General Motors in a Low ‘Volt’-age Mess

Taxpayers are on the hook for the $49k lost per car

   
General Motors in a Low ‘Volt’-age Mess

The news that General Motors (NYSE:GM) loses $49,000 every time it sells its green-dream hybrid-electric Volt is causing a lot of buzz among auto-industry watchers and consumers — and especially those of us who can’t stand the idea of marrying political objectives with taxpayer dollars.

The whole Volt mess got started Monday, when news agency Reuters published a feature story titled, “GM’s Volt: The ugly math of low sales, high costs.” The detailed and impressively-researched piece claims that:

“Nearly two years after the introduction of the path-breaking plug-in hybrid, GM is still losing as much as $49,000 on each Volt it builds …  [and] there are some Americans paying just $5,050 to drive around for two years in a vehicle that cost as much as $89,000 to produce.”

Ouch.

For a free-market capitalist like me, these figures are disturbing. You see, in a free market, companies are supposed to make a profit on products they sell. If they don’t make a profit, then that item should be discontinued. Unfortunately, the case of GM is anything but a free market.

Sure, the $50 billion taxpayer bailout of the once-mighty Detroit giant at the behest of the Obama administration may have saved the company (although some argue a structured bankruptcy would have been a better route). But the problem with taking money from the feds is that you then end up making decisions more focused on appeasing top-ranking bureaucrats than increasing the bottom line.

It’s no secret that the current administration has a penchant for green energy, and it’s also no secret that the push toward more fuel-efficient, electric vehicles is part of an overall energy policy seeking to wean Americans off of fossil fuels. The Volt was supposed to be a shining example of this strategy.

With these numbers, that shine has definitely been dulled.

The push toward green vehicles is not without merit, of course. But, still, when it comes to selling automobiles, the market doesn’t lie — and the market doesn’t like the Volt very much. The article points out:

“Lack of interest in the car has prevented GM from coming close to its early, optimistic sales projections. Discounted leases as low as $199 a month helped propel Volt sales in August to 2,831, pushing year-to-date sales to 13,500, well below the 40,000 cars that GM originally had hoped to sell in 2012.”

As you can see, even if they build it, consumers won’t necessarily come.

This is true not only for GM, but also for Nissan’s (PINK:NSANY) all-electric Leaf, which has sold around only 4,200 units so far this year. Honda‘s (NYSE:HMC) hybrid-electric Insight model hasn’t done well either, with sales of just 4,800 units. And Mitsubishi’s i electric offering is in even worse shape, with just over 400 units sold this year.

The one big success story in the electric-vehicle space is Toyota‘s (NYSE:TM) Prius — the hybrid that’s set the standard for the industry. Sales have surged year-to-date, nearly doubling to more than 164,000 units. Of course, it’s not fair to compare the Prius with newer, lesser-known electric and hybrid-electric vehicles that haven’t been out as long. But regardless, the relative-popularity of the Prius illustrates the point that consumers are willing to buy electric vehicles — if they meet their needs.

Perhaps an even better example of a company that’s making electric vehicles consumers are willing to pay for is high-end electric car-maker Tesla (NASDAQ:TSLA). The company and its share price have been buzzing over the past year due in large part to excitement among potential buyers for its new Model S sedan, as well as its new Model X SUV.

In July, I wrote about Tesla as the growth story in the auto industry; I’m not opposed in principle to the idea of an electric vehicle. What I am opposed to is a company that’s received such massive taxpayer support gambling on a product that  they not only are losing big money on, but that was designed more to appease the political desire for a greener world than it was to make a profit and recoup taxpayers’ investments.

Finally, it must be noted that GM doesn’t agree with the way Reuters reported its loss per unit figures on the Volt. The company issued a statement regarding the article, which said:

“The current loss per unit for each Volt sold is grossly wrong, in part because the reporters allocated product development costs across the number of Volts sold instead of allocating across the lifetime volume of the program, which is how business operates … Reuters’ numbers become more wrong with each Volt sold.”

And you can’t argue with GM’s logic — you must factor in the per-unit costs of a product over time, as the amount of money spent on creating new products could take years to recoup. Indeed, high-tech products that require big capital expenditures at their outset simply take longer to see a net profit.

Still, the anemic sales for the Volt show that at this rate, it’s going to take a very long time before the product is a viable winner for GM — and, unfortunately, for the U.S. taxpayer.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/09/general-motors-in-a-low-volt-age-mess/.

©2014 InvestorPlace Media, LLC

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