The Chevy Volt’s Bumpy Ride

At last year’s State of the Union address, President Barack Obama shared with the American people his vision of an electric car in every garage. But that was before garages housing General Motors’ (NYSE: GM) Chevy Volt started to catch fire. With slumping sales driving GM to suspend Volt production last week, Obama’s dream of “1 million electric vehicles on the road by 2015” is further away than he could have imagined at this time last year.

GM announced last Friday that it will suspend production of its Chevrolet Volt for five weeks and temporarily lay off about 1,300 employees at the Hamtramck, Mich., factory due to slow sales of the plug-in hybrid. That foils GM CEO Dan Akerman’s hopes of selling 45,000 of the plug-in hybrid-electric vehicles this year since the company now says it aims to simply “match supply with demand.”

The automaker had high hopes for the Volt when it was launched in December 2010, but only 7,671 cars were sold in its first year instead of the projected 10,000. Limited availability was part of the challenge: The Volt was launched in only seven states and the District of Columbia, and production of Volts for most states didn’t begin until November 2011.

Management also blamed a federal safety investigation for the lower-than-expected sales. Regulators investigated three fires the Volt was involved in last year — two that took place while the cars were charging in their garages, the third while sitting in a parking lot three weeks after a crash test.

The Volt was cleared of responsibility for the two garage fires (which burned the structures to the ground). But the fire in the crash-test car was due to a defect that GM subsequently changed to reduce the chance of delayed spontaneous combustion after certain types of crashes.

A base price of around $40,000 may also be giving car buyers pause, even with the federal government’s $7,500 rebate.

GM Vice Chairman Steve Girsky stood behind the Volt at Automotive News’ 2012 World Congress in January. “I think it will be May or June before we know whether this thing really has legs,” he told Automotive News after his speech at the conference.

There are a few pieces of good news: First, more than 1,000 Volts were sold in February — 545 more than Nissan’s (NSANY: OTC) Leaf, which starts at around $35,000 and is also eligible for the federal rebate.

Second, the Volt is drawing a different demographic into Chevy showrooms — buyers with a median family income of $170,000, CEO Dan Akerson said in an interview with The Los Angeles Times.

And on Monday, international automotive journalists named the Volt “European Car of the Year” for 2012. The Volt also won North American Car of the Year in 2011.

But as fans of the triple-Emmy-nominated but quickly cancelled TV series Freaks and Geeks learned in 2000, industry acclaim and popularity are often two very different things.

Obama still loves the Volt — so much so that his administration apparently is shilling for it. At a United Auto Workers conference last month, Obama promised to buy a Volt “five years from now — when I’m not president anymore.”

In a Chicago radio interview Monday, Transportation Secretary Ray LaHood said consumers will grow to love the Volt. “Apparently consumers have been making up their minds,” LaHood said. “And my point is, when people want to find cars that get better gas mileage, they’ll be looking at the Volt.”

The Volt’s biggest problem may not be its high price or bad buzz about its battery. Its biggest foe may be the third-generation Toyota (NYSE: TM) Prius. Last week, Toyota said sales of its Prius family of vehicles soared 52% in February — perhaps in response to higher gas prices.

Toyota, whose U.S. sales have taken a beating in the past two years over recalls and earthquake-related production delays, is poised to gain ground on its Detroit rivals this year. Toyota’s big market share grabber: the new 2012 Prius C subcompact, which boasts 50 mpg and a price tag of just $19,900.

Ford’s (NYSE: F) new Focus Electric (around $40,000) and Fusion Energi plug-in hybrid will also put pressure on Volt sales, as will Honda’s (NYSE: HMC) Accord EV and Fit EV.

While GM faces serious headwinds in Europe, it will capture a big share of a rebounding U.S. auto market. U.S. auto sales soared to an annualized level of 15.1 million units in February, the highest level in four years. And despite the Volt’s challenges, GM remains king of the road, racking up more than 209,000 vehicle sales in February.

The bottom line: Chevy must adjust the Volt’s pricing and value proposition to save it. Traditional Chevy buyers are not used to prices in the lower-tier luxury-vehicle range. And GM needs to inspire confidence that the battery fires were a flash in the pan — not an enduring safety issue.

While the stock is pretty cheap at $26, I’d wait until the second half of the year to see how Europe is shaking out before buying. But if you’re already long GM, it’s a good play to hold.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

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