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Conventional wisdom had expected that both changes would have increased costs to the point where buyers would lose interest in diesels.

"A lot of people were holding their breaths with the higher cost of diesels and lower sulfur fuels. We expected to see everyone line up to buy trucks built before January, but that doesn’t seem to be there," says Gary White, vice president GM North America and full size truck vehicle line executive.

According to Ford Motor Company, hardware costs did rise on its new 6.4-liter Power Stroke diesel engine by about $1,500 this year, over the previous 6.0-liter PSD, and we estimate GM also passed along a similar cost increase to Duramax buyers, but that’s only about 2% to 3% of the purchase price for trucks that typically sell for over $45,000. And Mr. Ballew notes what many diesel drivers have experienced at the pump, "We’re seeing a price differential of about $.50 for diesel versus gas," in favor of diesel, which has helped keep demand strong.

“[Buyers] seem to be buying right into the new diesels…even though the cost of a diesel today from when we launched Duramax is several thousand dollars more,” says Mr. White. But he adds, “In our diesel versus gas comparison data, if someone has a 100,000 mile diesel ownership lifecycle, between the diesel residuals and gas/diesel price differential, our data shows they pretty much recover their costs at 100,000 miles across the board. And if they’re towing it’s a hell of a deal."

Still, the cost of diesel ownership continues to keep GM up at night. Diesel emissions rules will clamp down even tighter at the end of 2010 for Nitrogen Oxide (NOX) levels and hardware costs will go up again to meet the final 50-state Tier 2 Bin 5 clean air standards.

"The need to manage the incremental cost issues of diesel is something we’re not taking lightly. It’s a pretty hefty price tag when you take this year and the next steps. Our goal in all of this is to get the costs down," says Mr. Ballew, who is leading a cross functional team at General Motors with Mr. White’s product group and GM’s powertrain engineers to, "get their arms around it," and determine GM’s future diesel strategy in full size pickups.

This includes thinking about GM’s future light duty V8 diesel engine too. Heavy duty truck owners know that a diesel engine has advantages other than lower costs filling up. They also crave the extra torque for towing. But light duty truck owners are likely to be more cost sensitive than HD buyers to any large differential between gas and diesel. "In the heavy duty space people value the diesel for what it can do. In the light duty space you need to get the cost right," says Mr. Ballew. And even though a recent Lehman Brothers investment report estimates that by 2012 light duty diesel penetration will hit 45% of all half-tons, Mr. Ballew says, "it’s still too early to tell."

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