Honda Diesels, Hybrids to Compete With Toyota's Prius

May 18 (Bloomberg) -- Honda Motor Co., vying with Toyota Motor Corp. for buyers seeking fuel-efficient autos, will add U.S. diesel models and a new gasoline-electric hybrid by 2009.

Honda's new gas-electric car will seat five and be cheaper and smaller than its $22,150 Civic Hybrid, President Takeo Fukui said in Tokyo yesterday. The Japanese company's diesel engines will probably be available in several U.S. models, and the cars will travel at least 10 percent farther on a gallon of fuel than gasoline versions.

``Their strategy makes sense: Larger heavier, more expensive products get the diesel,'' said George Peterson, president of consulting firm AutoPacific Inc. in Tustin, California. Honda is going back to its roots with ``very high fuel economy cars that are very inexpensive to operate,'' he said.

Honda, the first company to sell hybrids in the U.S., is trying to match Toyota's success with its Prius model, the best- selling gasoline-electric car in the world. Consumers are turning to more fuel-efficient cars as gasoline prices approach record highs, and Honda sees an untapped market in diesels.

Interest in hybrids and fuel economy are at record highs, ``reflecting the run-up in gas prices in the past year,'' said Jack Nerad, executive market analyst for Kelley Blue Book, citing the Irvine, California-based company's customer survey data.

Retail gasoline averaged $2.922 a gallon nationwide today, 4.7 percent higher than a month ago and 36 percent more than year ago, according to AAA's Daily Fuel Gauge Report Web site. The record was $3.07 a gallon in September, according to U.S. Energy Department figures.

Insight's Replacement

Honda, based in Tokyo, wants to sell 100,000 of its new hybrids a year in the U.S., Fukui said. The model, not yet named, replaces the Insight coupe, which Honda began selling in 1999 and will discontinue after this year.

Toyota is the world's largest seller of hybrids and expects global demand for such vehicles to rise to 1 million units a year by 2010, from about 350,000 in 2005. Toyota sold a record 146,560 hybrid cars and sport-utility vehicles in the U.S. last year, compared with 43,356 such vehicles for Honda, the market's second-biggest hybrid brand.

Hybrids conserve fuel by combining a gasoline engine with electric motors, a battery pack and brakes that capture energy from stopping.

Range of Hybrids

Toyota has a range of hybrid models -- two sport-utility vehicles, two Lexus luxury sedans, the Prius and a version of the Camry. The company says more are planned. Honda aims for three such vehicles by the end of the decade -- hybrid Civics, Accords, and the new model.

Honda has ``to pick their product segments carefully, and that's what they've done,'' said Alan Baum, director of automotive forecasting at consulting firm Planning Edge in Birmingham, Michigan. ``They've announced a strategy that plays to Honda's strengths.''

Honda, which already sells diesel-powered vehicles in Europe, is developing a four-cylinder diesel engine for the U.S. that will meet federal emission standards as well as the stricter rules in California, New York and three other East Coast states.

``It's Honda's style to be first to market with a new technology, and I think they are trying to do that with a low- emission diesel system,'' said Phil Gott, an analyst with Lexington Massachusetts-based Global Insight Inc.

Honda hasn't said what models will be available with diesel engines.

Dirtier Fuel

Cars powered by diesel can generally travel at least 10 percent more on a gallon of fuel than those with gasoline engines. Diesel is much dirtier than gasoline because of higher amounts of carbon and sulfur, and requires a higher degree of exhaust filtering to reduce emissions of black soot.

Honda's U.S. shares rose 6 cents to $34.31 at 4:02 p.m. in New York Stock Exchange composite trading. They have gained 18 percent this year. Toyota's U.S. shares rose 80 cents to $110.60 in New York. They have advanced 5.7 percent in 2006.

Germany's Volkswagen AG and DaimlerChrysler AG, the world's largest seller of diesel-engine cars, also are developing low- emission diesels to meet U.S. standards. Honda sold its first diesel engine in Europe in 2004.

U.S. consumers bought 543,777 diesel-engine cars and light trucks in 2005, according to data compiled by R.L. Polk & Co. That was equivalent to 3.2 percent of new vehicle sales. Hybrids accounted for 1.2 percent of U.S. sales last year.

To meet new U.S. pollution rules for diesel autos and reduce nitrogen oxide emissions, Volkswagen and DaimlerChrysler have said they're developing a system that squirts urea, a nitrogenous solid found in mammalian urine, on diesel fumes as they pass through a filtering chamber.

Cost

Such a system is ``as technologically complex and possibly as costly'' as a hybrid system, said AutoPacific's Peterson. Hybrids sold in the U.S., such as the Civic or the Prius, typically cost at least $3,000 more than a gasoline-only version.

Honda, which hasn't revealed details of its U.S. diesel system, won't use a urea-based treatment, Ed Cohen, a spokesman for the company's Washington D.C. office, said in an interview. In addition to its current four-cylinder diesel, Honda yesterday said it's also developing a V-6 engine that could be used for larger cars and light trucks, John Mendel, Honda's U.S. sales chief said in a conference call.

The U.S. Environmental Protection Agency in its most recent fuel-economy assessment for major carmakers in July 2005 said the average Honda car and light truck traveled 25.1 miles per gallon of gasoline in combined city and highway driving. Toyota was second at 23.5 mpg, followed by VW at 23.4 mpg.

Honda said that the new hybrid and diesel models will boost its fleet's fuel efficiency another five percent.

Honda's U.S. operations are based in Torrance, California.

To contact the reporter on this story:
Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net