Tuesday, September 11, 2012

Reuters Volt Value Analysis Meets Strong Opposition

Published September 11, 2012

By Jeff Cobb

With unequivocally hard-hitting phrases justifiable only for a piece of thoroughly documented investigative journalism, yesterday Reuters in so many words began an article on the Chevy Volt essentially declaring it an epic loser.

The publication alleged that taxpayer bailed-out GM is losing money hand over fist on the federally subsidized Volt with astronomical production costs for each car somewhere around twice the dollar amount of what it can manage to cajole consumers to buy one for.

But then, after opening up with the most damaging allegations – while also seeming to splice in possibly as last-minute edits GM’s same-day rebuttal to perhaps add to an appearance of balance – the piece also does somewhat concede GM’s points, and qualifies its stance well after it has grabbed the reader with its seemingly scathing expose.

The blogosphere latched onto it like fresh meat, and stirred the pot. Advocates took an immediate crack at rebuttals. News agencies followed up, including CNBC, which interviewed former GM Vice Chairman Bob Lutz who had immediately refuted the Reuters analysis himself in a Forbes editorial.

What were some of the allegations?

Things like “GM is still losing as much as $49,000 on each Volt it builds,” and following recent low-priced lease deals, “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.”

The report says analysts consulted put the total cost to produce each Volt at between $76,000-$88,000 and GM is still unable to adequately sell the cars due to sticker shock for a cousin to the Cruze demanding upwards of $39,995.

“GM's basic problem is that ‘the Volt is over-engineered and over-priced,’" Reuters quoted Dennis Virag, president of the Michigan-based Automotive Consulting Group.

To nail the point home, Reuters took a quote from a previous interview of Doug Parks, GM's vice president of global product programs and the former Volt development chief seeming to support its thesis.

"It's true, we're not making money yet" on the Volt, said Parks. It "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."

To then refute Parks, Reuters cited several un-named analysts who it said spoke on conditions of anonymity and quoted Sandy Munro, president of Michigan-based Munro & Associates, which tears down and analyzes vehicles and components for manufacturers and the U.S. government.

"I don't see how General Motors will ever get its money back on that vehicle," said Munro.

Last month GM recorded the best sales month yet for the Volt at 2,831 units sold, and the car which has famously had to overcome so much negative public relations spin already – including thinly veiled misinformation disseminated as facts by some media and politicians – seemed to finally be gaining traction.

But Reuters said GM had to all but bribe consumers to its own detriment and got these sales by low lease deals – and it is true, it was running low priced promotions. But as the Volt plant closes for a month into mid October to allow for GM to retool for the 2014 Impala to be built there, Reuters added its voice to others who said this is further proof the Volt cannot maintain the momentum, and essentially it is too little, too late, and costs too much.

Actually, GM’s Volt spokesperson Michelle Malcho said the Detroit-Hamtramck plant will close, but only after it had over-stocked the Volt supply by producing extra cars in advance just to allow for the four week assembly line shut down. Reuters did not mention this.

Flawed Accounting

The real problem, aside from convenient omission of facts, was the overall spin from effective misrepresentation portrayed in the guise of objective journalism from a highly ranked worldwide news agency.

In essence, GM and others in position to speak with authority on the subject said the reporters writing for Reuters defied normally accepted auto industry accounting practices to come up with their own skewed presentation of why GM’s plug-in car is such a financial boondoggle.

More or less declaring they could analyze GM's business better than GM, the reporters added up all associated Volt development and production costs – not unlike someone would who was trying to pad an insurance claim by adding every full-retail dollar spent – and then divided the numbers of the relatively few Volts sold thus far into the number to declare what each Volt costs to produce.

This contrived method is not the way the auto industry amortizes costs over a vehicle’s life cycle, and not the way it normally defines a success or failure. In drilling down on the Volt as a single car, the writers also did not give full weight to the value of spin-off benefits, technologies and lessons learned in GM's development work – particularly in pioneering a vehicle like the Volt.

Reuters did link to GM’s rebuttal also posted yesterday:

“Reuters’ estimate of the current loss per unit for each Volt sold is grossly wrong,” wrote GM, “in part because the reporters allocated product development costs across the number of Volts sold instead of allocating across the lifetime volume of the program, which is how business operates. The Reuters’ numbers become more wrong with each Volt sold.”

Later into the story, Reuters does seem to concede as much.

“Spread out over the 21,500 Volts that GM has sold since the car's introduction in December 2010, the development and tooling costs average just under $56,000 per car. That figure will, of course, come down as more Volts are sold,” wrote Reuters.

