said Daron Gifford, National Automotive Industry leader, KPMG LLP.

For the second consecutive year, industry executives said they believe the most popular vehicles over the next five years will be hybrids, cited by 83 percent of respondents, and low-cost cars, according to 64 percent of respondents. Last year, 88 percent of executives said hybrids would be the most popular, while 79 percent cited cars.

Overall, 64 percent of executives said they expect cars to increase global market share over the next five years, outpacing larger vehicles, such as minivans, which were cited as a growth model by only 33 percent of executives.

Meanwhile, just 28 percent said SUVs would be gaining share. Fifty-five percent of executives also expect market share for crossovers to increase, while 42 percent predicted market share for luxury vehicles would increase.

"Gasoline prices have shifted the model mix in executives' minds, and future winners in the global automotive marketplace will have to find ways to combine ingenious cost-efficiencies with startling design creativity," said Gifford.

In breaking the categories down into a regional view:

• 95 percent of North American executives said they were more likely to see a rise in hybrid sales over the next five years, while 67 percent of North American executives predicted crossovers.

• 89 percent of European executives were optimistic on the sale of low-cost vehicles, and 57 percent forecasted luxury vehicles sales would increase.

• 37 percent of Asian executives are more confident about the sales of large pick-up trucks, while 72 percent expected car sales to rise.

This year, 71 percent of executives believe hybrids will become a U.S. market force, with between 200,000 and 500,000 cars being sold compared with 200,000 sold in 2006.

"The hybrid mantra is that the breed cannot fail, given consumer demand and its relatively minuscule production numbers," said Gifford.

Additional key findings include:

• 90 percent of executives believe consumers will hold on to their new cars for three to seven years.

• 94 percent of executives consider product quality as the most important industry issue in 2006, while 89 percent named cost reduction.

• 66 percent of executives cited innovations in manufacturing as the greatest source of cost savings for vehicle manufacturers, followed by materials innovation and outsourcing to countries like China and Eastern Europe according to 61 percent of executives respectively.

• 48 percent of executives named new models and 43 percent determined that new technologies are the areas where manufacturers will increase investment.

In the KPMG survey, the executives interviewed represented vehicle manufacturers and suppliers in Canada, United States, England, France, Germany, Sweden, India, China, South Korea, Japan and Australia.

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