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UPDATE #2: LINKED BY POINTS AND FIGURES! THANKS!
UPDATE #3: LINKED BY AMERICAN ELEPHANTS! THANKS!
UPDATE #4: LINKED BY KILLER FROGS! THANKS!
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An otherwise informative Reuters article on the economics of the Chevy Volt makes the erroneous claim that "GM is still losing as much as $49,000 on each Volt it builds."
No, it isn't. The reporter and editor of the story just don't understand mircoeconomics.
I take a back seat to nobody in criticizing GM for its outrageous bailout, its poor management, its rapacious unions, and its money-sucking boondoggle called the Volt. If you doubt this, then see here, here, and here.
But I try to rely on arguments with a factual basis. If I didn't care about that, I'd just become a liberal and wallow in the smug self-satisfaction that comes from knowing that real-world results matter less than the fact that I care.
Besides which, a reliance on demonstrably false claims is injurious to the long-term project of convincing the skeptical of the validity of conservative arguments.
Which is why I bother to point out that Reuters' claim of a $49,000 loss per unit is clearly the byproduct of the author's economic ignorance.
The calculation confuses sunk costs - i.e. the $1.2 billion GM spent developing the Volt - with marginal costs - i.e. the incremental cost of parts, labor and other inputs to produce the next Volt. Spreading out the sunk costs across the Volt's modest production volume gives us an average all-in cost, which is important to know for the purpose of analyzing the overall profitability of the Volt, but it is not the right benchmark to gauge whether or not GM is better off producing that next unit.
The article cites estimates of $20,000 - $32,000 to build an incremental Volt. If these estimates are accurate, then GM can discount the $39,995 base price significantly and still earn a profit on every incremental Volt it sells.
That doesn't justify the Volt's existence, because they plainly have no hope of selling enough Volts to earn back their $1.2 billion in sunk costs, let alone turn a profit on the enterprise. But that is very different from claiming that GM is losing money - i.e. is made financially worse off - with every Volt it sells.
And there are other concerns raised by the article.
One is the discounting in an effort to juice sales, perhaps not coincidentally in an election year. GM seems to be aggressively discounting leases, which is especially interesting because it can mask losses through the term of the lease through optimistic assumptions about the residual value of the car when it comes off lease.
This seems especially risky since there is no real history of used plug-in hybrid values on which to base such estimates. So I would not be at all surprised to see that the surge in Volt leases in 2012 results in a sizable write-down related to lower-than-expected residual values in 2014. Which happens not to be a Presidential election year.
It is also a red flag that GM seems to have abandoned any pretense of turning the Volt into a profitable product line in the next few years:
"It's true, we're not making money yet" on the
Volt, said Doug Parks, GM's vice president of global product programs
and the former Volt development chief, in an interview. 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."
Whether or not volume ever reaches profitable is uncertain. What is certain is that the Gen 2 car, and any and all successors, will entail their own development costs, just like the $1.2 billion spent developing the first generation Volt, about which GM used to dream the same big dreams it now has for the Gen 2 iteration.
The Volt is a loss-making enterprise even with the massive subsidies it enjoys. It is an easy enough target on the merits. There is no need to risk one's credibility to bash it with an ill-informed argument from a reporter who doesn't grasp Econ 101.