FYI, I posted above that Toyota spent approx ¥2.2 trillion Yen on R&D and Capital Investments. At ¥108 per US dollar that is $22 Billion. They sold 9.34M units last year. That’s about $2,400 per car. I’ve heard the argument that Toyota is fluffing their numbers by putting non-car related items in their numbers (such as shiny office space and F1 R&D). If you believe such fluff is over 25% of their reported spending, then we don’t have much to discuss.

I know you guys don’t care about my other points – because if you did – did then the hybrid program wouldn’t make money. And thus you find a convenient way to tune out what you wish to ignore. Guess which management culture in Detroit is guilty of doing the exact same thing.

I didn’t think it were possible – but it seems like the TTAC “best and brightest” will quickly tune out others who poke at their comments. Go figure… the site that touts its open candor is quick to dismiss others at the drop of a hat.

…………

So let’s play a game and pretend you ran an automaker. One day you’re sitting in a meeting where you’re discussing this new “hybrid” technology that is being investigated. Your groups come in and tell you they want to spend $3B over the next 3 years to execute a revolutionary new hybrid program with it’s own powertrain and chassis. And when this car comes out, it will make about 5% margin.

You run the numbers in your head… (and for the sake of making this fair – let’s assume the vehicle gets a margin of $2,000 per unit). That doesn’t compute to the program making very much money. It would require that program sell 250K units a year for 6 years just to break even. Unfortunately, the news gets even worse when you realize that very few vehicles achieve 250K units a year.

Would you believe your workers and green light the project?

Would you tell them that they could do a hybrid for $1B because you know better?

Would you task them to innovate a new hybrid that is more profitable?

Would you tell them profitability is no problem so long as they make the car well?

Would you tell them it’s probably better to just take some existing car so you need less investment dollars?

Would you tell them to build a Volt?

If you have another alternative, please share because Detroit really needs someone to come up with a good plan. The people making decisions now haven’t been making enough good ones.

In what way would you parse that sentence so that it does not give the impression that the folks here panned the car? I am certainly “curious”, and often “sarcastic”. Yet, IIRC, I defended their idea to do a pilot. I thought the location chosen was less than optimum, but there were folks who made a good case that it was chosen for good reasons.

Regardless of your actual intention, it appeared to this reader that you intended to make, once again, an argument on terribly weak premises.

As for the stuff that follows, it doesn’t matter. You need to start with some correct premises before you run off trying to make your conclusions. RF doesn’t call his readers the best and brightest for nothing. We aren’t buying that gobbledy gook.

So your analysis consists of looking at the Prius’ marketing costs but ignoring everyone elses?

Every single car being sold today has launch costs. Unless you can demonstrated that Toyota had substantially higher launch costs than everyone else, your argument goes nowhere.

In exchange for a few hundred million more bucks worth of R&D than what companies normally spend to develop a conventional car, Toyota got a largely conventional car with a unique drivetrain. They have since gone on to sell over a million vehicles with this unique drivetrain, and passed on the cost of the battery to the customer while attaching an additional cool factor/uniqueness premium to the price of what would otherwise be a somewhat bizarre looking hatchback.

That isn’t just profitable, that’s a steal. Everyone would do it if they could. Your dog isn’t hunting.

Many billions are spent to get a new design of a volume production program off the ground. Many more billions are spent to support the subsequent sales and marketing functions to put those cars into driveways and parking spaces.

And these Billions (that’s a plural) are for traditional vehicle programs (think GM Lambda or Ford C1). If you consider that hybrid is actually a new approach to car-building and design, the traditional investment levels no longer apply.

Landcrusher – did you see the TTAC post with Jamie Lee Curtis and the subsequent comments? It looks more like you’re seeking a way to ignore my argument than to actually acknowledge the valid points. I never said everybody criticized the vehicle. My intention was to point out that mass-market appeal cannot be attained unless the vehicle were priced competitively. And if the vehicle were not available to the average citizen it faces criticism and will likely struggle in the market place.

If the Prius were priced at a point where the variable profitability were great, then the car would not sell in enough volume to make the program viable in the short term. New technologies are rarely affordable by the masses but yet Honda drew stiff criticism for promoting their new technology at those deemed wealthy enough to afford gasoline.

