The folks at GM headquarters are not happy. After a Reuters story on Monday morning was picked up and splashed around the internet on websites including CNBC.com and the Huffington Post there is a widespread perception General Motors is losing at least $49,000 on every Chevy Voltit sells.
For GM executives it’s one more shot at the Volt as a money losing car that few people want. To quote one GM executive, “The math in that article is not fair.” Is that true? Yes and No.
The numbers aren’t wrong, but it’s too soon to definitively call the Volt a “money-loser.” After all, Toyota lost money selling the first million Prius models, but now the hybrid car is a profit driver for Toyota and a major part of the company’s line-up.
The Volt is a money-loser, …for now.
General Motors has spent roughly $1.2 billion developing the Chevy Volt. And in the last two years it’s only sold 21,500 versions of the extended range electric car. That means GM has lost a little over $55,000 on every Volt it’s sold.
These are numbers GM does not dispute.
The issue GM has is with the methodology. “Reuters’ estimate of the current loss per unit for each Volt sold is grossly wrong, in part because they allocated product development costs across units sold instead of across the lifetime volume of the program, which is how business operates. Reuters’ numbers become more wrong with each Volt sold,” GM said in a statement.
Whether you like GM or not, the company is right.
In the manufacturing business it’s a cheap shot to take the total amount of money spent developing a new product and use that as a basis for calling the new product a money loser years before that product has finished its run. By their very nature, most large capital intensive manufactured goods lose money for years before they finally turn the corner and become profitable.
Look at Boeing . It has spent an estimated $14 billion developing the Dreamliner. Using GAAP accounting methods, Boeing has said the Dreamliner is profitable, even though it will still be years until Boeing recoups all the money it’s invested in the plane. What’s more, almost everyone on Wall Street expects it be a very lucrative plane for decades to come.
Is the Volt over-priced?
One reason so many question whether the Volt makes sense financially is because of its price. It sells for $39,995 before a $7,500 government rebate. In the eyes of many, that’s too pricey for most car buyers. In fact, when you talk with Chevy dealers they’ll tell you the Volt’s price is a major hurdle in selling more of the extended-range electric cars. This is one reason why GM is pushing leases of the Volt for as low as $199 a month. That’s helped boost Volt sales to their strongest monthly rate this year. Still, GM has sold just 13,500 this year.
For GM, it’s caught in a Catch 22.
If it lowers the price of the Volt much further it will take even longer until it turns a profit on the car. Plus industry consultants estimate GM already spends at least $75,000 per Volt to build the car. Lowering the price will mean losing even more money per car. As a result GM is in a period where it needs greater demand to spark Volt sales. If gas were to move sharply higher that would help. But until that happens, the Volt is a costly niche car.
Will the Volt eventually be a money maker for GM? Perhaps. Even critics of GM admit that several years from now, when GM is building the second generation of the Volt and the extended range electric car technology is put into other models in other markets around the world, the automaker could eventually re-coup all the money it’s invested so-far. When and whether than happens remains a big question.
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