Catch-22: If Diesel Sales Boom, Will Their Cost Advantage Bust? Page 2

March 2, 2013
2014 Chevrolet Cruze Clean Turbo Diesel, 2013 Chicago Auto Show

2014 Chevrolet Cruze Clean Turbo Diesel, 2013 Chicago Auto Show

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According to ALG analyst Eric Lyman, whether diesels keep the momentum they're gaining in the market depends on two things: public perception and pure economics.

As for public perception, diesel is at last seen by American new-vehicle shoppers as a premium technology, Lyman recently confirmed to us. “We’re really starting to see a shift in consumer behavior the past couple of years, in American consumers valuing the technology,” he said. “So some of the long-held beliefs about 'dirty diesel,' or concerns from decades ago, are finally starting to fade as consumers get more exposure to the technology.”

Supply is short and demand is strong

In economic terms, just like with most kinds of vehicles, it's a matter of supply and demand. And today, with Volkswagen being the only mainstream automaker to offer diesel options, demand far outweighs supply on the late-model used market—which is why values are so inflated.

“We’re going to see more and more automakers introducing that technology, which should help awareness, but it also has an impact on supply relative to those numbers we see today,” said Lyman.

Chevrolet has already priced the 2013 Cruze Clean Turbo Diesel at $25,695, including destination—a price that’s somewhat higher than that of the Volkswagen Jetta TDI. With the Mazda model anticipated to roll in at about the same price, possibly even less, we may see them cutting into VW’s sales, and its inflated late-model used values.

Mazda SKY-D Engine

Mazda SKY-D Engine

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ALG won't yet say whether it’s predicting that Mazda's diesels will do as well as Volkswagen's diesels in residual values, but Lyman says it's a good fit for the brand. “One of the things that Mazda has been doing well is the fuel-efficiency improvements in some of their recent redesigns, and the diesels fit squarely within that strategy,” said Lyman.

That said, success of the Mazda and Chevrolet diesels depends on those same familiar economics: initial pricing, and how long it takes to pay the sticker-price premium back with savings at the pump. Complicating that is that, in the U.S., diesel prices have stubbornly been significantly higher than those of regular-grade gasoline.

Will break-even economics slow diesels down?

“So you get the added fuel efficiency, but you have to pay extra on the front end for the technology, and you have to pay more at the pump—so it just really pushes forward the break-even point on your investment,” summed Lyman.

Automakers don't haveas much wiggle room on diesels' sticker price either, as the technology costs hundreds, perhaps thousands more in manufacturing costs (and related expenses like emissions certification) than a gasoline model

“Ultimately there's a factor at play that's beyond automakers' control, which is the price of diesel versus gas,” Lyman noted.

How does the diesel market expand without that softening on the used-car side, negating one of its key advantages? One scenario Lyman can think of is if gas prices rose up to the five- or six-dollar level for a sustained period. That’s because diesel has been at a lower cost premium in recent years, and as the per-gallon price of gasoline rises, the percentage premium for diesel usually lessens—making these vehicles more attractive, for people who keep a tally of their driving costs.

Diesel component supplier Bosch is, of course, bullish. It recently predicted than ten percent of the U.S. light-vehicle market by 2018 will be diesel-powered; and it counts a total of 42 diesel-powered product introductions just this year—most of them trucks, admittedly.

Will diesels make the jump from niche appeal to mass-market sensibility? Over decades, diesel technology in passenger cars has had a lot of false starts in the U.S. If recent, pleasing-to-drive products from Volkswagen, Audi, Mercedes-Benz, BMW, and now Jeep are any indication, the next couple of years are going to be interesting.


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