"At last leakage, GM is saying now the Volt may need a sticker price of
$45,000." $45K for a Volt? It will be DOA for commoners.
What Is GM Thinking?
"Violent change" in consumer tastes is not a new challenge for the car
business. The phrase is Lee Iacocca's, from his autobiography, referring
to public demand for small cars after the 1979 oil shock.
Less violently, a sudden shift in taste for smaller, more fuel-efficient
cars amid the recession of 1958 helped doom the Edsel.
The 1950s also happen to be the last time GM's share price sank as low
as $11 per share. Two morals must be drawn.
One is that GM's ability to avoid bankruptcy has again become doubtful
in the minds of investors. The 1950s comparison indeed overstates the
company's well-being today. In inflation-adjusted terms, today's share
price is closer to $1.50 in mid-1950s dollars.
Secondly, any forecast calling for a "permanent" shift in auto tastes
based on a quantum as volatile as the price of gasoline is nuts.
GM's leaders are not nuts, and yet to pour hundreds of millions into a
race to launch an electric car, the Chevy Volt, guaranteed to lose money
on every unit sold, begins to seem a peculiar strategy for a company in
dire liquidity straits.
With each hectic advance in the development process, the expected
sticker price to consumers has gone up. Reportedly, off-the-shelf
electrical fixtures, such as headlights and taillights, won't suffice
because they draw too much power. At last leakage, GM is saying now the
Volt may need a sticker price of $45,000.
At best, the Volt will be an affluent family's third car. It will have
to be plugged in for six hours a day – i.e., it will be a car for a
suburbanite with a sizeable garage wired for power. It won't be a car
for a city dweller who parks on the street or in a public lot. It will
travel 40 miles on a six-hour charge. After that, a small gas motor will
kick in to recharge the battery while you drive. Some reports claim the
Volt will get 50 mpg in this mode, but that's hallucinatory: If using a
gasoline engine to power an electric motor were so efficient, the
streets would be full of such vehicles. (Our guess: The car will be
lucky to get 15 mpg under gasoline power.)
Notice that, even today, some people continue to buy SUVs capable of
hauling eight passengers, the dog and groceries, though they spend most
of their time in the car driving alone. Customers value flexibility in
their vehicles. For a car with the Volt's narrow usability to sell would
require an unlikely revolution in consumer behavior, especially if
gasoline prices aren't going to $10 a gallon.
And for those who think the Volt's justification is greenhouse
emissions, notice that electric cars play Three Card Monte with energy
inputs: It all depends on where the electricity is coming from. (Ditto,
by the way, GM's long-range faith in hydrogen fuel cells – it all
depends on where you get the hydrogen from.) On the other hand, if you
replaced the world's coal plants with nuclear plants, it would have a
huge impact on greenhouse emissions regardless of what cars people are
driving. If curbing CO2 is your goal (however quixotic), power plants,
not cars, should be your focus.
Never mind. GM executives are not nuts. They justify the costs and risks
of the Volt as a way of changing GM's image in the minds of consumers
and politicians. To commit a pun, the Volt is GM's vehicle for making a
bailout of GM politically acceptable.
The company has already started signaling it expects Washington to
provide a whopping $7,000 tax credit to Volt purchasers. In Europe and
the U.S., under whatever fuel economy and emissions regulations prevail,
GM also expects special favoritism for the Volt. The goal is to re-enact
the flex-fuel hoax, in which GM receives extra credit for making cars
that can burn 85% ethanol, even if they never see a drop of such fuel.
CEO Rick Wagoner last week laid out the case to Barack Obama personally
for turning GM into a ward of the state, by way of direct and indirect
subsidies to support a transition to "alternative" fuel vehicles. GM has
done yeoman's work getting its structural costs (i.e., labor) in line,
but shareholders should note that a big part of the company's turnaround
gamble consists also of eliciting favor once again from Washington after
a period in which the domestic auto makers were nothing but whipping
boys on Capitol Hill.
This year, Ford designers are working to make the iconic Mustang look
smaller, though it won't be any smaller. Ford recognizes, apparently,
that there's a taste component to consumer demand for small,
unprepossessing cars as well as an economic motive. GM is making the
same bet, on a much bigger scale. It's betting the Volt will trigger a
change in Washington's taste for bailing out a domestic car maker.