By on September 11, 2012

“The estimate of the current loss per unit for each Volt sold is grossly wrong,” GM says as a retort to the Reuters story that GM loses around $49,000 on every Volt. GM says that “it allocates Volt development costs across lifetime volume, not across the current number of Volts sold.” TTAC commenters that rushed to the aid of the beleaguered company suggested the same. Oddly enough, GM passed on a much stronger argument that would have turned the Volt into a money machine. If not immediately, then much earlier than suggested by Reuters.

After the usual lame back and forth that in its first years, the Prius wasn’t a money machine either, long time commenter Pch101 came up with a hard-hitting argument that should fit right into GM’s creative accounting:

Most of the development of the Volt was paid for by a company that is now called Motors Liquidation. Motors Liquidation is a bankrupt entity that used to be called General Motors.

The new General Motors essentially got that R&D from Motors Liquidation for free. In terms of accounting, it would have acquired it at a steep discount through the bankruptcy sale, as the Volt was only one of many assets that would have been acquired through the court sale.”

As painful as it may be, GM should read TTAC more. Among the chaff of amateur spinmeistery, there are some masterful gems, such as this one. Instead, GM decided to write the full development and tooling costs off over the lifetime of the platform, even if it means many more years of non-profitability. Let’s hope that platform will live long. Says Reuters:

The average per-car costs for development and tooling will drop as sales volume rises. But GM will need to sell 120,000 Volts before the per-vehicle cost reaches $10,000 — and that may not occur during the projected five-year life cycle of the first-generation Volt.”

If that is true, then the Volt will need to stay on the government drip for many years until it can be made at a price that is competitive in the market. At $7,500 a pop, that intravenous infusion will cost the tax payer close to a billion dollars to prop up a car that can’t make it on its own in the market place.

The meek denial that ignored Pch101’s creative reasoning already had its Streisand effect.  Fox picked up the story, along with the denial, only to say that the consulting firm that did the analysis “stands behind the number,” adding that “it was calculated based on industry standards without any specific inside information about the Volt program.”

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38 Comments on “Volt High Tension: GM Says Reuters Wrong, Ignores Suggestions By TTAC Commentariat...”


  • avatar
    Joe McKinney

    Perhaps GM thinks it will get more sympathy with the argument that the development costs will be amortized over the lifetime of the platform. If they say these costs were essentially written off in the bankruptcy/bailout, then they are opening up another can of worms and inviting additional criticism.

    • 0 avatar
      Chicago Dude

      That’s true, it’s a huge distraction to invite politics into the discussion.

      GM needs to hammer away on the lack of business knowledge on the part of the consulting company. Every business owner knows this, every business owner knows that, etc. According to this consulting companies math, if GM had cancelled the Volt program 5 minutes before they built a single car, all of that R&D cost would have to be divided by zero cars and, well, perhaps this consulting company should tell everyone what happens to their computer when they attempt to do that math.

    • 0 avatar
      BrianL

      While what pch101 said was true, Joe is spot on with this. If GM had went out and said that they were making money on the Volt because they didn’t front the money for development costs, it would have been Ed Whitacre announcing that GM had paid back the loans on time and ahead of schedule. While Ed was technically correct, it ignores what really happened in that situation. It would have been the same thing for the Volt here.

      • 0 avatar
        Pch101

        “If GM had went out and said that they were making money on the Volt because they didn’t front the money for development costs…”

        The New GM doesn’t have zero development costs. The Volt wasn’t finished at the time of the bankruptcy sale.

        I have no doubt that GM is losing money on the car; the low sales volumes make such an outcome almost inevitable. But regardless, Reuters really blew it with the story.

      • 0 avatar
        BrianL

        You are correct. There are still some development costs by New GM, far less than what Old GM did, but still some.

        But, my point is that while technically true, it isn’t what most of the public would accept. Just like the loan situation that GM paid off, touting this probably wouldn’t have the response GM would have wanted.

      • 0 avatar
        Joe McKinney

        Brian and Chicago Dude get the point I was trying to make in first post.

        There are two issues here. First – what is factually correct. And second – what makes for good PR spin. PCH is factually correct from an accounting perspective. However, by avoiding these facts GM is creating a more positive spin on the story. The Volt’s critics are not going to be placated and there’s nothing beneficial to be gained by throwing the GM bankruptcy and Liquidation Motors onto the fire.

      • 0 avatar
        Pch101

        I followed your point. It was well taken.

        Still, I was just trying to provide the facts, one of which is that the bankruptcy changes the nature of how one would calculate profit for a project.

