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
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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….
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.
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.
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.
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.
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