Vehicles Feature - The Powertrain Power Struggle

www.forbes.com Jonathan Fahey

People want powerful engines and big vehicles. But there are those pesky regulations that require a certain, albeit low, fuel economy, not to mention rules capping the emission of smog-causing gases and particulates. And now there's unrest in the Middle East and Venezuela that's sending oil prices skyward.

Then there's the chatter at home about the politics of guzzling a natural resource we don't have much of. On top of that, California regulators may actually toughen environmental rules.

What's an automaker to do?

Find a new engine, apparently. Each company is assuming fuel-cell engines, which run on hydrogen, will be a commercial reality in 15 years or so. In the meantime, companies are also assuming they will need fuel-efficient engines that will not sacrifice power but bridge the gap between today's thirsty vehicles and tomorrow's fuel cells.

Some are looking at diesel engines, which is not exactly new technology at more than 100 years old, but one that has been mostly absent from the car and SUV market in the U.S. for 20 years or so. Diesel can be 30% more fuel efficient than gasoline. Others are looking at gasoline-electric hybrids, which use battery systems combined with traditional internal combustion engines to boost fuel economy 10% to 50%.

Not surprisingly, each carmaker wants the engine they are best at making to be the people's choice, and they are jockeying for position.

Japanese carmakers say hybrid-electric engines are the answer. Why? Because they know how to make them: Japanese environmental policy and driving conditions favor small cars with small hybrid engines, so Toyota (nyse: TM - news - people ) and Honda (nyse: HMC - news - people ) already sell tens of thousands of hybrids, the only makers to do so.

In January, Toyota showed off a hybrid Lexus SUV that uses the battery-powered electric motor like a turbocharger. The gas mileage: Toyota says somewhere in the mid-30-miles-per-gallon range. European makers say the answer is obviously diesel. Why? Because environmental regulations and fuel prices favor diesels in Europe. Nearly one-third of the cars sold there are diesels, and the Europeans make great, peppy, quiet and relatively clean ones.

Next year DaimlerChrysler (nyse: DCX - news - people ) will introduce a diesel Jeep Liberty and a diesel Mercedes-Benz E-Class sedan. Volkswagen already sells diesel Golfs, Jettas and Passats in the U.S.

That leaves North American makers stuck in the middle. "Both sides want to push their home solutions on the U.S.," says Larry Burns, vice president for planning, research and development at General Motors (nyse: GM - news - people ). "We need our own solution."

Ford Motor (nyse: F - news - people ) will offer a hybrid version of its Escape small SUV early next year, but the company's sales targets are modest, about 20,000 per year. "It could turn out to be like the electric vehicle," says Steve Lyons, president of the Ford Division. "People might say: 'That's a great idea, my neighbor should buy that car.'"

Ford's chief operation officer, Nick Sheele, a Briton who recently ran Ford of Europe, would prefer to bring the diesel engines sold in Europe to the States.

To GM's Burns, diesels don't make so much sense: "It's risky to put capital on the table for a technology that may be obsolete in 10 or 15 years," he says. GM announced last month a sweeping plan to offer various types of hybrids across as many as a dozen models. Some of GM's hybrids will use simple batteries that boost fuel economy a modest 12%, others will use large, complex batteries that provide a 50% savings. Many of the components used in gasoline-electric hybrids will later be used in fuel-cell powertrains.

Both diesel and hybrid engines share a cost problem: Both are more expensive for manufacturers and car buyers. With car prices falling and automaker margins already thin, extra cost is not welcome. Depending on the type of system, hybrids add between $1,000 and $5,000 in cost to the manufacturer, mainly for the battery and electric motors. Diesel engines are more expensive than gasoline engines to start with, and then they require turbochargers to match the pep of gasoline as well as special equipment to reduce emissions.

With some of the lowest gasoline prices in the world, there is little incentive for U.S. car buyers to pay more for fuel-efficient engines, it would take them several years to offset the expense with lower fuel costs. Jim Press, executive vice president and chief operating officer of Toyota Motor Sales, believes buyers are beginning to care more about the environment and that they are going to do something about it. "There's an awareness that is awakening in the soul of America," he says. With SUV sales setting new records every month, and the overall mileage per gallon down 10% from its 1987 peak, the awakening seems lazy so far.

Diesel has yet another problem. Though it gets better fuel economy and emits less greenhouse gases, it produces more carcinogenic particulates and smog-causing nitrous oxide. U.S. standards governing those kinds of are scheduled to get tougher by 2007. No automaker has yet to build a car that could meet those standards.

The reason: the amount of sulfur in diesel fuel. In order for automakers to meet emission standards, it needs oil companies to produce low-sulfur diesel, something the oil companies have been reluctant to do. This has put carmakers and oil companies--natural allies--at loggerheads. "When we ask petroleum companies to get sulfur out of fuel, they say 'the sky is falling,'" complains Burns. "We've got to get them to play a little more proactively here."

By 2006 they will be required to sell low-sulfur diesel, but the levels will still not be as low as they will be in Europe and not low enough to allow carmakers to meet the 2007 emissions standards.

With all of these variables--consumer demand, oil prices, engine costs and a government that will seemingly do anything to keep oil prices low--the prospects for any of these technologies are dim. We may just continue down the path we're on: using more and more gasoline in bigger and bigger cars.