        The new company didn’t pay for most of the R&D, except to the extent that (a) it paid to finish the project and (b) it purchased existing intellectual property at the time of the bankruptcy sale. One can safely presume that the new company didn’t pay 100 cents on the dollar for the costs that went into creating that IP.

        I realize that this line of reasoning will not appease anyone. I would not expect GM to provide such an explanation, or for most people to understand such an explanation. Unfortunately, facts are often boring and non-partisan.

    • 0 avatar
      Pch101

      “Perhaps GM thinks it will get more sympathy with the argument that the development costs will be amortized over the lifetime of the platform.”

      Under US GAAP, R&D costs are an “expense”. They aren’t amortized, they’re taken during the year that they are incurred.

      Claiming that the New GM paid for R&D performed before it existed is akin to saying that the New GM is paying for salaries that were paid back in 1968. It isn’t doing any such thing.

    • 0 avatar
      twotone

      The Volt’s development costs were paid by the US Government (American tax payer). We all paid for the cars, but not everyone gets to drive one.

      • 0 avatar
        Chicago Dude

        Over the course of my working life, I’ve paid more for aircraft carriers than I have for the Volt. Nobody is going to let me drive one of those either.

      • 0 avatar
        Carrera

        Good point twotone. But Chicago Dude is comparing Volts with with aircraft carriers. He paid for those as a tax payer too…why not for the volt? He omits to explain how the Volt is protecting his freedom on the high seas. He is not too far from the truth though ( truth as seen in a parallel world) since The Pentagon will be buying at least 1400 cars starting soon. I wonder what military hardware will the Pentagon install on the Volts, or if they going to launch them from the same carriers Chicago Dude has been paying for. And you know what? He should be paying for them! He is from Chicago :)

  • avatar
    magicboy2

    Yes, it should make it on its own, like the Prius! Wait, the Prius received over $200M in subsidies from the US government, in the form of $3400 per car for the first 60,000 sold?

    • 0 avatar
      Dr. Kenneth Noisewater

      How much $$ did Prius get from the Japanese government? Looks like a $3.8B subsidy just ended:

      http://www.bloomberg.com/news/2012-08-19/toyota-faces-20-drop-in-japan-industry-sales-as-aid-ends.html

      Clearly, if a car with a ton of new tech doesn’t sell enough in the first year to pay for all of the R&D and tooling costs involved in its creation, it’s a failure. At least that’s what I’ve been seeing bandied about as ‘criticism’ and ‘punditry’.

  • avatar
    nickoo

    I really don’t see the issue with the volt currently being a loss leader, as the second, third, and fourth generations start to roll out, they will be cheaper at retail, more efficient and longer electric only range, lighter weight, more reliable, and cost much less to develop now that the first model has shown to be a technological success.

    GM has been long criticized for taking short cuts, putting out mediocre products, and bean counting, all in order to look good from quarter to quarter and now that they’re investing in long term R&D platforms, they take criticism for that too–you just can’t win with some people.

  • avatar

    I wonder what the numbers would be for Tesla, using these calculations. A company that has never posted a profitable quarter (except that one time, using transparently laughable accounting chicanery). Roadster, or Model S (whatever) your choice.

    ERMAHGERD! TESLA LOSES MEELIONS ON EVERY CAR SOLED!

    • 0 avatar
      danio3834

      You’d think there would be just as much outrage toward Tesla with as much Government money that fuels that company. In contrast to GM, they don’t have any other volume products to make up for the loss on their halo cars (that’s all they have). There’s very little hope of there ever being a profitable Tesla.

      Maybe there is outrage. I guess I’m outraged that my tax money went to subsidze them. But these days there’s so much to rage about I’m all out-of-rage.

  • avatar
    Pch101

    “Spinmeistery”? Sounds a wee bit defensive.

  • avatar
    billfrombuckhead

    Just more “truthy” anti-GM propaganda. So predictable Fox jumped all over this. No wonder “fact checking” is now going viral.

  • avatar

    Bob Lutz has weighed in as well: http://www.forbes.com/sites/boblutz/2012/09/10/the-real-story-on-gms-volt-costs/

    My take on this is that the Reuters story was imperfect but worth writing regardless, as it opened a discussion that’s worth having. Thanks to its taxpayer ownership stake, GM doesn’t really have the luxury of dismissing analysis of its business decisions. That said, Reuters buried/missed the lede here… as many have now pointed out, their analysis overemphasized fixed costs that can be amortized over time. The real issue is the Volt’s per-unit revenue. Both Reuters and GM’s defenders are using MSRP numbers to calculate revenue on the Volt, when the data suggests that as many as two-thirds of all Volts sold in the last two months are bringing in significantly less than that ($199/month for two years lease). Given the likely killer depreciation associated with used EVs (thanks to battery degradation), which could well be compounded by the Volt’s documentable demand issues (sales only coming close to projections thanks to cheap leases), I think the public deserves to know what kind of revenue the average Volt is bringing in, and how that number (and assumptions built into leases) affect the program’s bottom line.

