Toyota Losing Money on Prius?

jhinton:

after your response to my claiming that most of what you say is BS...i have determined a few things...

1) i am not the only one here who thinks it

2) we still dont have anyone who claims to actually know. (i do know several people who work in the industry; granted, no at Toyota, but several at Ford past and present. more on them later

3) from your responses, its easy to see why you dont do it anymore...

BUT

i talked with one person who would know because he was pretty high up at Ford, but unfortunately his knowledge is so old i doubt (as does he) that is applies anymore. he retired in 1991 so he is not really bound by his non disclosure anymore, but he said that even their bottom of the line profit vehicles, base price, there was no less than 20% profit at MSRP.... the variance was not that much from low end to high end vehicles unless they were new and recouping development costs,

he said the real money was options packages. profit margin on them from top to bottom ranged from 50 to 75% and accounted for more than 50% of the profit made at Ford.

however the real money made on selling cars was not all that cut and dried. they did have cars that COULD HAVE SOLD for little or no profit. those were ones with factory incentives. all cars had to have "paper profit" simply because it offset expected warantee work. which if it ran over 10% of vehicle cost could, along with factory incentives, make Ford lose all their profit on the vehicle....

but, MOST of the rest of the profit was indirect and stemmed from the fact, that over 50% of the financing for new vehicles indirectly added to Ford's bottom line.

so even if a vehicle did have extra warantee work, very little options, and had factory incentives, and lost "paper" money, Ford would still profit on the financing.

so, like i said, this was Ford 20 years ago...which brings me to the conclusion that

1) Toyota SELLS NO VEHICLES AT OR NEAR COST PERIOD

2) they probably "make" their profit by ....

drumroll....

this is news??!!....

CREATING A VEHICLE THAT REQUIRES MINIMUM WARANTEE WORK AND THEREFORE DOES NOT EAT AWAY AT THEIR "PAPER" PROFITS...


**edit**
i do know someone who currently works at Ford but at the dealer level. they do have access to the people who probably have some knowledge of which we seek. i have not heard back from them yet and because of the holidays, it may be several days and there is no guarantee that any info is forthcoming.

 

Unfortunately for Toyota, there is a lot of profit in spare parts, not something Toyotas need much of.

 

It's amazing to me that there's been this much discussion already without referring back to the obvious source: Hideshi Itezaki's book The Prius that Shook the World.

The Prius project was started in earnest in early 1994. The car (NHW10) was released in December 1997. The hybrid system was not initially considered: it was a project to build a car for the 21st century, involving reconsidering a number of things. It was the first time for a long time that Toyota had built a car from scratch. (The Vitz/Yaris/Echo shared its engine with the Prius, but it came from the Prius project: profits made from the other car will count toward writing off the development cost of the engine.)

The hybrid system was first introduced to the Prius team as a demand for double the average fuel economy in late 1994. The PSD system was agreed upon in June 1995. The first prototype was delivered in November.

A total of 100 car prototypes were built, an exceptionally high number, but a lot of them were for testing the hybrid system and battery. At some points they were testing the cars 24/7. There were occasional errors, like failing to indicate a 10mm cut-out on the inside of the transaxle case where it would interfere with the PSD, resulting in the casing mould needing to be remade and the ten casings already made having to be machined down.

They did have to develop the IGBT (Isolated Gate Bipolar Transistor) chips used in the inverters themselves: at the time, suitable parts just weren't available. IGBTs were blowing up all through 1996.

Late on in the book the author refers to "1,000 engineers that had worked on the development," but earlier sections refer to starting with smaller teams and only later ramping up to large numbers once the concept is sound. The engine team started off as only five, and reached up to 50.

I seem to recall reading that they decided to reopen an essentially moribund plant to build the Prius, but I can't find the reference right now.

So I think we can say that the R&D costs would be more than a typical model change, but possibly not overwhelmingly more.

