Toyota Losing Money on Prius?

Happened to be reading a Road and Track (I think, maybe Car & Driver) last night at the Dr. office. Came across a review of this:

Cadillac CTS-V
556 HP
4,200 pounds
0-60 in 3.9 seconds
Starts at $58,000

How much did it cost to develop this thing?
How many will they sell? Being generous, a few thousand?

Now remind me why GM needs a government bailout?? Surely not because they spend a cr@pload of money developing vehicles that will never be big sellers and will never come close to recovering the development costs. In addition, it isn't even an intentional low volume learning and consumer educational stepping stone to a line of vehicles that WILL sell well (like the Honda Insight was to the Honda Civic Hybrid).

 

It is part of being a luxury maker, Mercedes has amg, BMW the M series and Cadillac the V series.

 

Profit per vehicle is no where near $3000 on a $25000 vehicle.

First the OEM's profit is not based on the MSRP but the Invoice. Take a base Prius. The MSRP is $23,375 with an invoice of $21,524. Toyota's average profit is 9%. So even if they made an average profit on the Prius it would only be $1937. However no manufacturer makes the same profit on all their vehicles.

In general they make more money on large and expensive vehicles and less on small and inexpensive vehicles. Take a typical truck. It is large, expensive, and simple. It is widely reported that an OEM makes $10,000 on a $30,000 truck or a 30% profit margin It also explains why they can afford to offer $8,000 factory cash back on a Tundra.

Why doesn't an OEM make much on small car? It costs as much to design and build a small car as a large one. The design work still needs to be done and the engineers don't get paid less nor do the certification labs. A small car still needs a factory and it doesn't cost less either. The labor rate is the same and it still has about the same number of parts. The only place an OEM saves is with material cost, less material and cheaper parts.

I suspect that Toyota at best breaks even on the Yaris and Corolla and loose a couple of % on the Prius.

This 2006 article from Autoweek states that Toyota was planning an making a profit on hybrids by April 2008. Considering that commodity prices for raw material like aluminum and steel have doubled in that time period I doubt this happened.

Toyota plans to profit from hybrids within two years - AutoWeek Magazine

 

jhinton:
ok... hmmm, so you dont know either.

too bad, someone must have a decent idea on a guideline. i do know enough to know that all vehicles have a different profit margin. but most of your statement i have to say is probably BS.

so, does anyone know?

 

The CTS-V is a money maker for GM. It is simply a higher performance version of the standard CTS. They take the standard car, up the horsepower, tweak the suspension, and charge an extra $20,000. The overhead and 99% of the development is covered by the standard model.

Money is not made on the bread and butter product, it is made on accessories, options, and special editions.

 

IMHO, to ramp up production, Toyota has to make an operational profit. No one can afford to make a product at a loss.

Capital and R&D costs are something different. A company spends these moneys so they can make future products. It is the cost of being competitive and what I'm expecting to pay for when I buy company stock. But to try and treat this capital expense as a 'loss,' is the same sort of accounting nonsense that tries to say we'll never break even on our hybrids. It is penny wise and pound foolish by not seeing the big picture.

I don't expect hybrid skeptics to change their stripes but even they are not so dumb as to ignore the demand for Prius versus their vehicles. No matter how much lipstick they put on their products, when they don't sell and Toyota can't make theirs fast enough ... the term BS comes to mind.

But even today, I'm amused that many hybrid skeptics think they can call something "Green" or anything 'hybrid' and customers will beat a path to their door. They really don't get it. As for the "n" models getting better than 30 MPG, again, they just don't get it.

Bob Wilson

 

My background is product development and product management for vehicles and vehicle components. I've been responsible for selecting what will be in a product lineup and how it will be priced. I've worked for Japanese as well as US companies and with customers on Europe, Asia, Australia, and Africa. I believe that I have a very good idea how much it costs to manufacture things.

Your background is?

 

Automaker accounting goes something like this.

Fixed costs(healthcare, pensions, advertising, white collar, r & d for entire model lineup, any and all costs that you have whether you sell one car or none.) are determined and spread evenly over the estimated build for a year. $1,000,000 divided by 100 units would equal a fixed cost of $10,000 per unit.

Varaiable costs are everything else: r&d for particular model(amortized for 3-5 years),labor, raw materials, shipping.



so if you have a fixed cost of $10,000 on every unit you produce, what do you want to produce? $15,000 vehicles or $45,000 vehicles?

When business is normal, GM, ford and toyota make $10,000-$12,000 per light truck and somewhere between -$2,000(gm and Ford) and +$2,000 on a car, i ahve heard Toyota makes close to $20,000 on some upper lexus models. During times like this production gets cut back so the fixed costs skyrocket per vehicle causing the cash burn you have heard so much about.