    • 0 avatar
      Dr. Kenneth Noisewater

      I think the jury’s still out on depreciation. After 2 years, the batteries still have 6 years of warranty on them and should not experience any performance degradation (other than a software-controlled adjustment in state of charge management). I would bet a pint of Guinness that Volts will have a higher to significantly higher resale value percentage (minus the subsidy) than a comparable conventional car at that age. I also bet that the drivetrain will prove more reliable, especially as folks push 90+% electric-only mode. After 100k miles, someone with 90% electric-only will have only 10k miles on their gas motor.

    • 0 avatar
      Pch101

      “Both Reuters and GM’s defenders are using MSRP numbers to calculate revenue on the Volt”

      Where are you getting that from?

      The manufacturer’s net revenue from a sale is invoice, minus incentives. The price that the consumer pays for the car goes to the dealer, not to the manufacturer. If a dealer sells a car at MSRP, or above sticker, or at $100 over invoice or whatever, the difference is the dealer’s money to keep, not the manufacturer’s.

      The leasing issue is different, and a fair point. The question becomes whether the leasing ends up becoming a loss leader, or whether it can be used effectively to create a market for the car.

      BMW uses lease support with great effectiveness to both move new product and to prop up the residuals on late model used cars. Even though BMW has high per-unit incentives, those incentives are indicative of their success with the leasing model, and don’t suggest that there is a lack of demand for their cars. High incentives are often a sign of trouble, but not in the case of a company with BMW’s approach.

      I doubt that GM will achieve the same results, but they do need to contend with a similar problem, namely getting expensive cars into the hands of buyers who are relatively affluent yet probably can’t afford to purchase them.

      • 0 avatar

        Sorry, meant invoice not MSRP. And the BMW comparison is, as you acknowledge, problematic. The 3er has been one of the most profitable models on the market over the last 20 years, the BMW brand is strong, they have global scale and high margins, especially on options. The Volt has none of these things.

        GM is clearly using leases to “build a market” for the Volt… the fact that last month’s jump in volume was accompanied by a significant jump in the lease rate (40%>66%) tells us that much. Whether that A) will create enough revenue to hold the business model together and B) will lead to an MSRP market for the Volt remains very much to be seen.

        Meanwhile, the government task force’s prediction that the Volt would not be “commercially viable” is becoming increasingly prescient… and with all due respect to Mr Lutz, I’m still not convinced that the Volt’s concept will ever evolve into something the market can’t live without.

      • 0 avatar
        Pch101

        “GM is clearly using leases to “build a market” for the Volt”

        That’s a totally reasonable thing for GM to do, given the high MSRP of the car — a lot of people who drive newish cars in that price range need to lease them, because they can’t afford to buy them. (They often have good credit and decent incomes, but are also buried in debt and are cash poor.) But in order to make it work, GM will need to create a solid CPO market for used Volts and get those lessees back into GM cars when those leases expire. Prospects for either may be doubtful.

        “Meanwhile, the government task force’s prediction that the Volt would not be “commercially viable” is becoming increasingly prescient”

        I think that it’s a no-brainer that the Volt wasn’t destined to turn a profit. But Rattner also wanted to Volt to be built for the sake of brand building, and I think that was a wise decision.

        GM has been long perceived as a dinosaur that had nothing of value to offer an import buyer. If the Volt can create momentum that gets import buyers to at least consider other GM vehicles, then it will have been worth the expense. The old status quo of losing those buyers permanently simply wasn’t, or isn’t, sustainable.

    • 0 avatar
      CJinSD

      Battery degradation won’t be the only drag on residuals of Volts. They sell or lease new with huge tax credits that won’t apply to off-lease cars. Depreciation of a $40K Volt starts at $32,500. If you’re the owner of the $40K car that is being leased to someone who is getting the tax credit, you need to amortize that $7,500 immediate loss in value in the lease price, because you’re never going to see it any other way. Obviously, this isn’t being done when the lease rates reflect a $20,000 transaction price and minimal depreciation.

      • 0 avatar
        sunridge place

        ‘If you’re the owner of the $40K car that is being leased to someone who is getting the tax credit, you need to amortize that $7,500 immediate loss in value in the lease price’

        That is not correct. A person leasing a Volt does not get the tax credit. The leasing company gets it.

