Cutting the Cost: GM may take a hit on the price of hybrid systems to sell more units

So GM is expecting to offer three systems. The first two are the so-called Hollow hybrids. The third is their two mode system, which is a real hybrid. As a $10,000 option, their sales will be close to zip, especially selling to their traditional customer base. Compare that to Toyota, which expects their hybrids to cost the same as traditional ICE cars by 2010.

 

<div class='quotetop'>QUOTE(TonyPSchaefer @ Jul 11 2007, 09:05 AM) [snapback]476739[/snapback]</div>

I'm guessing that neither you nor fan-atic actually read the article. The whole point of the article was that GM admits that they won't sell many at the full recovery price of $10,000 and are contemplating absorbing some of the cost. In other words, they are considering on selling the option at less than the full recovery cost of $10,000 in order to increase sales of the vehicle.

 

<div class='quotetop'>QUOTE(Marlin @ Jul 11 2007, 06:23 AM) [snapback]476745[/snapback]</div>

Which, as you may recall, was why GM said they'd never go into the hybrid business. GM claimed it was BAD business to have to subsidize your cars to get them to sell - and they accused Toyota of doing this with the Prius, and pointed out that it would come back to bite Toyota in the nice person. I think this is what the phrase "eating crow" was invented for.

 

Funny how the BAS will give an "11-12% increase in mileage" and the BAS plus will give a "14-15% increase."

Can they really call it that closely? And why put three different systems into the service and parts pipeline?

 

<div class='quotetop'>QUOTE(Marlin @ Jul 11 2007, 08:23 AM) [snapback]476745[/snapback]</div>

OK, I did read the article but I didn't factor in GM's contribution. Sorry. Let's say GM swallows half the cost. (Fat chance). Then GM customers would have to pony up $5K for the two-mode hybrid option. Same Result: sales would be zip. But yes, there would be a lot of good will generated.

To continue the GM bashing, is anyone else as annoyed as I am that GM has contributed $1000 to the general scholarship fund for every college football game they have sponsored for the last 25 years, AND BRAGS ABOUT IT? That's about 0.01% of their ad budget for college football. Was it Fuji Film that mimiked them for a while by contributing $10K per game?

 

<div class='quotetop'>QUOTE(darelldd @ Jul 11 2007, 12:30 PM) [snapback]476872[/snapback]</div>

$1,000's in rebates for Hummers, and the rest of their gas chugg'n fleet? Seems like they invented the term subsidized.

Oh, I'm sorry ... rebates are different from being subsidized

 

<div class='quotetop'>QUOTE(Pinto Girl @ Jul 11 2007, 12:25 PM) [snapback]476930[/snapback]</div>

Because that's where they make their money...in parts and repairs. Thus an incentive for a more complicated system and more parts.

 

<div class='quotetop'>QUOTE(Godiva @ Jul 11 2007, 01:53 PM) [snapback]477012[/snapback]</div>

Oh...yeah...riiiiiiiiigggghhhhhhhttttt...


Clearly I do *not* have what it takes to become a rising star in the firmament of GM upper management...

 

The only reason GM might do this is in an attempt to gain back some market share. This would especially be true if they were able to get a full-size hybrid truck to market before Toyota. Beyond that, it is just bad business.

 

<div class='quotetop'>QUOTE(fan-atic @ Jul 11 2007, 02:14 PM) [snapback]476975[/snapback]</div>

I think it's good that GM is going in this direction, but reluctantly, I'd have to agree with your statement. GM is promising a 25% improvement in gas milage. For (say) an Escalade (EPA 14 mpg), at 15,000 miles a year that would save just $650 a year in gas. That's an 8 year payback period for a $5,000 device. So it's not going to attract many on its economic merits. And, I may be wrong, but I doubt that your typical Escalade purchaser places much value on reducing environment damage or dependency on foreign oil. Tough to see what GM thinks its market is here.