Do you deny that the Prius makes 5% margin? If you accept a 5% margin then the program could not have a pay back on its investment as of today. If you believe the margin is higher than 5% then you are defying the analysis of the majority of real automotive business analysts.

Do you deny that Toyota needs more then $1B of investment to launch a new product? Then you are denying their own financial statements showing their annual r&d and capital spending figures.

The Prius will likely make money as the technology proliferates, which has been my point all along. Toyota is working to arrive at their strategic goal of a profitable hybrid system. But the other carmakers who have invested with hybrids are struggling.

“When the FCX Clarity was announced as a premium car aimed at celebrities and wealthy people, then the curious and sarcastic people on TTAC decided to berate Honda for failing to offer the Clarity as a car for everyone.”

Having been one of the many people who were on the other side of that argument, I know you are incorrect. Throwing out a line like this is a great way to have the rest of your argument ignored, which in my case is exactly what happened. I stopped reading it.

If you work in the car industry, then you should know that it often costs several hundred million dollars to develop a new vehicle. Spending a billion dollars to develop a new vehicle with a newly-invented hybrid drivetrain isn’t all that costly to amortize in comparison.

If any of the major car companies could spend a billion dollars and get a technology that allowed them to develop a product that sells this many cars, they’d be thrilled to pieces, because you can’t help but be profitable with those numbers.

Not only must it profitable, but at this point, it must be immensely profitable because the billion dollars they spent on one car contributed to the creation of several other cars and an advancement of the brand. Any car company would do that deal all day long.

If Toyota sold the Prius as a conventional car, it would have to charge less for it. The “hybrid premium” of a few thousand dollars that everyone has noted should be enough to pay for the battery pack. The R&D of the original Prius got paid for moons ago, given the huge sales volume of hybrids achieved since then.

First, let me make it clear… I’m not “ranting.” I’m explaining to you using my firsthand knowledge (not hearsay – not speculation – and not guesses).

The market will only bear a certain premium for hybrids. Toyota isn’t stupid – they have to position their car. When the FCX Clarity was announced as a premium car aimed at celebrities and wealthy people, then the curious and sarcastic people on TTAC decided to berate Honda for failing to offer the Clarity as a car for everyone. The Prius has had some of the most aggressive price increases of any car over time, but the rise in pricing is gradual and in line with their management of their vehicle. Toyota knows they need volume to sell promote the technology effectively. You cannot get high volume with high MSRP. They’ve planned and are executing an extremely long-term strategy.

If you read that link that you provided, you will see that the car provides margins (to Toyota… not to Toyota’s Dealers) of about 5%. This is an accurate representation based on serious analyst legwork. This isn’t 5% of the $25,000 MSRP. This is 5% on top of the variable cost that Toyota pays to build each Prius.

As PCH101 paints in broad strokes, $1,000 per car puts you at payback on a billion dollars of r&d. GM spends over $6B per year on r&d. Their recent scale-back of capital spending puts them at $7B per year. Toyota says in their their 2007 annual report that r&d is ¥890B per year and their capital plan is ¥1.5 trillion per year.

It so happens that $1,000 per car is approximately 5% margins for a car that MSRP’s in the low to mid $20K. Start doing the math and it becomes clear that for the number of major new programs and powertrains launching in any given year, that program needs to cover many billions. $1,000 a car isn’t adequate.

I began with a post at the top of this page that Toyota is struggling to break even on the Prius program. They truly believed that Hybrid was the way to go – and they’re in a position of actually working to arrive at a place in time where they will be the only automaker to have found a way to develop a business case for hybrids. It may take many years to arrive there – but they’ve got a plan. And while they’re reaping the rewards of their efforts, almost everybody else is losing big time (as seen in negative margins for GM’s hybrids).

Karesh can take the “WTF” tag off this article because now he should know why Saturn would add MSRP on a car that isn’t selling. Resistance to believe this would put him as a prime candidate to work for management at a Detroit automaker.

Then a few still insist that Toyota looses money on every Prius claiming that the technology is much too complicated to sell for $22,000 to $26,000. Perhaps the Germans and D 2.8 don’t want to pay the licensing fees, be seen as copying the Japanese, or are hoping they have some other technology that will be all theirs and save fuel.

In the meantime I want to thank the Japanese people for paying for the technology and thank Toyota for selling me a fun car at below cost:-)

Sorry but that rant doesn’t explain why Toyota is happy to leave money in dealer’s hands.