      • 0 avatar
        CJinSD

        Thanks. That goes a long way to explaining the $279 base lease rate too.

      • 0 avatar
        sunridge place

        The $269 lease on leftover 2012′s has about 5k-6k of GM cap cost reduction money in it…about on par with what BMW puts into a lease on a 3 series at certain time of the year.

        65 residual for a low mile 24 month lease so its $26k residual after the Cap Cost and customer down payment of $2200 or so.

        24 months @ $269 per month is $6456.

        $6456 (customer monthly payments @ $269 over 24 months)
        $2200 (customer down payment)
        $5700 (GM Cap Cost Reduction)
        $26,000 residual

        Ally owns the car at the end of the lease (and the risk on the resell) and also pockets the tax credit.

    • 0 avatar
      TruthTorpedo

      Where is this whole “Cheap Lease” thing coming from? Any lease can be 200 a month depending on how much is put down right?

      The way you’re framing this it’s a 200 a month no money down for two year lease? Do you have any links to support that?

      Thanks

      • 0 avatar
        Pch101

        There was a 3-year, $260/ month lease ($2529 down) during August. But I believe that expired last week.

        Prior to that, there was some higher priced lease deal.

        As of this moment, Edmunds isn’t reporting a lease incentive.

      • 0 avatar
        sunridge place

        There still are 36 month leases too…

        2012 Volt
        39k price
        $5000 GM Cap Cost reduction
        $2325 customer down payment
        59 residual ($23,600)
        $269 a month @ 36 months=$9684

        2013 Volt
        39k price
        $2500 GM Cap Cost reduction
        $2300 down pmt
        63 residual ($24,570)
        $299 a month @ 36 months= $10,764

    • 0 avatar
      Secret Hi5

      Anecdotal observations on used Priusesses indicate that battery degradation has not been an issue for used EVs. Of course, there’ll be the age-old “Toyota vs GM quality” argument.

      Depending on the price, off-lease Volts in 2014 will present an interesting buying opp.

      • 0 avatar
        CJinSD

        non-plug-in hybrids like Priuses that have been in the field for a few years use NiMH batteries instead of Li-Ion like the plug ins. More importantly, plug ins come closer to fully charging and fully discharging their batteries while the Prius manages its battery in a narrow range of charging that both doesn’t degrade the battery and isn’t much effected by mild battery degradation. The deep cycling of batteries by plugs in is known to degrade the battery far more, and it will be noticeable as lost electric range.

  • avatar
    Jimmy7

    Anybody actually contacted a dealer and tried to get a Volt for $199 a month? Good luck.

    • 0 avatar
      sunridge place

      A lot of the ‘under $200′ crap came from an absolute moron writing for Forbes.

      http://www.forbes.com/sites/joannmuller/2012/09/05/at-this-price-we-should-all-own-chevy-volts/

      She says she ‘writes about the global auto industry’ in her bio but appears to be an absolute moron when it comes to vehicle transactions. She shows her grasp on the the process by writing things in the comment section like:

      ‘Ah, the downside of leasing a car that’s so cheap to drive: you go over your lease miles limit! I hadn’t considered that possibility before!’

      She said her friend got $159 per month…no money down. Its quite simple how they got it. They took the basic advertised Volt lease plus $3000 in GM Card Earnings plus a $1000 dealer discount.

      $249 per month with $2000 down on a 24 month lease was the GM deal.

      The walked in with 3k ‘cash’ from their GM Card. So that left $1000 to lower the monthly payment (after the down payment) and the dealer also discounted $1000.

      So, $2000 divided by 24 months is $83 bucks a month to lower the payment from $249 to $166 per month. The fact that she quoted $159 in the article vs $165 is a bit off..but not by much. Perhaps the dealer discounted a shade more than 1k? Who knows.

      But, the $3000 in GM Card earning was not ‘free.’ This friend probably spent around $60,000 on that credit card to earn the $3k in rewards.

  • avatar
    bd2

    I’m wondering if TTAC was as harsh on Toyota for losing $$ on the Prius program for its 1st gen and most, if not all of the 2nd gen run? (Likely not.)

    Toyota also subsidized sales of the LS400 when Lexus was launched.

    Sometimes, the “payoff” is down the road.

    Think about it – likely GM won’t be making any serious $$ on the Omega platform until the 2nd gen products.

    That’s why Ford and Honda gave up on their RWD/V8 projects, and why Nissan gave up on a RWD flagship for Infiniti and is looking to save development costs for Infiniti by pairing up with Daimler on a no. of things.


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