Monday, September 10, 2012

GM's Bizarro business model

From The Truth About Cars: "Your tax dollars at work: GM loses its shirts on every Volt"
GM loses around $49,000 on each Volt it builds says Reuters. GM sold a record 2,831 Volts in August, but that may “have pushed that loss even higher. 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,” says Reuters after a deep data dive into the elusive profitability of GM’s green halo car.
With tax credits, the Chevy Volt costs around $32K and GM loses $49K.  Remember when the White House was criticizing Romney's time with Bain by saying government is not about making a profit?  They weren't kidding.

Extra - The Corner: "The Democrats' GM fiction."

More - Gateway Pundit: "Obama makes lying about Ohio auto jobs a campaign staple."


Anonymous said...

Read the comments on your Truth About Cars link. Plenty of instructive context and commentary, though much of it spoils the spin.

The incorrect, business-ignorant "GM loses X dollars on every car it sells!" line is widely and properly shredded.

Nigel Tufnel said...

From the MSM Lib Pinkos over at

The Real Story On GM’s Volt Costs

General Motors Chevrolet Volt

I was surprised to read Ben Klayman’s piece on alleged astronomical per-unit losses on the Chevrolet “Volt.” Ben is usually a solid professional who checks his facts.

The statement that GM “loses” over $40K per Volt is preposterous. What the “analyst” in whom poor Ben Klayman placed his faith has done is to divide the total development cost and plant investment by the number of Volts produced thus far. That’s like saying that a real estate company that puts up a $10 million building and has rental income of one million the first year is “losing” 9 million dollars, or several hundred thousand per renter.

Listen, Ben and Micheline: that’s not how car business cost accounting works.

Let me provide a look at how a car company tracks profitability of a product program: measured are material cost and labor, and these are deducted from the selling price. The positive difference is called “gross margin.” Then, one allocates per-unit “fixed cost” (advertising, general overhead, etc.) plus per-unit depreciation and amortization of the initial investment, based on the TOTAL NUMBER TO BE PRODUCED OVER THE LIFETIME of the product. If the margin, after all deductions, is still positive, then we call it a “fully accounted profit,” and the car is a winner.

The Volt “variable cost” (labor and materials, without revealing any confidential GM information), looks very roughly like this: A Li-Ion battery today runs about $350 per KWh. The Volt’s is 16KWh, so that’s roughly $6000. Add $4,000 for the battery pack structure, the cooling, the high-voltage wiring, the motor and the power electronics. So, that’s the electric portion. Add about 20 hours of assembly labor which we’ll round to a very generous $1000. The dealer net price is, say, $37,000. We now have $26,000 left for the rest of the car, which, cost-wise, is about equal to a Chevy “Cruze” which sells for around $22,000 retail! (And the Volt has no costly conventional transmission.) Thus, the “Volt”, by my estimate, is either close to “variable break-even” or may be on the cusp of a positive gross margin. Deduct the per-unit allocation for all fixed cost, depreciation and amortization and it is, surely, still “under water”….but not by much, and less and less so as the volume builds and other, higher-margin GM cars, like the Cadillac ELR, piggy-back off of the Volt’s initial investment.

Maybe the Volt, a first-generation technology masterpiece and the most-awarded car in automotive history, will never make a really decent profit.

But succeeding generations of the same technology will. Meanwhile, the happy Volt buyers (most satisfied owners of any nameplate in the market) are getting more that they paid for. (Is that so bad?)

We won’t even factor in the profound halo effect the introduction of the Volt has had on GM’s reputation as a leader in environmental automotive technology; it’s priceless, and could never have been achieved without it.

So, once again, the knee-jerk Volt bashers, devoid of any real knowledge, have had their usual joyous verbal catharsis, but the car doesn’t care: The volumes are building globally and it’s doing exactly what it was designed to do.

Bram said...

Nice spin by Lutz.

Of course your R&D is part of the cost of the car. Only a bunch of idiots in the process of driving their company into bankruptcy again would think otherwise. That R&D will never be recovered given the Volt's current production suspension.

I'm guessing that production will only resume if Obama is reelected - and most of the sales will go the government.

Beep Beep said...

The suspension begins next week, and lasts four weeks. There are twelve weeks of existing Volts in GM's current inventory.

But it's true: one day they will stop making new Volts. And on that day, all of its costly design developments will be instantly forgotten, never to be used again. That's basic Car Making 101.

Eric said...

Who you gonna believe? Bob Lutz or your lying eyes...and the VP from GM:

“It’s true, we’re not making money yet” on the Volt, Doug Parks, GM’s vice president of global product programs told Reuters. The car “eventually will make money. As the volume comes up and we get into the Gen 2 car, we’re going to turn (the losses) around.”

Yes, and in the long run, we're all dead. But for now, let's idle the Volt plant.

Anonymous said...

So screw you, documented history of manufacturing! I want what I want NOW!

Complaining about the investment cost of green cars one day after complaining about the soaring price of gas? You should be on cable TV.

Nigel Tufnel said...

Vike, your response isn't even contradicting what Lutz is saying.

This fundamentally flawed analysis of the Volt is splattered all over conservative blogs with a gleeful abandon not seen since the Shirley Sherrod 'expose'.

The right wants GM to fail.


siacd999 said...

Re-elect Obama, he'll pay for your Volt.

Eric said...


Here's today's WashPost:

"The Energy Department study assumed that General Motors would produce 120,000 plug-in hybrid Volts in 2012. GM never came close to that and recently suspended Volt production at its Hamtramck, Mich., plant, scene of a presidential photo-op. So far, GM has sold a little more than 21,000 Volts, even with the help of a $7,500 tax credit, recent dealer discounting and U.S. government purchases. When you factor in the $1.2 billion cost of developing the Volt, GM loses tens of thousands of dollars on each model."

That's from "GM's Volt is on the road to nowhere"

Contrary to your belief, I did not want to see GM fail. What I wanted it to do was go through the normal bankruptcy procedure and make the painful - but necessary - steps towards solvency. Instead the White House gave a gift to the UAW, pushed for the awful Volt as part of their green initiative, and set the stage for another bailout in only a couple years, throwing good money after bad.

Nigel Tufnel said...

That's an opinion piece, not an analysis. It does nothing to refute Nigel's point.

I do think there is a desire on the right for GM to fail to validate the article of faith that everything Obama does is bad or failed. I base this on the glee with which these skewed analyses are presented.

This faith is why otherwise rational people forget how to do a cost analysis, forget about how the product life cycle works, and forget that temporarily suspending production on a line is something that goes on all the time in many industries and is a sign that they are watching their cash flow and inventory levels.

Nigel shared the concern about bailing them out, for much the same reasons as the Vike. But he accepts the fact that it appears to have worked in this case and is relieved that it did.

Anonymous said...

Post: When you factor in the $1.2 billion cost of developing the Volt, GM loses tens of thousands of dollars on each model.

Indeed - which is why it's ridiculous to factor in the development cost in a "world ends today" manner that no longterm business uses.

The Prius was originally sold for less than half of cost, and was unprofitable for years and years. That must be why it failed completely, and Toyota was forced to stop making them.