Chevy stops Volt production (temporarily ...)

Insight: GM's Volt - The ugly math of low sales, high costs (New article)

Insight: GM's Volt - The ugly math of low sales, high costs - Yahoo! Finance

 

At the begining they say

But if you get to read further down

Which seems like quite a small number of vehicles to push all the development costs onto. I give the financial analysis in this article a F

 

Assuming your qualifiers are correct, which they are not, it still follows that you choose less efficient because you don't use it often, thus it has little impact on your overall electrical usage. Or is the TV used a lot?
In that case forget the analogy as it wouldn't apply.

Seriously, next time you need to replace the TV, check out LED TVs. I replaced a 50" Plasma with a 50" LED. The LED cost half as much, uses only 30% of the energy, has a better picture and is the same size.

 

Totally agree... is a smeer piece, if one of my students did this type of analysis they would be doing their report again. R&D costs need to be spread over projected total sales impacted, not just the first one off the line. We teach this to Freshman, so either the author is an idiot or, more likely, they just want to write a piece that bashes the volt.


The other quotes I found telling was

Despite GM has explicitly stating tooling for the Impalas is the reason and sales is NOT the reason for the shutdown, and they don't even hint/cite that other reason.

and then there is

Which is clearly a comment from someone that has not actually plugged in, and does not understand we plug in at night/work so time does not really matter.


But on the positive side, Murao's estimate of the per-unit costs, at 20-32K, is interesting suggesting that the per-car margin is better than many had been suggesting.

 

...well I did not make a new thread out of it

 

yes. thanks. (if there was a thanks button I'd use it..)
good or bad, its useful to know what people are writing and understanding.

So what part of the article do you agree with, and what parts do you see as wrong?

 

I agree the "as much as $89,000 to produce" statement seems to have been dropped in at the beginning of the article to "sensationalize" the news. The article later provides a range of production costs for the car, estimated at between $20,000 and $32,000 per vehicle. The total costs of the car to GM have to be accounted for by adding in the R&D costs, as well as the associated corporate costs for marketing and advertising. The latter costs are only hinted at, with no figures suggested.

With R&D costs at $1.2 billion, to date, and continuing R&D ahead, it is hard to say exactly what number of vehicles will have to account for these costs. The article added the following statements:

I don't know whether $10,000 per car is a good or bad number for development costs for the lifecycle of a first generation vehicle, but it seems to me that five years is a rather long time for a first generation vehicle to be around.

If we are through 21 months of sales (December 2010 through August 2012) with 21,500 cars sold, then 120,000 total units sold through five years will require the sale of an additional 98,500 cars across 39 months, for an average month's sales of 2,525 Volts. If that happens, and it seems like a stretch at this point, though most people would not have predicted the high sales volume of the Prius, then the "as much as $89,000 to produce" figure would drop to "as much as $42,000 to produce" based on the estimates noted above.

I'm certain that $42,000/car costs are going to keep the Volt from a break-even proposition. This not only isn't a shock to the auto community, it shouldn't be a surprise to GM. It is the depth of the loss that is the question, I believe, and it is going to take some deeper analysis to figure out such a number -- all of it to happen only after the first generation has come and gone.

I have a hard time believing Toyota hit break even on the first generation Prius, and I'm guessing it took several years before the second generation covered the gap. The current generation is a money-maker, of course, but that is the payoff for taking the chance on new technology and finding a way of producing an affordable and popular car that is reliable and produces results.

Toyota found a way to reduce its costs, and GM is looking to do the same with the Volt. The article quotes Doug Parks, GM's vice president of global product programs and the former Volt development chief:

I don't know that I like the sound of this quote. When paired with the article's earlier statements about the high quality of the engineering and materials in the Volt, it suggests the next generation is going to be a cheaper-quality build. Let's hope he is just saying that suppliers will be able to reduce costs to GM because there will be a lower risk of having the order shrink or disappear.

I'm hoping, for the sake of the American taxpayer, the health of the American environment, and the future of available energy, the Volt project continues, improves and develops to the point where GM produces highly-competitive, reliable and popular cars based on the Volt and the R&D that produced it.

I don't know that the article is a hatchet job, but it leaves a few questions unanswered. Perhaps it is written to be read by the auto industry folks, but it leaves out information I think would be valuable. How long does a first-generation vehicle typically stay in production? How normal is it for R&D costs for first-gen cars carry over to the second generation?

Also, given the fact the Volt is the American answer to the Prius, shouldn't there be some financial comparison going on there? The only thing I see is the reference to Toyota's " reported $10 billion or more that Toyota has plowed into the Prius and various derivatives over the past decade." I don't know how Toyota managed it. Perhaps Toyota had been saving up a war chest full of cash in order to launch such a vehicle. GM certainly didn't, and the taxpayer has been carrying that burden. If GM follows through and completes its payback obligations, then I'll be alright with the handout and other help.