Toyota can build a very nice small car and sell it, happily, for $10,500. They are very good at making vehicles inexpensively. Selling a Prius for $22,100 and making money is within the capability of a company that can sell a car for $10,500.

Now, you may know lots of powertrain people but if they work for Detroit, bear in mind that Detroit can’t sell a car for $10,500 unless it’s a) not very good and b) built in a slave-wage country.

The logic of hybrids never computed. Why do you think the Germans shun it (the BMW joint stuff with GM is half hearted and ill conceived).

Nissan’s Goshn spurned hybrids so badly he just bought the tech from Toyota; slapped it in a poorly executed Altima variant; offered no advertising support; and then sold the resulting car for well below the Camry just to get rid of the things.

Toyota hit a marketing/strategic stroke of brilliance by doing something that made no rational sense. And then they sold it to an unsuspecting public just itching to latch on. These guys used the hybrid-ploy for the long haul… they built a company around the notion they were green and had great engineering prowess.

Honda was the first in the game, but also the first to miss an opportunity. Now they’re second fiddle.

Everybody else forced to play the hybrid game does so unwillingly and fail quite spectacularly.

So in summary… Prius program has yet to break even, but Toyota is close. Everybody else has negative margins. It is what it is.

The R&D for the first model allegedly cost about $1 billion. They probably didn’t directly profit from sales of that first generation model, given how few units that they sold.

However, that R&D trickled into every other hybrid unit since. They have sold over 1 million hybrids worldwide since. Divide a billion by a million, and you get $1,000/car. Not a whole lot, really.

It is my understanding that I could go to the local Toyota dealer and get a battery pack for about $5,000 or less. (Not sure what I’d do with it since I don’t own a Prius, but it might look nice in the living room.)

If that’s my cost, you can rest assured that Toyota’s wholesale cost is something less than this. My guess is that it doesn’t exceed the $2,000-3,000 “hybrid premium” that you keep hearing so much about.

Otherwise, the car is much like other cars, with a hatchback body, gasoline engine and CVT tranny, with a battery stuck in it. I can’t see how they couldn’t help but make money on selling a car that is in most ways like other cars of its sort.

Other automakers are a bit miffed to have been left behind. But here’s a thought — if hybrids were a born money loser, they wouldn’t be trying to build mass production hybrids of their own. Clearly, they want to build them in enough volumes for the revenue, and not for just PR purposes.

There would be no point in building a million cars in order to lose money, and no one would want to imitate them if the cars were destined to lose money. That logic does not compute.

Toyota with the insanely high volume of hybrids makes almost no margin on their bread and butter Prius. Every other automaker with much lower volume (or a contract-purchased hybrid tech) has costs greater than revenue on a per unit basis for their hybrids. So for Saturn, they are selling them trying to cash in on the hybrid name and to promote their competitiveness. But those hybrids aren’t being sold to turn profit on their own.

It’s always easier to make fun of a situation and assume idiocy than to actually jump into a situation to learn about it.

So back to Toyota. You’re probably thinking something along the lines of positive margin resulting in positive net profit. But then there are the issues of investment, research/dev, and corporate advertising dollars, etc. Go poke around in auto and you’ll find out how much investment dollars it takes to develop the hybrid technology and then how much investment it takes to set up to build the resulting car. As your article points out, 5% margins are expected from their volume-selling Prius. 5% doesn’t cut the mustard, and if you dig up analyst reports you’ll find the vast majority project total program break even sometime in the next decade.

But since analyst reports cost lots of money – you’ll have to go sign up on some high-dollar business sites and extract that information.

I guess there are some nuggets of mostly anecdotal stuff online. But the gist has always maintained that Toyota may make money per unit but the entire summation of all investment has not been recovered. For everybody else without the high volumes, their margins are often negative.

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http://news.bostonherald.com/business/automotive/view.bg?articleid=1089629

… Toyota’s profit plans are mapped out for a decade or more in advance, and when Toyota executives insist the Prius is profitable, they mean it’s on track to eventually make a lot of money.

In other words, with negative margins, high volume is not the best plan. True enough.

However, you went on to say that Toyota was still selling the Prius at a loss. This is almost certainly not the case.

http://yahoo.businessweek.com/globalbiz/content/jan2007/gb20070119_906171.htm

I’ve seen other articles that report unit revenue > unit cost as of late 2002 for the Prius (can’t find the link at the moment).