 

Yes, they can and companies do it everyday. Some products make money, some break even, some lose money. The money losing products are made to fill out a product line and attract customers and dealerships to your product. The key is to make money on the whole not on every one of the parts.

 

This is a huge pile of hoo haa because it has no specifics just offhanded comments that have no basis in fact anywhere in the article.

This quote:

"...still widely believed by analysts...." OK where is the data to support this statement. Which analysts? VW? Chrysler? Hummer execs?

Disclaimers first: I do not work at TMS or in any TMM center. I also have a good working knowledge of accounting and big business having been VP for a major international steel company. The following kind of analysis was done every day by me and other colleagues.

Take two similar vehicles:
The 09 Prius Package #2 ........... MSRP ~$24900
The 09 Matrix base w/ VSC+TC... MSRP ~$20500

What's the difference between these two vehicles? Not much actually.
Both are about the same size; steel, rubber, plastic, glass, line time, etc
Both have smallish 4 cyl ICE's
Both have the same safety equipment
Both have lead-acid batteries
The Matrix has a traditional FWD transaxle
The Prius has a smaller, simpler PSD and transaxle

The Prius has two electric motors
The Prius has an inverter/converter
The Prius has extra wiring
The Prius has a NiMH battery pack

That's it.

What's the cost of the 'extra' Prius equipment? Well we have an idea already on the major item the NiMH battery. At any Toyota store today anyone can walk in and buy a Gen 2 battery at $2599...full retail ( not OEM cost ).

The Prius was and is made on the same line as the Camry/Crown sedans. No special investments are needed here.

The Prius does have the extra cost of R & D to amortize. So pick a number. How much do you think it cost to develop the Prius as a stand-alone platform and the THS as a plugin power system for several vehicles?

$1.5 Billion EACH????? $3 Billion in total? That sounds huge to me but lets use it. According to GAAP commonly throughout the world R&D has to be amortized over a specific and reasonable period of time, lets say 10 yrs and 1.5 million vehicles.

$3 Billion in R&D divided by 1.5 million units worldwide since 1997 ...equals... ~$2000 per unit. BTW as comparison GM announced that it's R&D cost for it's 2-Mode hybrid system was $1 Billion, which it shared with BMW and Daimler. I'm exagerating that the Prius R & D was three times greater!!!!

So going back to the Matrix and the Prius...

$20500 Matrix @ Full MSRP + ( $2000 R&D ) + ( $2000 OEM battery cost ) + ( $400 for 2 motors ) + ( ? extra wiring ) + ( ? Inverter/Converter ) ... equals about $24900.

This assumes that the Prius+THS R & D cost was/is $3 Billion.

Actually according to GAAP since unit No 1 the Prius was profitable !!!! Hows that? If the fixed costs are properly amortized all during the 'breakeven period' there is always a profit margin built into the selling price.

For example in 2004 when the standard model Prius was selling for about $24500 ( the one I have ) the price included
All variable costs
All proper amortizations of fixed costs
All proper amortizations of R&D costs
Transport
Selling General and Administrative Expenses
Gross Margin
Dealer cost
Dealer Margin
============
Selling Price to Me

The cost of the R&D is not imputed totally on the first vehicle sold, it's amortized over a specified number of vehicles or a time period.

 

These numbers are realistic. Toyota's Gross Margin rate is in the range of 10-15% as a corporation. Obviously more on light trucks and SUVs.

Yaris', Corolla's, and Prius's are probably marginally profitable in the base trim levels. Note the lack of advertising marketing of any kind except on the internet which is very very cost effective.

 

You don't make money with any new technology in the first few years, when your investment is high and your return is low. Toyota has a break even time for Prius like any other new product. Demand has now outstripped supply, so that turnaround time for profit has probably been reduced.

 

DeadPhish,

You are underestimating how different the Matrix and Prius are.

The Matrix is built on the Corolla platform. It is a Corolla with a different body shell and new interior. The Matrix is also a joint venture with GM, and GM helped share the development cost and tooling cost. It uses a standard engine and transaxle that is a simple plug and play and is built by the millions

The Prius is a stand-alone platform that is not shared. It has an unique engine, electronics, and transaxle. The short block is shared with the Echo and Scion but the rest in unique for the Prius.


You are also severely underestimating the development cost for an automobile. A facelift that I was personally involved with cost $750 million. That is only a new front clip, new rear clip, and updated interior. I have not personally been involved with a complete automobile but from the trade magazines I've read it is ~ $6 billion to develop and tool a conventional automobile. For the Prius you would need to add an additional amount to develop the hybrid and batteries. I will readily admit I don't know how much that cost.