In any event, the article certainly has its week points. At the same time, I think it brings up pretty valid concerns about the financial viability of the whole project. I just think there are a few statements leaving the reader begging for the authors to have done a bit more research before publishing this piece.

 

Since it is supposed to be about gm's bottom line on the volt, its absolutely misleading. Since the start of the article seems to say they lose money on each one they sell. I have no idea if the $20K-$32K is accurate, if it is they have dropped the costs a great deal from the $40K/volt at the beginning of 2011, and that would be a good thing.

The initial volt was supposed to be $700M, if we are at $1.2B then it likely includes costs to develop the volt 1.5 and cadilac ELR. No one expected the volt to recoup R&D in the first generation. The money has been spent, much of it before bankruptcy.


+1

Yes, the R&D is a success if the gen II makes money.

We need to wait to see in the next generation. I fully expect that the electric motors, battery, and display will drop in cost. We don't know about the materials in the interior. Since they will have a cadilac version in a year, they may cheap out with the plastics, but that could be a mistake.

 

I don't see what is misleading about it. The title says the math will show a loss, and the article describes the Volt as a bottom line loss item, and the GM executive admits a loss. Maybe it is misleading because it doesn't say "This is to be expected from the first generation of a new concept car." The initial dollar figures are overstated for what the losses, per car, eventually will be, and I don't like the sensationalism of it all, but the article does at least say that the numbers given account for all R&D across only the cars sold to date.

I think the figure is just Volt, first generation. That is my take away after reading this in the article:

It is clear the Parks interview was just about the Volt. Though he declined to talk about production costs, he did talk about the R&D costs as quote above.

Certainly, the R&D for the Volt will have carryover to other models, assuming GM finds there is a market for the other cars. Let's hope so!

 

This is the first line of the article.

When in fact more volt sales don't do much for the bottom line, but certainly do not increase those sunk past R&D costs. For those not reading down to the bottom, the article leaves the impression that losses are piling up with every vehicle. Leading with development and production costs would be fine. Dividing the development costs by past sales and projecting future losses based on that number is misleading.

 

Now I think I see what you are saying.

By misleading, you are saying the author is suggesting GM should just shutter the plant and stop the project now, because each Volt sale only expands GM's losses. It never occurred to me to read the article that way.

I have believed GM's total commitment to the Volt project, and I was not reading the article as calling for GM to just stop now and cut the losses where they're at. Clearly, GM knows it is losing money on each Volt -- the ones already built, the ones on the line, and the ones to be built after the plant reopens next month. I don't think that changes their plans for going forward. It didn't stop Toyota. (Of course, it didn't stop American Motors and some of the cars I wish I could erase from my own memory.)

I guess it all depends on your perspective. I now see what your real complaint has been. I don't share the same view, but I understand your perspective.

 

To me that seems the main point of the article. And I don't think it is accurate to say GM loses money on each Volt produced.
They already spent the 1 billion or $1.2 billion in research. That wouldn't change if they sold 1000 Volts last month or if they sold 3000.
It would be more accurate to say GM is losing money until they sell 120,000 Volts (or whatever number it is).

 

I do not see it as a smeer. It is politically incorrect as far as Congress is concerned, since Congress is heavily supporting non-gasoline approaches. I think it is fair to question that, and holy cow I have a hankering to go and get me a top notch ~$50000+ car for $199 a month, but I would only want to try it for a while. I hope they give the rental car agencies a good deal too.

 

Seems you have been mislead by the article. This concept applies to any new product.
Here is a good counter to the point you raise: Why GM Actually Is Getting Its Money's Worth From The Chevy Volt - Autos & Trends

 

Remember the politics of volt. For Obama supporters GM was worth saving - Biden - GM is alive, bin laden is dead. Which makes it a political punching bag for the Romney supporters. They like to portray the bail out as because of the volt, and not jobs. Since the volt is not selling as well as the DOE projected, it must mean gm is going bankrupt again. This leaves a slew of politically motivated pieces on that narrative. Better volt sales get an article to dispute the anti-Obama car narrative, then we get another one of these. The volt isn't going to sell enough in the first generation to save america, but it also is not how the government is destroying america. I can't quite understand the reasoning of some that seem to think that the policy to kill gm, would have created more jobs in the economy either.

They aren't dumping the volts on rental car agencies. This is the information on the current deals though.