I wonder how much of that $10K is amortization of the engineering cost and similar overhead, verus the marginal production cost of each unit. I mean, an Escalade costs $50K, the transmission costs an additional $10K? Doesn't quite seem plausible to me.

 

<div class='quotetop'>QUOTE(fan-atic @ Jul 11 2007, 02:14 PM) [snapback]476975[/snapback]</div>

Keep in mind that Toyota hasn't swallowed the cost of HSD on the Highlander, and sales there have been just a little bit better than 'disastrous'. In that respect, it's nice to see GM learning from Toyota's blunder.

 

fifteen percent of not very much is...not very much.

 

I think it's perfectly normal practice as a new technology. I remember that when the Prius first came out in late 2000 Toyota said that it's cost was about $35000 but they were selling them at the market price of $22000.

Years and years of R&D and retooling now have to be amortized. On a small volume, at least initially, they will have to 'absorb' the costs. In fact that money is already spent and they are just allocating costs to the Fixed segment.

Nothing unusual here except as Tony said 'crow' is about to be consumed....8 yrs later.

<div class='quotetop'>QUOTE(Jonnycat26 @ Jul 11 2007, 04:29 PM) [snapback]477076[/snapback]</div>

Explain the 'blunder'.

 

To be realistic about this..how much would you say the 2-Mode has cost to develop? $1 Billion? It feels right to me.

GM / MB / BMW all shared in the cost. Let's say GM takes 50% of that cost or $500 Million. That's just development. That get's allocated in the Fixed cost part of the accounting equation and it's amortized over the expected volume.

The cost of the battery pack and two electric motors are a Variable cost. Variable in that if you don't build the vehicle you don't spend the money for the batteries. If it's like the HSD then let's estimate the internal cost per vehicle as about $3000 + $500 for the two motors = $3500.

How many might GM sell in a year? Two scenarios:
5000 units like the Prius did in it's first year
25000 units? It seems a good goal. Toyota's first goal for the Gen2 Prius was 35000 units annually

Estimation of annual sales:
Yr 1 .. 5000
Yr 2 .. 10000
Yr 3 .. 15000
Yr 4 .. 30000
Yr 5 .. 40000
For 5 yrs that's about 100000 units.

If GM amortizes its already-spent R&D of $500 Million over 100,000 in 5 yrs then they will have a per unit Fixed 'cost' of about $5000 and avariable cost of about $3500. Omigosh they've 'absorbed' $5000 per vehicle. More accurately stated: they've recaptured previously spent money.

Oh after this recapture ends in 5 yrs or 100,000 units whichever comes first the $5000 goes directly to the bottom line.

 

<div class='quotetop'>QUOTE(cwerdna @ Jul 11 2007, 05:02 AM) [snapback]476682[/snapback]</div>

What is "cost"? They sunk $1 billion into R&D. If they spread that over a billion trannys the "cost" is $1. If they spread it over 100,000 units the "cost" is $10,000. Does this mean that GM believes they can sell only 100,000 units? It is rather obvious to me that GM has already figured out a way to screw up their hybrid. The only question is: Will the price of gas increase enough so their customers will buy their hybrid trucks anyway?

They may very well increase the MSRP of the vehicle by $10,000 and offer $15,000 rebates to get them off the lots.

 

<div class='quotetop'>QUOTE(DeadPhish @ Jul 11 2007, 08:34 PM) [snapback]477203[/snapback]</div>

Uh, charging too much for it? Missing their sales goals by over 20% the first year? Seems like a few blunders to me.

<div class='quotetop'>QUOTE(JimN @ Jul 11 2007, 08:53 PM) [snapback]477211[/snapback]</div>

Oh, right.. you're talking about the magical R&D where after you spend the money, the materials just appear out of thin air, right?

 

<div class='quotetop'>QUOTE(DeadPhish @ Jul 11 2007, 07:34 PM) [snapback]477203[/snapback]</div>

Read the history written before that particular hybrid debutted. Toyota's goals for Highlander-Hybrid were not as implied.

Looking back rarely gives the same impression as looking forward, especially when misconceptions are involved.