 

I think I remember reading the chief engineer of the hybrid project saying that they only expected to sell 100,000 units (can't find quote).
If Toyota is a well run company, the budget allocated for development would have been based on what could be recovered from that sales estimated so I doubt that there was a budget of 6 billion. As pointed out above, the first generation used an existing platform and ICE which would have most of the cost going in to electrical parts and software algorithms.
Toyota probably have a 'bluesky' R&D budget where small teams play with all sorts of ideas which don't get directly charged to a single product but get expensed annually as a corporate overhead. This how 'concept' cars are paid for. The costs up to Nov 1995 may have been in this budget and never allocated to the production cost.

Cost accounting is a dark political art, and just as there is never any 'profit' to share with actors in blockbusting movies, car models can be made profitable if they want to keep producing them, or unprofitable if they need to be killed (like the EV1)!

 

Justlurkin:

It is pretty pointless to compare a government project in the 60's to a private project in the 90's and 00's. However $6.75 Billion in 1972 is $35.2 Billion in 2007 dollars. The Inflation Calculator

If you want to look at a current project take a look at the JSF (Joint Strike Fighter). It's development cost so far are $42.2 Billion (in 2001 dollars) and procurement is estimated to be $255 Billion (again 2001 dollars) The DOD is allocating $11 Billion per year for the next 20 years to this program. http://www.gao.gov/new.items/d08388.pdf

You also can't compare an OEM facelift to a ricer body kit. The OEM requires hardened steel stamping tools that will knock out hundreds of thousands of body panels that must fit exactly and install in less than a minute. The ricer company makes molds to produce a couple thousand fiberglass fenders that take hours to sand and shape so they fit.

As I said, I remember reading that a new model cost ~ $6 Billion to develop. That is from trade magazines like Design News, Mechanical Engineer, and Automotive Design. I don't have any of those articles handy. I did find this in the International Herald Tribune.
"A European-developed car from Ford, the Mondeo, had only limited success when it was sold in North America as the Ford Contour and Mercury Mystique in the 1990s. Moreover, the car cost $6 billion to develop and became a symbol of the fractured state of Ford's global operations.
GM hopes new car has international appeal - International Herald Tribune

DaveinOlyWA:

I find it hard to believe that Ford made 20% on their vehicles in 1991. If they did great, but it it doesn't reflect today's market. I agree than options are where the bulk of profits are made.

Toyota made an operation profit margin of 8.9% in 2006. Mercedes hopes to take their crown by 2010 by reaching an operation margin of 10%
Toyota: A Turbocharged Profit Machine
Daimler wants Mercedes margin above Toyota's: report | Reuters

Toyota's profit per vehicles:
2005 ---- $1175
2006 ---- $1977
2007 ---- $922

http://www.caranddriver.com/news/car_news/japanese_automakers_lead_in_per_vehicle_profit_car
Harbour Report Says Detroit 3 More Productive But Still Losing Money Per Vehicle


Now some of you may still believe that Toyota is making money on the Prius. You may even think they make $3000 per car and the Prius is a revenue leader for Toyota. I personally don't. I look at single digit profit margins and an average of less than $2000 per vehicle profit at their peak of profitability and conclude that Toyota can't make money on the Prius due to it's high complexity and unique platform. You can believe what you want.


Edit: I believe Toyota is still the most profitable automaker in the world based on total sales. They don't make the most per vehicle. Porsche makes the most per vehicle and has for a long time.
http://www.iht.com/articles/2006/02/27/bloomberg/bxcar.php

 

I want to add that a typical model change is a 5 years project while the G21 project completed in 3 years (1994 to 1997 when the first gen Prius was released).

 

Then we have the inconvient sales figures:

I'm pretty sure the first group is making at least an operational profit. If they only wanted to 'be green,' they could make and sell less and still be 'green.' We're talking quantities that are large enough that any loss gets quickly multiplied to serious numbers:

-$500 * 200,000 -> -$100 M.
($500 is not too much to add to MSRP price)
​

The second group is debatable with the exception of the Lexus brand. If this group is losing money, it has to be affordable or close to break even.

The third group includes "greenwash," whose sales are limited to states following CARB guidelines. As for the Saturn Vue, the mock hybrid, well that one is pure "greenwash" as were all of its predecessors.