Interest in Chevy Volt surges with cheap leases - USATODAY.com

Which means some dealers have some great deals, because of incentives trying to get them to start trying harder to sell the volt. If you can find one of those dealers at close to that goal number, you can get a great deal.

 

I got a Volt on lease for $12 @ 41 miles per day. I have seen better deals since then.

 

What were the terms, and which dealer. Maybe it will be time to trade in my prius.

 

Stingray Chevrolet near Tampa Florida. No cash, 36 month/45,000 miles, $350/month including Texas taxes, title, registration, No first month payment, Ally SmartLease.

I did end up paying extra for the local state safety inspection ($14) and delivery to Austin.

 

Regardless of the fact the R&D is a sunk cost, the objective of any manufacturer is to recoup those costs through sales of the car. The article notes: "GM said it allocates development costs across the lifetime volume of the program." In the case of a "halo" car, the company goes into the deal expecting not to recoup all of these costs. Even so, GM will want to make money on any car it produces. Its shareholders and lenders are even more interested in seeing such a situation.

If the production costs of the Volt exceed the sales revenue, then GM IS losing money on every Volt produced. The article mixes R&D recoupment with production costs, so the first figure of $89,000 per car is not a real, current cost. It is an average figure which places all R&D costs on the cars sold to date plus adds estimates of current production costs on top. Thankfully, the authors later acknowledged the R&D per car costs drop with each sale, but the damage is done for those who don't read beyond a few sentences.

The estimates of current production costs, according to the authors:
"The actual cost to build the Volt is estimated to be an additional $20,000 to $32,000 per vehicle, according to Munro and the other industry consultants." With the dealer invoice at $39,212 (according to www.truecar.com) and actual sales prices happening below invoice, without even accounting for the incentives GM is paying to dealers, GM's actual revenue for each car is going to be considerably lower. I'll make a rough estimate of $37,000. If the actual production costs are as little as $20,000, then GM will be operationally in the black and able to recoup R&D on each sale. If the costs are at the $32,000 end (which is closer to GM's own early estimates), then I wonder (but don't know one way or the other) whether the $5,000 delta, per car, is going to be enough to pay for the corporate charges. If not, then GM is going to lose money on each and every sale, and the only justification for continued production will be either or both: a) consumer demand; b) GM commitment to further development of the Volt project.

Any way you cut it, once you consider the R&D costs, GM must sell many, many more Volts in order to make money on the car. These aren't my words. The writers further refer to their interview with the GM VP:

If it is more accurate to say GM is losing money until they sell 120,000 Volts (or some other, unstated number), then you've dropped the concept of sunk costs as being behind GM, and you are right where GM says it is.

I haven't attributed political winds blowing in support of or against the Volt in this article, and I'll leave that to people who follow Reuters and/or these writers. Still, the $89,000 per car figure is misleading in that it doesn't track the lifetime of the car. Were the Volt project to be shut down today, that figure would have some accuracy, but I just don't believe it is going that way. More likely, there are fewer than two years left for GM to make whatever hay is to be reaped from the first generation. After that, they will need a pretty profitable second generation to make the real dent in those R&D costs (assuming they can keep the further R&D for 1.5 and/or second generation down). If GM can sell 6,000 more Volts in 2012, 20,000 Volts in 2013 and 30,000 (first gen) Volts in 2014, before going to the second generation, then the R&D costs of $1.2 billion, spread across 77,500 cars, would be $15,500. To my understanding, GM can recoup all of their R&D if they can keep the average production costs under $20,000 per car.

If the factory takes in $37,000 from each Volt, pays out charges of $15,500 for recouping R&D, and pays corporate another $1,500 per car for all other charges assessed (marketing, advertising and who-knows-what), then that leaves $20,000 for actual costs of production. According to one of the industry analysts consulted by the authors of this article, that was the estimated cost of producing each Volt. Assuming that best-case scenario, my attempt at finding a "break-even" point for the Volt is total unit sales of 77,500 across four years. Given sales are at 21,500 for about 45% of that time, it appears to be a tall order.

When it is all said and done, I think it is very accurate to say GM is losing money on the sale of each Volt. They can stop losing money by halting production, but if the corporate commitment is to expand and improve on the Volt project, GM is going to have to boost sales by the one sure way to make it happen: drop costs further. I'm not a financial analyst (as if that isn't obvious by now), but I wonder how anyone could come to a different conclusion.

 

Then there is the CAFE math accounting. How many higher margin non-Volts does GM get to sell for every Volt sold and stay within CAFE?

Years ago I read an article that the Prius enabled the sale of higher margin Tundras, at something like a 1:4 ratio, prompting a proposal to just give away a Prius for every 6 Tundras sold.