Chevy Volt good or bad for GM?

Electric cars seem to many as the next frontier in the auto industry, not only is it easy to find an electric outlet, they also less detrimental to the environment. However some experts estimate that GM loses as much as 49,000 dollars on each volt it builds. This is including research and development costs. Despite the 7,500 dollar tax credit from the federal government, the Chevy volt seems like a clearly poor business decision. Not to mention GM is fresh off a bailout from the federal government. GM is hoping that the volt follows a similar path as the Prius which just recently became marginally profitable. The volt, as well as nissan’s leaf, are largely in response to Toyota’s success with the Prius. Do you think given GM recent financial problems the volt is a good idea? Will it give GM the an completive edge in the auto industry’s oligopoly?

The facts for this blog post are from this article: http://www.reuters.com/article/2012/09/10/us-generalmotors-autos-volt-idUSBRE88904J20120910

8 thoughts on “Chevy Volt good or bad for GM?

  1. It largely depends on the accounting practices used to calculate those costs.

    Here’s an interesting counter to the $40,000 loss per Volt:
    http://www.forbes.com/sites/boblutz/2012/09/10/the-real-story-on-gms-volt-costs/

    In this article, the author uses amortization to show that the Volt is a break-even car and that as GM uses “economies of scale” and increases volumes, it could even have a positive margin in the near future.

    I think if GM can get the 2nd generation’s costs down then it will really be a game-changer to fight the Toyota Prius. In my opinion, it has far better technology than the Prius, but obviously most consumers are not going to pay double the lot tag for a car that is considered a substitute good.

    • Yes, if you add all [cumulative] battery & electric vehicle R&D to the cost of the Volt, almost all done under the pre-bankruptcy GM and hence no longer on the balance sheet, you certainly can come up with a high cost. And flunk Accounting 203. But journalists with no accounting knowledge and political hacks….

  2. There is also public perception at work. Other OEMs have been chasing Toyota’s tail ever since the wild success of the Prius. I assume that more than a permanent business strategy, this seems like an attempt to snap up a portion of the “eco” market that is willing to pay a high premium for a car.

  3. The Leaf and Volt are trying to enter the booming market that the Prius appears to have created. There is no doubt that the ‘eco’ market seems to be growing, but how large will the market grow? The hybrid is successful since its high MPGs appeal to consumers wishing to save money on gas, while paying a little more for the car. For electric cars to gain a larger share in the market, more electric charging stations and other industries related to the electric car movement would need to grow. Americans, men especially, like driving big SUVs and trucks and I can name many that would hardly ever consider driving a ‘sissy’ car.

  4. Does even the Prius make sense on a fuel cost basis? It comes at a several thousand dollar premium over a regular car, which today may be 36 mpg highway (vs 1/3rd more or 48 mpg for the Prius). If you drive 24,000 miles per year, about twice the US norm, you use 500 gallons with the Prius and 666 gallons with standard cars. So at $4 per gallon that’s a $666 difference (166×4). So it would take 4 years or more to break even, not factoring in a net present value discount or possible lower gas prices. No other hybrid has sold well…
    So these are R&D vehicles put out to test the waters. Fuel economy standards are one driver. The other is the car company belief in peak oil and global warming – they’ve betting big bucks on that. But don’t think just in terms of the US market; that of China is 50% bigger. So even if we remain antediluvian (and remember what happened to Noah’s generation) the rest of the world seems to be intent on survival.
  5. It seems this is a large question of fixed costs, particularly in regard to electric car outlets. Clearly none of the car companies are going to individually place electric car outlets disbursed throughout cities for people with electric cars to park and charge. Is this the responsibility of each locality to start this initiative? It is kind of a chicken and the egg story: should electric cars come first, or should the infrastructure to support electric cars come first. Right now, it appears electric cars won’t remain profitable for quite some time, especially until an infrastructure is in place for electric cars to be able to charge for cheap, affordable rates, thereby increasing demand substantially.

  6. As with all R&D products, there will be very high fixed costs associated with the production of the good. While in the financial short run this car may be losing GM money, there are still several other benefits for the company in the long run which need to be taken into account.

    The development of an interesting, cutting edge car such as the Volt could do wonders for GM and Chevy’s image among consumers. GM’s car production in recent years has seemed uninspired and unimaginative to many. So a significant and original R&D investment in the Volt may serve as a signal to the american consumers of the new energy within GM after the Government bailout. Using tools like the volt to revitalize GM’s image among American consumers could add considerable market shares in an industry with strong product differentiation and costumer loyalty.

    The move by GM also shows a long run commitment to the Hybrid Car market. By committing the R&D to creating a hybrid now, if and when the market for hybrid cars increases, it will be GM, Toyota, and Nissan poised to capture the business in this new market. So with the big risk inherent within the high R&D costs, comes the possibility of a big reward. As we have seen with the sustained success and expansion of the Prius and the market for hybrid cars, this reward is still a possibility for GM.

    • If you look at the new GM models — I’ve been car-shopping — many now incorporate “mild” hybrids (alternator-motors) that provide rapid stop/start capabilities (the engine shuts off when you put your foot on the brake, turns back on when you lift your foot, all so quickly that you don’t notice it) and also (depending on the model) an acceleration boost and some regenerative braking. They thus deliver better mileage, especially in stop-and-go city driving, and boost performance permitting a smaller engine / less weight / better mileage. However, they are emphasizing their good mpg numbers in their advertising, not how they achieve it. Other manufacturers have their variations, I’ve just test-driven the new Ford C-Max, 47 mpg city and highway, and I and (as important) my wife liked it a lot…

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