If Toyota was losing money on the Prius, a) why would they leave fat dealer markups on the table b) why would they work aggressively to expand their market share in a losing proposition and c) where are their massive profits coming from? On a key measurement of effectiveness, (return on capital employed or return on equity – I forget which), Toyota is ahead of Honda. You don’t get there by losing money on a product which is shipping in mass quantities. Why would Honda be rushing their own Anti-Prius in – rumored at even lower cost than the Prius?

Here is the hole(s) in your argument (pun intended).

First, you assume rationality on the part of Saturn.

Second, What it costs to hybridize a low volume 2.8 car, which may or may not be using parts patented by Toyota, does not necessarily reflect the cost for Toyota to build a pure hybrid of very high volume. If I play the part of the parts supplier, I can make a much different arrangement and investment on Toyota and Prius than I do Saturn. Would GM put up a bond to protect me from their going bankrupt before I fill their order? How many are they going to guarantee to buy? For how many years? In short, I want the Prius business, and would go to short margins to get it, not so for GM.

Lastly, I am sure that many people here would be happy to weigh the opinions of the experts you mention. Who are they?

I think we all agree that raising price in light of a vehicle not selling well is counter intuitive. I would wager that if this decision followed normal intuition that it would never had been posted on TTAC at all. The only reason it received any attention was because the action goes against common sense.

I post to you the exact reason why an automaker would feel fit to raise price in spite of low volume sales. The short answer is that hybrids (especially in the realm of Detroit’s automakers) are not sources of profit per unit. The long answer is one that any common-sense individual would strike down as illogical and therefore shun such an answer with ridicule and disbelief.

So there you have it. In light of a situation where something seems to make no sense, people demand proof that they would never believe (even if such proof were to be available). Does someone out there really expect Toyota to publish that hybrids do not pay back their investment on their hybrid program?

By and large, those that cite the hybrid’s lack of profitability are individuals that have spent time working in the auto industry. And I don’t mean individuals posting blog entries and playing e-pundit. Rather the profit-criticism comes from people who have actually gone and executed powertrain programs. Feel free to maintain the notion that a hybrid add-on to a regular powertrain is only a few thousand bucks. But then don’t start thinking “huh what gives???” when Saturn prices upward on a car that isn’t selling planned volume.

The Prius has a long waiting list and dealers are selling heavily optioned vehicles for more than sticker. If Toyota wasn’t making money on the Prius, they’re raise the MSRP and take some of that cashola away from the dealers.

If you were selling cars with negative margins, you’d want to sell as few as possible. That is, unless you’re Toyota which is still trying to make their Prius program break even in spite of 200K units a year.

Toyota claims they make a profit on the Prius. Nobody believes them, but that’s what they say.

So why take away its only selling point by increasing the price tag?

That said, like others I doubt they’re still losing money on the things.

I mean, does anyone else have a distinctive looking hybrid that gets 45 mpg? No? Even the best of other hybrids do worse on that measure. And you don’t get the green cred for having a civic hybrid.

Then why would they take a loss when they have a waiting list for the damn things, and are the major players in the market. They could charge almost anything they wanted too for them. The wait lists alone prove they could easily add 3 to 5k and still have them flying out of the factory.

I can’t imagine that they are actually losing money here, unless they have some significant ulterior motive to do so.

LOL, yes, we agree, but only you are correct. That’s classic! I am going to use that one every chance I get.

The $3,000 (actually $2,790) is the price increase from the beginning of the 2008 model year, not the extra over the non-hybrid.

If it qualifies for a California HOV sticker and gets a tax break and gets 2mpg better than average, that would be worth the extra 3,000.

Toyota has sold over one million Priii, Priuseses, Priora or whatever you want to call them so far. It is impossible to imagine that they haven’t recouped their R&D after selling a million units — they would have to be grossly incompetent for that to happen.

If the Prius was an inherent money loser, you can rest assured that Toyota wouldn’t produce it in such massive quantities, year after year, and distribute them to so many markets. They would have either already killed it off, or else created some limited production showcase program ala the EV1 or RAV4 EV so that they could get the PR benefit without too much cost.

Toyota has consistently strong earnings and is an efficient producer. GM should be so unlucky.