Fiesta ECOnetic

By BusinessWeek

If ever there was a car made for the times, this would seem to be it: a sporty subcompact that seats five, offers a navigation system and gets a whopping 65 miles to the gallon. Oh, yes, and the car is made by Ford Motor (F, news, msgs), known widely for lumbering gas hogs.

Ford's 2009 Fiesta ECOnetic goes on sale in November. But here's the catch: Despite the car's potential to transform Ford's image and help it compete with Toyota Motor (TM, news, msgs) and Honda Motor (HMC, news, msgs) in its home market, the company will sell the little fuel sipper only in Europe.

"We know it's an awesome vehicle," says Ford America President Mark Fields. "But there are business reasons why we can't sell it in the U.S." The main one: The Fiesta ECOnetic runs on diesel.

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Automakers such as Volkswagen and Mercedes-Benz have predicted for years that a technology called "clean diesel" would overcome many Americans' antipathy toward a fuel still often thought of as the smelly stuff that powers tractor-trailers.

Diesel vehicles now hitting the market with pollution-fighting technology are as clean as, or even cleaner than, gasoline-powered cars, and they are at least 30% more fuel-efficient.

Yet while half of all cars sold in Europe last year ran on diesel, the U.S. market remains relatively unfriendly to the fuel.

Taxes aimed at commercial trucks mean diesel costs anywhere from 40 cents to $1 more per gallon than gasoline. Add to this the success of the Toyota Prius, and you can see why only 3% of cars in the U.S. use diesel.

"Americans see hybrids as the darling," says Global Insight auto analyst Philip Gott, "and diesel as old tech."

None of this is stopping European and Japanese automakers, which are betting they can jump-start the U.S. market with new diesel models. Mercedes-Benz by next year will have three cars it markets as BlueTec. Even Nissan Motor (NSANY, news, msgs) and Honda, which long opposed building diesel cars in Europe, plan to introduce them in the United States in 2010.

But Ford, whose Fiesta ECOnetic compares favorably with European diesels, can't make a business case for bringing the car to the United States.

First of all, the engines are built in Britain, so labor costs are high. Plus the pound remains stronger than the greenback. At prevailing exchange rates, the Fiesta ECOnetic would sell for about $25,700 in the United States.

By contrast, the Prius typically goes for about $24,000.

A $1,300 tax deduction available to buyers of new diesel cars could bring the price of the Fiesta to around $24,400. But Ford doesn't believe it could charge enough to make money on an imported ECOnetic.

Ford plans to make a gas-powered version of the Fiesta in Mexico for the United States. So why not manufacture diesel engines there, too?

Building a plant would cost at least $350 million at a time when Ford has been burning through more than $1 billion a month in cash reserves. Besides, the automaker would have to produce at least 350,000 engines a year to make such a venture profitable.

"We just don't think North and South America would buy that many diesel cars," Fields says.

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The question, of course, is whether the U.S. will ever embrace diesel fuel and allow automakers to achieve sufficient scale to make money on such vehicles.

California certified VW and Mercedes diesel cars earlier this year, after a four-year ban. James N. Hall, of auto researcher 293 Analysts, says that bellwether state and the Northeast remain "hostile to diesel."

But the risk to Ford is that the fuel could take off, leaving the carmaker to play catch-up -- despite having a serious diesel contender in its arsenal.

This article was reported and written by David Kiley for BusinessWeek.