DETROIT – Audi AG’s hybrid Q5 cross/utility vehicle is on schedule for a production launch in late 2010 or early 2011, the auto maker’s top powertrain official tells Ward’s in an interview.

Although more bullish on diesel engines and other fuel-saving technologies, Audi will follow through on plans for the full-hybrid system, says Wolfgang Hatz, head of powertrain development for Volkswagen Group.

The Q5 is part of a handful of related moves by Volkswagen Group that includes optional hybrid powertrains for several upcoming VW-brand vehicles, beginning with the next-generation Jetta in 2010.

Volkswagen Group also ultimately will incorporate micro-hybrid technology – stop-start and regenerative-braking systems – as standard equipment across all brands and models with conventional powertrains, Hatz reveals.

Here at the North American International Auto Show, CEO Martin Winterkorn promises Volkswagen will continue its aggressive investment in new products, saying it will spend E8 billion ($10.6 billion) per year on “new vehicles and eco technology, including hybrids, electric vehicles and biofuels.”

Audi first showed the direction of its new hybrid powertrain in the Metroproject concept that serves as the design direction for its upcoming A1 small car.

The HEV system is a modular design that incorporates lithium-ion batteries, ultimately paving the way for plug-in technology. It employs an electric motor to drive the rear axle, while the gasoline engine powers the front axle, providing all-wheel-drive capability.

The auto maker is focusing on the Q5 for its hybrid debut because the vehicle shares its modular architecture with several other models, including the A4, A5/S5 and upcoming A7, strongly hinted at with the Sportback concept that debuted at the NAIAS this week.

That will allow Audi to expand application of the gas-electric powertrain to other models if the hybrid technology proves a winner.

Plans to offer a hybrid Q7 were dumped last year, in part because Audi believes the smaller Q5 has a brighter future in the face of tightening carbon-dioxide and fuel-economy regulations in Europe and the U.S. that will force auto makers to skew their product portfolios in favor of smaller vehicles.

The technology could be shared with controlling stakeholder Porsche AG, which cornered 50.76% of Volkswagen shares earlier this month, but not other auto makers.

“I think we are, at the moment, one of the biggest auto companies in the world,” Hatz says. “With powertrain as one of our core competencies, we should be in position to (finance development) ourselves.”

The Q5 Hybrid mainly will be aimed at the U.S. market and targeted at limited volumes, while Audi will continue to focus more effort on expanding availability of diesel engines, which it sees as a more cost-effective solution to increasing fuel economy.

“We have to explore (hybrid) technology, even if the volumes are not high,” Hatz says. “But there may be limits in what the customer is willing to pay.

“On a full hybrid, the figures are not very nice. It is not a good business case at all.”

Dual-clutch transmissions have proven to be a better business prospect. Launched six years ago first in the Audi TT, Volkswagen has been struggling to meet demand ever since.

“At the moment, on the volume side we are at 100%,” Hatz says. “We are always short, but we will invest more in production.”

He expects DCTs to all-but replace conventional automatics and manuals, which will remain available in some lines.

“Manuals worldwide are going down, down, down,” he says. “Today, once somebody buys one of our DCT transmissions, they don’t change back to a manual. The demand for automatic transmissions grows every year, even in Europe.”

He predicts manual transmissions will account for no more than 25% of penetration in models where offered, though demand could remain higher in some markets, such as Brazil.

Volkswagen is zeroing in on more than just engines as it looks to eke out fuel-economy gains, Hatz says, pointing to wider-spread use of lighter-weight materials, electric steering, less rolling-resistant tires and more aerodynamic designs. Forthcoming regenerative braking and stop-start technology, plus development work under way to recapture and use heat more effectively will further enhance conventional powertrain efficiency.

There could be as much as 15%-20% in efficiency gains yet to be made in vehicles with conventional powertrains, he says.

But vehicle downsizing is inevitable if auto makers are to meet tougher CO2 limits and fuel-economy requirements on the books in the U.S. and Europe.

“If you look at (U.S. fuel economy) and (European) greenhouse-gas regulations, it will require downsizing of cars,” Hatz says. “That will be a consequence, I am very, very, very sure.

“You can’t just continue (with vehicles of the same size) and say, ‘We’ll just build hybrids and we’ll solve the problem.’”