A Mercedes Hybrid at Last

German automakers pride themselves on being at the leading edge of new technology, so it has been a bit of an embarrassment that—a decade after Toyota (TM) launched the Prius—none of them has a hybrid electric model on the market. But, with fuel economy and environmental impact suddenly a key concern for well-heeled buyers, Daimler's (DAI) Mercedes unit is finally poised to get into the hybrid game.

In June 2009 the company will begin European sales of a hybrid version of its luxury S-Class that, its engineers say, will use 7.9 liters of gasoline per 100 km (or get 29.8 miles per gallon). Launches in the U.S. and China will follow in September, Mercedes said on Sept. 11.

The carmaker hasn't yet established a price for the hybrid land yacht, but Mercedes Sales and Marketing Director Klaus Maier said the premium will be less than €10,000, or $14,000. The S-Class starts at about $88,000 in the U.S., though the top-of-the-line V12 costs a staggering $145,000.

Why Such a Big Car

Cynics might say that people concerned about global warming and the massive transfer of wealth to oil-producing nations should simply buy a smaller car. But Mercedes executives don't think their customer base has quite reached that stage of enlightenment. "Not everyone can drive a Smart on vacation," Maier says. "We need solutions for big cars."

Why did it take so long for Mercedes to get into the hybrid market? One reason is that Mercedes, as well as BMW (BMWG.DE) and Volkswagen (VOWG.DE), have concentrated on optimizing diesel engines. BMW's diesel Mini and 1 Series rival the Prius for gas mileage and carbon dioxide emissions. Daimler says its BlueTec line of diesel SUVs, launched in the U.S. over the summer, account for 20% of Mercedes SUV sales in the country, a substantial percentage considering that diesel passenger cars make up only 4% of the total market.

From an engineering point of view, diesel is the better technology because it offers comparable gas mileage to a hybrid—or even superior mileage in highway driving—with less weight and expense. But the success of Toyota's luxury Lexus hybrid models showed that gasoline-oriented U.S. buyers want hybrids. "Mercedes said: 'If you want to save the planet, buy a diesel,'" says Christoph Strmer, Frankfurt-based auto analyst at Global Insight. "They were right in their own way but proven wrong by the market."

The S-Class is not a so-called full hybrid—it can't run solely on battery power. Rather, the electric motor supplements the six-cylinder, 279-horsepower gasoline engine, improving fuel economy by providing a boost while accelerating. The car also recovers energy when braking, feeding it back into the battery. However, Mercedes has included some innovations that it hopes will set the S-Class hybrid apart from Japanese competitors.

Better Battery

The main innovation is the lithium-ion battery. Developed along with German components supplier Continental (CONG.DE), the battery weighs less and takes up less space than batteries used by competing hybrids. Slightly larger than a conventional auto battery, it fits under the hood and does not reduce the amount of space in the rest of the car. All told, the hybrid components including an electric motor add a modest 75 kg (165 lb.) to the total weight of the car.

The battery employs the same chemical principle as those used in laptops and mobile phones, but Mercedes execs insist there is no danger of the overheating that has plagued consumer electronics makers. In the unlikely event that the battery gets too hot, says Oliver Vollrath, strategic director of the S-Class hybrid project, the system will shut down automatically. In any event, Vollrath says the car's power-management system precludes any such problems. "You can be sure that what happens in laptops won't be a problem in automobiles," he says.

Besides being more efficient than competitors, the battery also helps Mercedes meet its long-term goal of offering better mileage without any sacrifices in performance and comfort. Following the S-Class launch, the company aims to add at least one hybrid model a year. "We have to ensure that people in six years will be able to drive a big car without sacrifices or a bad conscience," says marketing chief Maier.