A Tale of Two Mid-Recession Green Car Markets: U.S. vs. Japan

The federal tax credit for plug-in hybrid and all-electric vehicles in the U.S. — $7,500 — is just enough to let Tesla Motors tout a sub-$50,000 base price for its planned Model S electric sedan. But is the credit, and other incentives now coming into play from the stimulus package and other legislation, enough to facilitate the intended transition to a cleaner vehicle fleet with advanced technologies from viable U.S. automakers?

If you look at Japan’s market for fuel-efficient vehicles, especially hybrids, the answer seems to be: no, not on its own. Japan has cultivated a hybrid boom with a set of incentives and policies that both lower the upfront cost of fuel-efficient vehicles — and keep the fuel costs for gas-guzzlers high.

Japan and the U.S. are after the same goals — to boost the fuel-efficient car market — but the two already-contrasting vehicle markets are beginning to diverge even more. Put simply, hybrid sales are topping the charts across the Pacific and slumping along with the rest of the market at home. Granted, the next-gen Prius and its new competitor, the Honda Insight, are just beginning to hit the U.S. market, but the contrasts offer a window into how policies and high-MPG vehicle sales may end up playing out stateside.

In Japan, where hybrids are now tax-free and gas prices are 78 percent higher than in the U.S., a hybrid (Honda’s Insight) topped the charts for vehicle sales for the first time ever in April. And Toyota’s gen-3 Prius, which took the crown last month, is doing well enough that the company has reportedly brought back overtime and started recruiting workers from other Toyota factories to keep up with booming demand. Chief Prius engineer Akihiko Otsuka told the New York Times recently that he expects hybrid sales to “push up the entire car market.”

Yet a Honda executive has just announced that the company expects to miss its sales targets for the Insight by as much as 33 percent this year in the U.S. That’s partly because of relatively low gas prices — they’ve dropped as much as 35 percent in the last year. As J.D. Power and Associates powertrain analyst Mike Omotoso told us recently, “When gas is cheap we tend to buy large vehicles without too much concern for the environment.”

Japan has made the bet that a comprehensive incentive program — including vouchers worth up to $4,500 for trading in gas-guzzlers for more fuel-efficient vehicles, a big push for electric vehicle infrastructure, and that zero-tax provision for hybrids, which is worth about $1,500 — will help keep the yen flowing through the economy during the recession. Even more it could help its automakers maintain or increase their lead in the high-MPG vehicle market when demand recovers (similar to the basic idea behind U.S. tax credits).

At this point, hybrids and plug-in vehicles are not quite the bargain stateside that the Insight and Prius are in Japan. But more incentives are in the pipeline for fuel-efficient vehicles that could nudge the U.S. market in that direction. According to one White House official who spoke with the Wall Street Journal recently, “We fought for the $7,500 tax credit for the purchase of advanced technology vehicles in the Recovery Act, [and] our administration remains committed to policies to help bring the costs down” for consumers.

As the Journal reports, the White House is more likely to favor more tax credits than a proposed gas tax hike. It’s politically dangerous, but a big gas tax hike would sweeten the deal for high-efficiency vehicles.

A version of one of the incentives already in place in Japan — a so-called cash-for-clunkers program that rewards consumers for trading in old gas guzzlers — could soon come into play stateside. In one of the cash-for-clunkers proposals working their way through Congress now, consumers would qualify for vouchers of different amounts based on how much they’re improving their fuel economy with a new car purchase. The basic requirement is for the old car or truck to get less than 17 MPG and the new one to get at least 24 MPG. But the vouchers range from $2,400 for a 7 MPG upgrade to as much as $4,500 for a 13 MPG upgrade. A competing version of the bill is designed to move new-car inventory, regardless of fuel economy.

Japan’s incentive program and the recent boom in demand for hybrids there illustrates how in the mainstream car market, price has prime importance. The trick will be for innovators at the big auto companies and startups like Tesla to really drive down prices, at the same time that policy makers, as Ford Motor Co. executive chairman Bill Ford has suggested, keep prices up at the pump. All so that when the incentives coming into play during this period of transition disappear, the high-efficiency car market doesn’t fall flat.