The great electric car race

High oil prices, green regs, and better batteries are behind the mad dash to create the ultimate electric automobile. So far, Asian manufacturers are leaving U.S. rivals in the dust.

By Alex Taylor III, senior editor

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(Fortune Magazine) -- Did a battery bring down General Motors?

Not by itself, but it helped. For several years GM has been touting the battery-powered Chevy Volt as a sign of the company's vitality and proof of its drive to become a technology leader. Former CEO Rick Wagoner drove one in Washington, D.C., last December when he went hunting for federal aid. Despite the car's limited range (40 miles between charges) and stiff price (estimated at $40,000) GM (GM, Fortune 500) had made the Volt its standard-bearer and touted it as an antidote to climate change and oil imports.

Earlier this year a GM executive declared, "We think a plug-in offering 40 miles of gas- and emissions-free driving like the Volt is the sweet spot for the majority of customers." (For those who want to go farther, a small gasoline engine acts as a range extender.)

The Treasury Department doesn't share that view. Its auto task force has cited the Volt as one reason it doesn't consider GM a viable company. As usual, the department noted, GM has been paying little attention to competitors like Toyota (TM). The 2010 Prius hybrid, which comes on the market 18 months before the Volt, can go 50 miles or more on a gallon of gas and may sell for as little as $21,000 - a lot less money for a big environmental boost.

Treasury's task force was scathing in its appraisal: "GM is at least one generation behind Toyota on advanced, 'green' powertrain development," it said. "While the Volt holds promise, it is projected to be much more expensive than its gasoline-fueled peers and will likely need substantial reductions in manufacturing cost in order to become commercially viable."

It's just that kind of wrong-footedness that has led GM to the brink of bankruptcy. GM has no commercially successful gas-electric hybrids; it put its long-standing fuel cell efforts on the back burner; and now its big push behind the battery-electric Volt looks misguided, even foolhardy. GM has failed as badly when it comes to planning for the future as it has in coping with today's market.

It wasn't always that way. GM was the company that introduced the electric self-starter at the dawn of the automotive age, making the arm-breaking engine crank obsolete, and it developed the catalytic converter to treat tailpipe emissions. But for the past two decades it, along with other U.S. manufacturers, has been slaking America's thirst for horsepower with big V-8s while Toyota, Honda (HMC), and other Asian manufacturers have developed gas-electric hybrids that keep getting more efficient and economical. Now the Chinese are on the verge of introducing their own battery-powered cars, leaving Detroit further behind the curve.

After driving the automobile for a century, the internal-combustion engine is giving way to electric motors powered by batteries - which burn no petroleum and produce no emissions (though the electric plants that charge them may do both). Early efforts to develop battery power have focused on exotic cars with names like Tesla and Fisker made in boutique quantities, but prices are coming down and potential volumes are growing.

The U.S. has a lot of catching up to do. But just when GM, Ford (F, Fortune 500), and Chrysler need to transform their industry, they have fewer resources than ever to do so. GM, for instance, just asked the government for $2.6 billion to develop three variations of the Volt. The winnowing of brands at all three companies has been accompanied by a decline in revenue and market share as familiar names disappear and dealers vanish. Vehicles and engines will get smaller too, and automakers will have to scramble to recover the profits they used to make with larger ones. The Midwest manufacturing base will also shrink.

The process won't be pretty. The company that Walter Chrysler founded and Lee Iacocca rescued will probably see such iconic cars as the hemi-powered Chrysler 300C disappear, along with the company's private equity owner, Cerberus, whose 81% stake has been rendered worthless. GM is in the process of downsizing or dumping four of its brands, including Pontiac, which it introduced in 1926. Ford, at 106 the oldest American car company, is the healthiest, though it appears so only in comparison with its neighbors. Even it is going through resizing as it sloughs off Volvo and extinguishes Mercury through benign neglect.

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