We can get some idea if we look at the US PNGV program (Partnership for Next Generation Vehicle) Started in 1994 by the Clinton administration it was by it's charter a program with costs split 50/50 by the federal government and big 3. It was killed by the Bush Administration in 2001. (3 years early)

The government spent:
1994 $228 million
1995 $308 million
1996 $278 million
1997 ?
1998 ?
1999 ?
2000 ?
2001 ?
Note: Bush claimed the federal government would save $1.1 billion by killing PNGV and not funding it through 2004 as scheduled

If you assume relatively steady funding that is ~ $3 billion spent by the government and matched by the industry. That is $6 billion only to get to the running prototype stage.

 

Hi All,

Another thing to remember is Toyota is playing the Henry Ford Game, by having its finger in the Battery Company too. They own something in excess of 40 % of that Battery Company, so they make 40% of the profit on those Prius batteries.

 

Hi All,

On fixed costs - if you need to make 1/3 of the transmission cogs for a car design, than another car design, you only need 1/3 of the buildings to house those gear hobbing / powdered metal machines. And so, 1/3 of property tax, 1/3 of the building maintanence. These are fixed costs.

So, that is allot of money (about 1/2 of a transmission company) that can go into motors, inverters, batteries and cables.

If anybody is not making a profit on their hybrids, its gotta be Honda. Using standard transmissions, and tacking stuff on.

 

I do recognize that the Matrix is a form of a knockoff of the Corolla platform which has been screwed down the tightest nut and bolt cost -wise. I also recognize that the Prius is a clean sheet of paper so to speak.

If the developmental costs of a complete new body is in the $5 - $6 Billion range I'd be somewhat shocked but open to being shown ( your stats suggest this ). It just seems too high to me.

I was figuring $2 Billion for the platform and body and $1 Billion for the THS.

 

Actually, the first-generation Prius was not a standalone platform. The 1997 NHW10 (JDM only) and 2000 NHW11 (first Prius in U.S.) were based on the Vitz platform, so Toyota did not exactly design that car from the ground up. The only thing they really had to design from scratch was the hybrid drive system.

The second-generation platform was a standalone. But for the NHW20 they didn't have to design the hybrid system-- Just improve on the existing one from the NHW11.

I agree with DeadPhish. $6 Billion to develop a car is ridiculous. If Detroit spends that much money to develop a single car, I suspect this is one of the reasons why Detroit is in such trouble.

The cost charged to the Taxpayer by Rockwell back in 1971 to develop and build the Space Shuttle was $6.75 Billion in then-dollars (figure $12 Billion in today's dollars due to inflation). $6 Billion to develop and build a car which is nowhere near as complex as the Shuttle sounds like there is a lot of waste involved. And the Shuttle was a government program with legendary bureaucratic waste! (And Rockwell was a union shop!)

[facetiousness on] $750 million to just facelift a car also sounds rather wasteful.... Considering a Ricer can do that to his own car for maybe a couple grand. Whatever happened to economy of scale! [/facetiousness off]

Edited to add source for the shuttle costs: http://en.wikipedia.org/wiki/NASA_Space_Shuttle_decision

 

Toyota Prius - First Drive Review/Green Machines/Car Shopping/Hot Lists/Reviews/Car and Driver - Car And Driver from October 2003 says this about the previous gen Prius:
'Since the original Prius launch in Japan in 1997, Toyota has sold more than 150,000 units. More important, in the previous generation's final moments, Toyota says it finished recovering its investment and then produced a few profitable cars."

Since people are talking about the average profit/loss per vehicle, see the graphs on the right side of http://www.detnews.com/apps/pbcs.dll/article?AID=/20080606/AUTO01/806060373/1148/rss25 for figures on cars produced in NA. Too bad it isn't on cars produced in other regions.

 

For GM at this point, the fixed costs are pretty much meaningless. Yes, in the long run, they have to be covered. But crisis mode means focussing on covering the variable costs, and selling what's already built as soon as possible. Cash flow is more important.

 

Having listened to you in multiple threads it appears that you have zero objectivity with respect to the Prius. You remind me of many other management types I've dealt with, ready to manipulate the figures to get the answer they need, regardless of what the real answer is. It is an example of determining the answer first, then trying to restructure the question to get that desired answer.

I noticed this in your misrepresentation of figures in other threads. As a result I believe you have little idea of what the Prius costs to manufacture or what their profit margin is. Toyota's actions speak louder than your words or opinion.

That is my professional opinion as one who has done product development, research, engineering, and operations including international projects.