Bob Wilson

 

That inflation calculator you linked to says $6.75B in 1972 is $19B in 2007 dollars, not $35 Billion.

You are not purposefully fudging your numbers, I hope.

My point is that $19 Billion in today's dollars produced a vehicle that uses cutting-edge technology-- advanced thermal protection systems and adhesives, fly-by-wire and reaction control systems, throttlable liquid rocket engines orders of magnitude more complex than a car engine, advanced communications systems, environmental control systems that can withstand temperature extremes of space, advanced electronics and miniaturization, etc. These advancements have benefitted the world at large, because they found applications in the civilian world, such as miniaturization leading to smaller and smaller computer chips, use of FBW technology in airliners, etc.

What does Detroit have to show for throwing $6 Billion at developing just one car? $6 Billion later the resulting car is still using pretty much off-the-shelf motive technology that has not fundamentally changed in 100 years.

The amount of disparity in the apparent costs vs. benefits ratio is staggering, if you ask me.

Umm... The way you describe it, the ricer kit sounds like it's more LABOR-INTENSIVE and consequently would cost more money to make and install than a mass-produced item that has economy of scale. Whatever happened to Henry Ford's advantages in mass production, I ask again?

From what you describe of the tooling costs, it seems to me that you can't explain $750 million for developing just (your words) a new front clip, new rear clip and updated interior with tooling costs alone. Who spends $750 million on tooling for just a few body panels?

And just because some profitable German automaker can afford to waste that kind of money, does that mean Detroit should too? Where's the refinement and improvement in production and cost savings we keep hearing about from executives?

You just proved my point about the inefficiencies of the Big Three, then. Question is, is Toyota as inefficient? From what we've seen of how they do business, most people would be inclined to say NO.

 

No, but I did make a typo. I put in 71 as the base year not 72.

I have no idea how you are getting $19B
From The Inflation Calculator

What cost $6.75 in 1972 would cost $33.11 in 2007.
Also, if you were to buy exactly the same products in 2007 and 1972,
they would cost you $6.75 and $1.37 respectively.

Do you want to do another calculation?

I'm not sure if you really don't get it or are just being difficult.

It depends on how many you build. You are completely missing the difference in scale for each process. If you are only making a small number of parts you use simple and inexpensive tooling. The tooling cost is low but the piece price is high. If you are making a large number of parts you use expensive tooling. The tooling cost is high but the piece price is low.

Here is an example from my UTV. Take the plastic hood. This hood could be thermoformed or injection molded.

Thermoforming tooling is inexpensive ~ $50,000 but the process is labor intensive and wastes material. The vendor charges my company $125 per part.

High-pressure injection tooling is expensive ~ $500,000 but it only takes a minute per shot and the extra material is trimmed off and reused. The vendor charges $35 per part.

So as a product manager I have to decide which process to use. Either way I pay for the tooling. I need to calculate a break even point. That point is 5000 pieces.

Thermoform:
($125 x 5000)+$50,000 = $675,000

Injection:
($35 x 5000) + $500,000 = $675,000

So if I make more than 5,000 parts it is cheaper to spend the money on the injection tool. (This is a simply comparison that doesn't take into account cash flow or present value of money)

Now you know why the low volume UTV manufacturers use thermoformed hoods and the big guys use injection molded hoods.

That $750 million was for SUV currently sold in the US market by a German manufacturer. They made a 9.5% profit margin in 2007 one of the highest in the industry.

 

It just dawned on me. I am going to get all of my Big 3 supporting friends to buy a Prius as it should drive Toyota out of business with all of that money lost.

 

Brilliant idea!

As nobody really knows, let's just speculate for a while. In a recent column in Cycle World, Kevin Cameron speculated that Toyota makes an unusually small profit (he postulated 2% to 5%) on each Prius sold. In this way Toyota can keep other manufacturers from wanting to enter the field and compete. In the long run, this strategy would give Toyota a huge head start in hybrid manufacturing processes and technology.

If that were Toyota's strategy, I'd say it is working.

 

Can you get me a source on "Toyota dealers I know" that think it's a loss?