Time To Payback

Not really in question is that the Volt is an investment in technology intended to wean the world away from oil, reduce emissions, and start on the road to domestic energy security. No one at GM ever said the first generation car would be a cash cow – although they did overestimate how well it would do, and have had to cut back earlier sales projections of as many as 45,000 North American sales this year, to "match supply with demand," and thus far, as Reuters observes, just 13,500 have been sold.

That notwithstanding, the question is still how to fairly paint the picture.

As Parks said above, the car was not expected to payoff until later. This jibes too with a report by Brad Berman, who wrote yesterday for plugincars.com citing a 2007 interview with then GM Vice Chairman Bob Lutz, when he asked him how long it would take before the Volt would be profitable.

“About as long as it took Toyota to make money with the Prius,” Lutz had said up front to Berman in 2007.

Berman noted it took Toyota about a decade to make money on the Prius.

“Now, 15 years since the Prius’s debut in Japan in 1997, the hybrid has become its own successful line of profitable models," Berman wrote. "For at least four or five years after its introduction, the Prius was ridiculed as a costly science experiment that would never make money.”

Now it’s the Volt’s Turn

That the Volt is "disruptive" technology and controversial is without question, and it has tempted some – even traditionally held guardians of public trust – to stretch the picture of its costs, value, and benefits into what others would consider a caricature.

Yesterday, Bob Lutz wrote in Forbes with dismay over the Reuter’s analysis.

“The statement that GM ‘loses’ over $40K per Volt is preposterous,” wrote Lutz. “What the ‘analyst’ in whom poor [Reuters writer] 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.”

He continued:

“Listen, [writers] Ben and Micheline: that’s not how car business cost accounting works," Lutz said. "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.”

Lutz then goes into a breakdown of the Volt’s costs from its manufacturer’s perspective painting a far-less damaging portrayal, while admitting numbers do add up to less than an initial profit-generating home run for the technology’s first time up to bat.

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

In its statement yesterday, GM also defended and broadened the perspective on value the Volt represents:

In addition, our core research into battery cells, battery packs, controls, electric motors, regenerative braking and other technologies has applications across multiple current and future products, which will help spread costs over a much higher volume, thereby reducing manufacturing and purchasing costs. This will eventually lead to profitability for the Volt and future electrified vehicles.

Every investment in technology that GM makes is designed to have a payoff for our customers, to meet future regulatory requirements and add to the bottom line. The Volt is no different, even if it takes longer to become profitable.

That the Volt is undergoing a trial by fire would seem apparent.

But as Lutz mentioned, it has been very well received by many here already, and, is in process of being introduced to warm reception by many worldwide as well. For now, it is being exclusively exported from the U.S as Volt-badged and Ampera-badged variants to Europe, the UK, Australia and elsewhere in initially conservative allocations. Reports are it is selling out, and they want more.

GM and others have been heartened that this is true for a uniquely American solution to a world problem, and coming at a time when the U.S. manufacturing sector has largely been eroded and off-shored.

Those who do embrace the car, see it as a first step toward tackling rising fuel prices, meeting a need for energy security, and reduced emissions. True, it did come in higher priced than early on projections, and it is being subsidized in the U.S. and elsewhere.

That said, Consumer Reports rates U.S. Volt owner satisfaction as the highest among all cars sold in North America, and stories abound of Volt drivers who – even though some paid handsomely for this first-generation vehicle – have recouped costs in fuel savings.

And reading further between the lines, it may be little wonder the Volt is number one in owner satisfaction. If the Reuters estimates are at all correct, it also means first-gen Volt owners are getting an over-engineered car chock full of value that was well below (one measure of) cost. They have a term for this set of conditions: "a bargain."

Some may complain the price is still too high, but appears like it's being subsidized even by its own manufacturer at this point, and GM is furthermore giving white glove treatment with personal Volt advisers and Cadillac level customer care for its first adopters.

And all this and more may be absolutely necessary at this point. Advocates have said changing the entrenched oil-addicted culture will be hard enough with as many boosts as possible, and need to overcome muddy waters, but in the long run, it is believed the whole truth will rise above the fear, uncertainty and doubt.

For the time being, "the truth" for some is still an open debate. Is the Volt a wasted exercise, or is it an underdog that will, despite running a gauntlet of criticism, eventually prove its worth to more people than those who already see it now?

Reuters, General Motors, Forbes, plugincars.com


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