IS THE PRIUS MAKING A PROFIT ?

[FloridaShark]

One another note . . .

In a column a couple of weeks ago, I wrote about the Toyota Prius, which deservedly swept most of the "Car of the Year" awards for last year.

I said: "Last year, the Toyota Prius dominated the awards, as the redesigned gasoline/electric hybrid vehicle was so loaded with technology that we wondered how Toyota could make any money selling it for the base price of $20,000 or so.

"The answer is that Toyota isn't making any money -- despite the company's insistence otherwise -- and that the company is so rich it doesn't care. Toyota's profit plans are mapped out for a decade or more in advance, and when Toyota executives insist the Prius is profitable, they mean it's on track to eventually make a lot of money. Someday. This is legendary Asian inscrutability at its most effective, and it's why Toyota is the most successful car company of our time."

This drew the attention of Irv Miller, Toyota's group vice president for corporate communications, who e-mailed: "My sources tell me that we do, in fact, make a profit on every Prius sold now. Your position may have held some validity for the first-generation vehicle, but not today."

We entered into an interesting discussion about what "profit" actually means. My definition is that if you make something, then sell it, and if there's any money left over after covering what it cost you to make and market, that's profit.

That's oversimplifying my position, but that's what it boils down to. Until proceeds from the sales of the Prius cover all the research and development costs that went into it, plus the costs of the hardware and construction labor, I can't see a profit there. Especially because Toyota, unlike most other manufacturers, develops most of its own technology, rather than buy it from subcontractors. This means Toyota owns it, but it also means the company paid all the developments costs -- a great strategy for the long term, at a time when many car companies are thinking short term.

"I look at what makes up a Prius, base price $20,875, and what makes up a Camry LE, base price $22,380, and it seems one is conceivably subsidizing the other," I told Irv. Even with about a quarter-million Priuses sold globally, I just couldn't make the math work to cover the cost of developing the car, plus the proprietary equipment that goes into it, such as the pricey battery pack and the electric drive motor.

"I think we are on the same page," Irv said. "With R&D [research and development] amortized over the number of vehicles sold thus far, there is no way it comes clear. But our thinking is that this R&D investment is to be spread out not only over the breadth of our hybrid line," which is the Prius, the upcoming Highlander, the Lexus RX400h, plus another Toyota and Lexus, and possibly a pickup truck, " but that it is the foundation for all our [hydrogen] fuel cell development, as well.

"So when you say that we don't make money on the Prius, you are technically correct. When do you say that critical mass has been reached unless you take out the long-term investment and let the car stand on its own? If you consider manufacturing cost, sales, marketing and distribution cost, the car makes money."

On that, we agree. And the money Toyota has invested in hybrids, and fuel cell development, will likely put the carmaker so far ahead of the competition that it won't be long before these vehicles make money, no matter what definition you use.

Sentinel Automotive Editor Steven Cole Smith can be reached at scsmith@orlandosentinel.com or 407-420-5699.

[boa8]

We had a lot of heated discussions about Prius profitability at this forum:

http://priuschat.com/forums/1-vt2873.html?...er=asc&&start=0

Don't be surprised to see some hate mail...

[bruceha_2000]

A pricing scheme that entails recovering development costs early makes the first units totally unaffordable. No mfg can claim to make a profit on the first cars sold after a redesign if they have to recover the R&D costs as part of the calculation.

[8AA]

Why does this issue keep coming up? Who cares? What company has ever developed a product for free?

Research and development is always a risk, and it takes time to find out if the investment was profitable or not. "Return on Investment" is the amount of time it takes to make a profit after paying for the initial research, development, and capital expenses. If I were an executive or shareholder in a company, I would be interested in the payback period. As a consumer, I am only concerned with initial cost, operating costs, maintenance cost, and possibly how long the product will remain on the market.

Lets not forget that Ford, GM, and Chrysler were given $1.5B of our tax dollars for the research and development of a hybrid vehicle, and all of them failed to produce a commercially viable product.

Congratulations to Toyota and Honda for sucessfully developing and selling hybrid vehicles to the general public. Their dedication to the continuous improvement of their product line should be an inspiration to other corporations, especially here in the United States.

[FloridaShark]

I agree who cares. I put the article up for all to read. I don't believe I have ever seen anything with a direct response from a Toyota represenitive on the subject.

[prius04]

I care very much. American business seems to focus on short term profits and that philosophy will be the end of us.

What Toyota is doing is a profound change in management style from the traditional American one. And I think the Prius is proving the superiority of that style.

I happen to like the USA and feel it would be a shame for us to lose our leadership in the world.

That's why I care very much about this Prius business model.

[8AA]

<div class='quotetop'>QUOTE(FloridaShark\";p=\"51925)</div>

I agree who cares.[/b]

Talk about being inscrutable, you were the one who wrote the article. If you don't care, why the diatribe on Toyota's business practices? If you truly don't care, why the concern about receiving a response?

To reinterate, who cares?

[DaveinOlyWA]

WHAT AN IDIOT!!

that is the same as saying that the first H1 hummers that came out at $120,000 were unprofitable also...

what an idiot!!

[jchu]

Perhaps even worse than the H1 analogy as the Prius represents a new technology that will migrate to other platforms further mitigating the R&D costs over time.

[DaveinOlyWA]

the sad thing is that many people will be suckered into the writers cracked logic and will just create resistance to the Prius movement.

what makes it more difficult is when fighting a resistance based on fallacies. people will read the article, and only remember the high points of the story; that Toyota is dumping the Prius at a loss on the american market.

this is the same story that went around for the corolla back in the 80's. well Toyota wasnt losing money on the corolla and its not losing money on the Prius.

we are talking about the fastest growing and richest (by far) automobile company in the world. they do not market any product for a loss internationally.

several times they have admited that they do exactly what most japanese electronic firms do when they test market a vehicle in japan to determine whether it would viable in a larger market. its during this time when they determine if they can build the vehicle at a price that will bring a profit.

and the stories about building cars cheaper in japan and dumping them in the us for cheap is bull. it costs MORE to build a car in japan than in the US. their cost of living is higher than ours is. that balance did shift for a few years when the yen suffered in value against the dollar, but that isnt true any more. so cars built in japan have to be done very cheaply to still make the money.

A Prius built in the US will bring a lot more money to Toyota, but there is also a supplier problem (ask ford about that) which im sure has complicated matters, but you can be assured that Toyota is working on a US site right now. they may have not announced anything yet, but they are definitely working on it.